Commission changes for home buyers & sellers

The real estate industry is going through a pretty substantial shift. If you've been following the news lately, you may have heard about the National Association of Realtors (NAR) lawsuit settlement and proposed changes to how buyers and sellers compensate their real estate agents. Here's a brief explanation of the proposal as it stands today.

Subject to court approval, NAR has agreed to a $418 million settlement prompting the trade association to initiate immediate changes to prevent future lawsuits/claims. NAR has denied wrongdoing and maintained their position that commission-sharing policies are an important consumer protection measure for homebuyers, nonetheless, they agreed to remove publicly advertised commissions.

Under the current structure, buyers have separate representation and cover the cost of that representation through something called "cooperative compensation". In other words, the seller's agent shares their commission with a buyer's agent via escrow. This effectively allows buyers to finance their agent's commission rather than paying an additional fee on top of everything else, meaning less money out of a homebuyer's pocket upfront. Currently, seller's agents publicize the amount of that commission in their local Multiple Listing Services (MLS); typically 2.5% - 3% of the home's sales price.

Under the proposed structure, home sellers may opt to lower the amount they pay their agent, thereby eliminating "cooperative compensation" altogether. Without the ability to publicly display how much, if anything at all, would be shared with the buyer's agent, buyers will work out an agreement to pay their agent upfront.

Pros & cons of the NAR changes

• Intent: buyers will be more dedicated in their home search rather than casually touring homes without the obligation of upfront out of pocket costs. Prior to these new rule changes, buyers could take their time finding the right home, look at many properties, and ultimately walk away without spending a dime. While their agent effectively worked for "free". Now home buyers will have to compensate their agent regardless of whether they end up crossing the finish line to purchase a home.
• Expense: The cost of compensating a buyer's agent (outside of the mortgage) will reduce overall affordability, especially for first-time homebuyers and underrepresented groups who are stretching as it is to buy a home.
• Saturation: A real estate agent's quality and qualifications will become even more important when buyer's are vetting their representation. When buyers don't have financial 'skin in the game' they're not as concerned with the skill and experience of their agent. Whereas, when money is coming out of a home buyer's pocket from the get go, they will opt for an agent with a proven track record. As a result, part time and inexperienced agents will likely leave the industry.

The NAR settlement and resulting rule changes will impact how millions of buyers and sellers navigate real estate transactions, and how the agents representing them get paid. Agents say the added upfront cost could push homeownership further out of reach for some socioeconomic and underrepresented groups. Although buyers have always indirectly paid commission fees, the requirement of paying upfront will hurt first-time homebuyers already straining to afford the Bay Area’s hefty down payments and closing costs.​

The big question ... will a change in commission structure lower house prices?

The answer ... frustratingly, yes and no. Yes, the change in commission will lower house prices, because buyers' budgets now have to account for their agent's fees, thereby reducing the total amount they can afford upfront. BUT, as long as home supply remains low and demand high (surplus of Silicon Valley high wage earners) home prices will undoubtedly continue to rise. My hunch is properties will still sell quickly, with multiple offers, over list price. The only difference will be that the competition pool of those who can actually afford super high properties will get slightly smaller.