New regulations for real estate commissions are set to take effect Aug. 17, based on a settlement reached earlier this year, which ended a lawsuit filed by home sellers against the National Association of Realtors.
There are still a lot of unknowns about how the new rules will play out, but the change could significantly impact the market, say experts.
“It’s still a matter of time before it shakes out,” Norm Miller, professor emeritus of real estate at the University of San Diego, told The Epoch Times, “but as soon as some firm decides to compete on price, it’s going to be a revolution.”
Federal agencies that oversee the business of real estate have not yet set forth clear policies or regulations, he said.
In the lawsuit, complainants alleged that the realtors’ association policies were driving up commissions and harming consumers.
Under the settlement, the association agreed to require homebuyers to sign agreements that specify commissions and services before touring a home—either virtually or in person. The agreement also must notify buyers that commissions are negotiable and not set by law.
In the past, only sellers signed commission-based contracts to pay typically 6 percent of the sales price, with buyer and seller agents splitting the payout.
Under the new rules, however, the buyer could be forced to write a check to cover their agent’s fees unless an agreement is reached with the seller. Typically, such costs have been financeable and paid as part of escrow.
Miller said guidance about how to handle such fees would have been beneficial and could have encouraged competition while still allowing for negotiations.
“The settlement was a little bit half-baked in the sense that they didn’t think about the question of can the buyer finance the fees,” Miller said.
Some sellers could benefit from the changes, as buyers could now be responsible for paying their respective agent’s fees, according to the realtors’ association.
Buyers’ agents are being encouraged by some real estate agencies to ask the sellers’ agents for concessions or other mechanisms to allow the amount to be financed with the mortgage, according to real estate agent training documents.
Significant disparities exist in real estate transaction fees paid in California and the United States as compared to other countries, including Great Britain, Israel, and Singapore where costs are about half as much.
Miller said the market would benefit from increased competition should some real estate agencies decide to reduce commission percentages altogether.
“On the buyer’s side, we still have too many agents out there,” he said. “But eventually, someone’s going to come along and ... compete, and I can’t predict when that revolution is going to happen, but I hope it’s within a couple of years.”
According to the settlement, sellers can still offer to pay buyer agent’s commission fees, but the benefit cannot be shown on the Multiple Listing Service (MLS)—where brokers provide information on properties for sale.
Commission offers can be made via social media platforms, on marketing materials, and on the listing agent’s brokerage website.
Such offers might incentivize buyers and make listings more attractive, according to the realtors’ association.
Buyers can also still accept offers from sellers to cover closing costs, and these concessions can be listed on the MLS.
Some in the industry believe the changes will result in lower commissions which will likely reduce the number of agents.
“The real estate landscape isn’t just evolving—it’s undergoing a seismic shift,” Philip Kranefuss, real estate consultant with PWK Consulting said in an Aug. 6 newsletter. “As we enter this new phase, brokerages must evolve to meet heightened performance requirements and support their agents in an increasingly competitive market, or risk falling by the wayside.”
He said brokers will need to quickly modify their strategies—by potentially reducing fees and taking on more clients—to stay successful.
“With regulatory changes looming and profitability at risk, the need for brokerages to adapt is both urgent and critical,” Kranefuss said.
The California Association of Realtors responded to the new rules by issuing an open letter in May, which sought to dispel rumors circulating about the regulations.
“All this noise has caused confusion, fear and, in some instances, panic about the process of buying and selling a home,” Melanie Barker, president of the association, wrote. “While we understand that uncertainty can be deeply unsettling, especially when there are few answers and many opinions, we know we’ll figure it out together, as an industry and with our clients.”
As the new regulations are loosely defined, real estate agents, and buyers and sellers should work together and communicate how best to proceed, she said.
“How consumers work with agents in this new environment will need to work itself out, and there will be differing approaches between agents and their clients,” Barker wrote. “Many in the industry ... are currently working on sorting through and articulating those new practices as quickly as possible.”
The attorney responsible for negotiating the settlement said the changes should help lower home prices by creating more competition and making it more difficult for agents to encourage buyers to choose properties that offer higher commissions.
“I’m proud of the work that we’ve done to make the process of selling and buying a home less expensive,” Robert Braun, who represented the home sellers, said in a July 31 press release. “We’re hopeful that pulling down some of the barriers to competition in the industry will energize a new wave of innovative companies and models for buying and selling homes that will benefit consumers.”
In addition to the new rules, he secured a $418 million payout from the National Association of Realtors to compensate litigants and noted the historic nature of the settlement.
“Any case where you are setting out not only to obtain monetary relief for your clients, but to literally change the rules governing how an industry operates, is going to be challenging,” Braun said. “In a lot of ways, it’s an incredibly both impactful and interesting case.”
