Ending 6% commissions could create a ‘Venus flytrap situation’ for home buyers, economist says
Following a landmark settlement reached by the country’s largest real-estate-industry group, the housing market is on the precipice of a major change that’s poised to disrupt how people buy and sell homes.
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But the proposed new arrangement could quickly saddle buyers with additional costs , one professor says.
The settlement announced by the National Association of Realtors, which will go into effect in mid-July if it’s approved, would require that listings on the NAR-run multiple-listing service — a database of homes for sale — no longer show how much buyers’ agents will earn in commissions on the sale.
In other words, buyers’ agents won’t be offered compensation up front.
Although fees for real-estate agents are technically negotiable, they typically run from 4% to 6% of a home’s sale price, depending on local market customs. Home sellers traditionally pay these commissions, which tend to be split between the buyer’s and seller’s agents, while buyers don’t pay the agent anything.
The settlement is seen as a win for home sellers, as homeowners will no longer be obligated to offer the buyer’s agent a commission, saving thousands of dollars in fees.
But disrupting the status quo for home buyers is “a Venus flytrap situation,” Ken Johnson, a real-estate economist at Florida Atlantic University, said in a statement.
The Venus flytrap is a carnivorous plant that traps and consumes insect prey. In Johnson’s analogy, the insects are home buyers.
Even though it might seem straightforward enough for buyers to directly approach agents who list homes for sale, “buyers are entering into situations where they may not be equipped to get the best deal possible,” Johnson said — and “going directly to a listing agent who represents a seller in a legal sense puts the buyer at an extreme disadvantage in terms of bargaining power and market knowledge.”
More costs for buyers
While the new rules would not prohibit sellers from offering to pay a buyer’s agent on the side, it’s possible many sellers won’t do so. That would mean home buyers will have to foot the bill for their agent’s fees themselves.
For a $400,000 house, paying a 3% commission to a buyer’s agent would add $12,000 in extra expenses for an aspiring homeowner, who also has to come up with the down payment, closing costs and other fees associated with purchasing a home.
To be sure, commissions have been, and will continue to be, negotiable. And though buyers can offer a much smaller fee to their agent, the lower commission could also mean that buying a house takes much longer. “Buyers will almost certainly have to negotiate with more sellers before they find the deal they are satisfied with,” Johnson said.
Buyers will also have to sign written agreements with their agents stipulating how much their services cost, based on the proposed settlement. But that raises questions about who truly represents the buyer when an agent has conflicts of interest. “If [a buyer works] with one agent exclusively, what happens when the selling agent is committed to other buyers as well? What happens when two of the selling agents’ buyers want the same property?” Johnson asked.
Some real-estate CEOs, such as Redfin’s Glenn Kelman, have said the proposed settlement won’t necessarily be a game-changer, but that it will lead to heightened awareness of fees.
Ultimately, “this is just going to lead to a less efficient housing market without a lowering of cost,” Johnson said. “I hope the presiding judge throws the settlement out.”
