Ending 6% commissions would mean ‘dangerous times’ for home buyers, mortgage lender says
The way people buy and sell homes in the U.S. may be about to change, following a landmark settlement proposed by the nation’s top real-estate-industry group.
Most Read from MarketWatch
Microsoft is already bigger than Apple, but its ‘iPhone moment’ could be coming
Visa, Mastercard agree to lower credit-card fees in landmark merchant settlement
But that may not make things easy for home buyers, one mortgage-company CEO says.
The settlement proposed 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 have a field showing how much buyer’s agents will earn in commissions on the sale.
In other words, buyer’s 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 are typically split between the buyer’s and seller’s agents.
The outcome of the settlement, if approved, would “be pretty disruptive,” said Greg Schwartz, CEO and co-founder of Tomo, a digital mortgage lender. “I’m concerned about first-time home buyers that are cash-strapped,” he told MarketWatch in an interview.
While the new rules would not prohibit sellers from offering to pay a buyer’s agent on the side, it’s an open question as to whether sellers will stop offering to do so, which would mean that home buyers would have to foot the bill for their agent’s fees themselves.
The typical home buyer makes an 8% down payment on their home, according to a 2023 report by the NAR. That amounts to roughly $32,000 for a median-priced home of $400,000. On top of that, closing costs can run between 1.2% and 2.5% of a home’s value. Aspiring home buyers say that saving enough money for a down payment is one of the biggest obstacles they face, the NAR report found.
“Folks really scrape” to come up with the cash needed to buy a home, Schwartz said. If buyers need to come up with an additional $12,000 — 3% of the value of a $400,000 home — to pay an agent’s commission, “it’s just not going to happen,” he said.
“The stakes are really high here,” Schwartz added. “And the seller’s agent has a fiduciary obligation to the seller, not the buyer. They’re there to get the most for the seller. So these are dangerous times.”
The “NAR settlement spells disaster for first-time home buyers,” Schwartz added.
What will happen if buyers must also pay commissions?
Government regulations mean that buyers can’t simply add their agent’s commission fees to the amount of their mortgage.
If fees for the buyer’s agent were added to the mortgage, that would increase the amount buyers would be borrowing against the home’s sale price, which could represent a credit risk, Ted Tozer, a fellow at the Urban Institute, told MarketWatch.
That might mean that buyers could also have to pay an additional fee, because their loan-to-value amount would increase, he said.
“The housing-finance market is so complicated that if we try to change too much, all the wheels could fall off,” Tozer said.
But if buyers forgo using a real-estate agent in order to avoid paying fees, they may lose an advocate who is motivated to help them close on the home, Schwartz said. For example, if a buyer was negotiating concessions from the seller, they wouldn’t have the benefit of an expert who is familiar with the processes involved in buying real estate, such as inspections and appraisals.
Experimenting with new types of fees
If the settlement is approved, beginning in July, buyers will have to sign agreements to detail how much they are willing to pay their agents for their services. Though home buyers are free to hire agents, having to sign an agreement can be a little daunting, Schwartz said, especially if they have only met online.
At Tomo, Schwartz said that he was thinking about piloting a way for buyers to sign agreements with agents for a specific listing in exchange for compensation.
So if a buyer hops on Tomo and finds a home listing they like, they could exclusively use the agent that comes along with it and pay them a fee by signing an agreement with them for that particular home.
Urban Institute’s Tozer also suggested in a November blog post that the real-estate industry could move toward a system that pressures commissions down without tearing apart the current housing-finance system.
Under his proposal, buyers would negotiate their own fees with the buyer’s agent and sellers would do the same with their agent, but the commissions would ultimately come out of the sales price. So a seller would still pay the buyer’s agent fees, as is the case now.
The key difference would be that the seller could compare multiple commission offers from different bids and understand how much they would need to pay the buyer’s agent, which in theory, could pressure fees down.
Some home sellers are already trying to negotiate lower commissions for buyer’s agents or forgoing using a seller’s agent.
To Schwartz, hiring a buyer’s agent is a part of the home-buying process that he would never skip.
“There’s no chance that I, or my family, will ever be allowed to buy a home without a buyer’s agent,” Schwartz said. “We need folks to be represented, or they’re gonna end up really putting themselves in bad spots.”
