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Real estate agents and US housing experts have had the date circled on their calendars for months: Aug. 17, when the terms of a class-action settlement over industry compensation practices will take effect.<\/p>\n
The changes laid out in the agreement are technical, revolving around paperwork consumers complete at the beginning of the buying or selling process, and they add new wrinkles to an already complicated undertaking. Agents currently command a 5% or 6% fee that gets divvied up between both sides, but the rules are poised to shift power away from them, and drive down commissions over time.\u00a0<\/p>\n
\u201cAgents have such great advantages over consumers in any negotiation,\u201d said Stephen Brobeck, a senior fellow at the Consumer Federation of America. \u201cThe typical consumer doesn\u2019t know what a reasonable commission is. Two percent is a good goal, and in some areas they can get it down to 1.5%.\u201d<\/p>\n
The US system for paying agents is an old sore spot for consumers, who have long complained that they paid higher commissions than buyers and sellers in other parts of the world. The industry, however, resisted change, until a Missouri jury found the National Association of Realtors liable for colluding to keep commissions high. The Department of Justice was also circling, arguing in a\u00a0separate suit<\/a>\u00a0that buyer and seller commissions should be handled separately.<\/p>\n The NAR\u00a0agreed\u00a0<\/a>to settle the Missouri suit in March, sending shockwaves through the industry. Experts predicted that the deal would lower consumer costs by as much as 30% and put armies of agents out of work. Others suggested brokerages would simply find loopholes.<\/p>\n In an interview, NAR President\u00a0Kevin Sears<\/a>\u00a0said that while it will take time to determine the impact of the changes, government regulators are paying close attention to how they\u2019re implemented.<\/p>\n \u201cAnyone looking to skirt the rules,\u201d he said, \u201clet me just tell them the Department of Justice is going to be watching.\u201d<\/p>\n For years, agents set their fees by a path of least resistance. Typically, sellers worked out commissions with their representatives, who split the payment with buyers\u2019 agents. The fee was culled from the proceeds of a sale, giving sellers little reason to haggle. Buyers, who ultimately bore the cost, got almost no say in the matter.<\/p>\n That framework isn\u2019t going away entirely. Under the new rules, sellers can no longer specify the commission they\u2019re willing to pay to the buyer\u2019s agent in the forms they fill out to publish a listing. And buyer\u2019s representatives must enter written contracts with clients that spell out the commission at the beginning of the relationship.<\/p>\n Some states, including\u00a0New Jersey<\/a>\u00a0and\u00a0Indiana<\/a>, have already implemented the changes, offering a window on how they\u2019ll play out on the ground. Before a buyer goes to look at a house they\u2019re interested in, their agents are calling ahead to find out if the seller is willing to cover the commission, said\u00a0Jake Johnson<\/a>, a Redfin Corp. broker in Indianapolis.<\/p>\n If the seller won\u2019t pony up, buyers\u2019 are less inclined to visit the property, Johnson said, limiting the number of bids that a home will receive and reducing the chance of getting the highest price. What\u2019s more, sellers are generally focused on the final proceeds from the sale, once closing costs are paid, so they\u2019re willing to cover buyer commissions if it generates better offers.<\/p>\n Forcing buyers\u2019 agents to set their fees at the beginning of the process could have a larger impact. All other things equal, a buyer who offers $500,000 and asks the seller to rebate 2% for commission costs will be more appealing than one who makes the same bid but asks for a 3% concession.<\/p>\n \u201cNow, buyers are the ones signing contracts,\u201d said Ryan Tomasello, an analyst at Keefe, Bruyette & Woods. \u201cA buyer who negotiates a lower fee with their agent is going to be more competitive.\u201d<\/p>\n Commissions are already trending lower, perhaps due to the attention the settlement has generated. For the four weeks through July 14, Redfin\u00a0estimated<\/a>\u00a0compensation averaging 2.55% for buyers\u2019 agents, down from 2.62% at the beginning of the year. That decline has come as existing-home sales hover near historic lows, and it may be that agents are simply willing to accept lower fees to win business in lean times.<\/p>\n Brobeck said he doesn\u2019t expect commissions to come crashing down as a result of the settlement. But over time, he envisions a system where buyers and sellers pay a base rate of 1% to 1.5% each, with add-on charges for services such as high-quality photography, or showing a buyer a large number of properties.<\/p>\n It\u2019s not clear yet that buyers\u2019 representatives would be willing to work for lower compensation, aside from at the discount brokerages that have been around for years with mixed success. Top agents won\u2019t eagerly embrace reduced fees, especially since the settlement doesn\u2019t alter the services they provide.<\/p>\n If fees do fall, it will likely be gradually. The growing pains will be apparent right away.<\/p>\n In New Jersey, which implemented the rule changes on Aug. 1, Farah Alli, a Hoboken-based broker with Story Residential at Compass<\/a>, has been frustrated by new parts of the process. If she wants to show five properties to a client in one day, she has to call each seller\u2019s agent to find out what the commission would be, and if they don\u2019t pick up the phone, she may not show that home. It\u2019s also awkward to set out the commission on the form.<\/p>\n \u201cOften I\u2019m connecting with people on the phone \u2014 they haven\u2019t met me, they don\u2019t know what a fabulous person I am,\u201d Alli said. \u201cAnd I have to tell them that I can\u2019t help them until they sign the form.\u201d<\/p>\n The extra work is a worthwhile price to pay for greater transparency, said\u00a0Jennifer Johnson<\/a>, who focuses on real estate transactions as an attorney at Flaster Greenberg PC in New Jersey.<\/p>\n \u201cWhen I call to get my refrigerator fixed, the guy says, \u2018I can fix it, here\u2019s how much it will cost,\u2019\u201d Johnson said. \u201cTalking about money is always uncomfortable, but it\u2019s also good.\u201d<\/p>\n<\/div>\nRecommended Newsletter: <\/strong>CEO Daily provides key context for the news leaders need to know from across the world of business. Every weekday morning, more than 125,000 readers trust CEO Daily for insights about\u2013and from inside\u2013the C-suite. Subscribe Now<\/a>.<\/div>\n