Realtor lawsuit settlement unburdens home sellers from heavy commissions. What now for buyers?
The historic settlement could shift some burden of paying agent commissions to already struggling homebuyers.
The settlement reached by the National Association of Realtors (NAR) over real estate agent commissions could end up hurting an already beleaguered group: homebuyers.
The $418 million deal announced last Friday would resolve litigation brought by home sellers accusing the trade group of setting unlawful agent commissions and indirectly inflating home prices. If approved by a federal judge, the long-standing standard 6% commission would be eliminated, and buyers could be responsible for their own agent compensation.
“I think it's going to be worse for the buyer,” Lei Wedge, associate professor in investments and real estate at the University of South Florida, told Yahoo Finance. “Buyers will [probably] end up paying more money for the home because now they have to come up with a commission to pay their buyer agent because this is a seller's market.”
Furthermore, experts are skeptical that the change will do much to abate America’s housing crisis. Squeezed by a lack of inventory, buyers could be further burdened by having to pay agent commissions on top of hefty down payments required in today’s elevated price environment.
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Homebuyers now responsible for their agents’ commission
Under the longstanding system, homeowners looking to list their property are typically liable for both seller and buyer commissions. They sign a contract specifying the percentage of the commission split — traditionally, each party takes 3%.
That puts the standard commission on a $300,000 home at $18,000. If a buyer had to come up with half that amount while also shelling out a down payment, financing, and closing costs, the burden could be prohibitive and turn away some buyers.
“If they can't afford it and they love [a home], then they're going to be heartbroken,” Charles Gilbert, Realtor and brokerage owner Sellstate Heartland Realty based in Kansas City, told Yahoo Finance.
Nevertheless, Wedge believes it's a step in the right direction. The agreement would usher in new standards, giving all parties more transparency and negotiating power, which could eventually lower transaction fees.
“There is no other country as expensive as the United States,” Wedge said about agents’ fees. “[In] the rest of the world, the commission to sell a property is 2% to 3%. There's no reason the average cost of selling a property in the United States is 5.49%.”
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Don’t expect home prices to drop
Experts are skeptical that the elimination of guaranteed commissions will be reflected in listing prices. Economic factors like supply and demand are what’s keeping homes expensive.
“As long as we have a shortage of housing, housing prices aren't going to go anywhere,” Gilbert said.
Homeowners look at market indexes, consult professional appraisals, and check what neighboring homes have sold for in setting list prices. None of that is changing due to the new commission structure.
“It’s a benign wish,” Wedge said.
Blame the current seller’s market.
“Sellers want to get as much as they can,” said Ryan Williams, a Realtor and brokerage owner of Beth & Ryan in Southern California. “So even though they are paying less of a commission, they're not going to lower the price of their house. It doesn't make their home any less valuable just because they're getting more in the end.”
Furthermore, the settlement won’t affect appraised values, at least not immediately.
“The idea is less commission means people will be willing to take less on their homes,” Gernelle Bokuniewicz, a Realtor and founder of Lively Real Estate in Volusia County, Fla., told Yahoo Finance. “I just don't see that happening [because] the appraisers don't take into consideration what the Realtors are getting for commission.”
But in real estate, everything’s negotiable
While home prices are not poised to drop right away, the commission changes could open up new money-saving opportunities for both buyers and sellers in closing deals.
“In real estate, everything has always been negotiable,” Bokuniewicz said.
Gilbert said sellers could subsidize closing costs in lieu of paying buyer agents’ fees.
Flat-fee or discount brokerage services may also become more popular, Wedge said. Buyers could hire agents to advise on complicated transactions or draft contracts but schedule their own showing appointments and research neighborhoods themselves.
Essentially, buyers could save money by “DIY(ing) a lot of the work,” Wedge said.
Homeowners, especially ones in expensive areas, could benefit further from the injection of more competition. Williams said when multiple brokerages are competing, he has always employed fee negotiation as a strategy to win listings in Orange County, Calif., where the median sales price surpassed $1 million in January.
“I've been negotiating for years,” Williams said. “I don’t think I’ve ever been paid 6%. Not only is [the market] competitive for the buyer, but it's competitive for the agents.”
That trend could spread into other parts of the nation as real estate agent compensation enters a new era.
Rebecca Chen is a writer and reporter at Yahoo Finance. Follow her on Twitter @RebeccaChenP.
