So, recently, we’ve been hit with a surprisingly large number of questions about the new real estate commission rules. It’s kind of like the plot to a bad spy movie with confidential information being exchanged between secret agents, but hopefully with fewer explosions and chase scenes. I didn’t write about the new commission rules earlier because I thought only folks in the real estate industry—or someone prepping to buy or sell a home—would care. But it seems this topic has been all over the headlines, so let’s jump into the wild world of real estate commissions, my precious and curious readers!
Real Estate Commissions: A History Lesson (Coffee Time)
Before we dive too deep, grab your binoculars and let’s take a nostalgic look at how things used to work. Long ago (we’re talking last month), the listing agent—the brave soul fighting in the trenches for the seller—would negotiate two different commissions: one for themselves (cue confetti) and one for the buyer’s agent (a little something for their efforts). On paper, sellers were essentially writing a check for both commissions. While the listing agent’s pay was like a super-secret recipe kept between them and the seller, the buyer’s agent fee was plastered on the Multiple Listing Service (MLS) for all agents to see. This led some to suspect a conspiratorial nod-nod, wink-wink situation—like a secret code where “2.5%” became the belle of the ball across the U.S. for buyer’s agent’s commissions.
Now, this method had its quirks. Let’s look at the drama:
- Price Fixing: With buyer’s agent’s commissions laid out like the dinner menu on the MLS, many agents casually threw around phrases like “standard commission” or “normal commission” when chatting with their sellers—like they were discussing the weather on a Tuesday! Some even ominously warned sellers that if they dared to offer a lower commission, their homes might get ghosted by greedy buyer’s agents. Cue the spooky music and price-fixing allegations! While those scare tactics deployed by some unscrupulous agents might have worked 30 years ago, today they’ve lost their effectiveness. There was a time when real estate agents held all the info cards—back when the Internet was just a glimmer in its creator’s eye and children played outside. Nowadays, all homes for sale are on the Internet on sites like Zillow, Redfin and Realtor.com. It’s nearly impossible for a real estate agent to play hide-and-seek with a home for sale. The most a shady agent could do today is try to dissuade the client from buying a place by fabricating concerns about its “vintage character,” which may or may not involve a squishy foundation.
- Inability to Negotiate: buyer’s agents were also making some questionable statements when they’d tell their clients that the agent’s services were “free” to them. Spoiler alert: the buyer was really the one bringing the money to the table! Yet, under the old system, buyers couldn’t negotiate their agent’s commission since it was set by the listing agent and the seller. While this fact was part of the class-action suit, let’s not kid ourselves; I’ve had plenty of buyers who were eager to negotiate a slice of that commission pie for themselves, making it feel a bit disingenuous to say they buyers had no say in their agent’s commission. Some companies even made it a part of their marketing that they rebated buyers part of the commission.
- Conflict of Interest: Another spicy reason for dismantling the old commission structure was the accusation that the buyer’s agent was secretly working for the seller, thanks to the commission they were promised for bringing in a buyer. The more a buyer paid for a home, the fatter their agent’s wallet got. Some argued this meant buyer’s agents had zero incentive to negotiate a lower price—because, why would they lower their potential paycheck? In my experience, though, most agents are working hard behind the scenes to snag the best deal for their buyers. You’d be surprised how quickly agents can whip up lowball offers for their clients!
Anyway, all these juicy suspicions resulted in a class-action lawsuit against the National Association of Realtors (NAR) and major real estate brokerages. Meanwhile, the Department of Justice (DOJ) decided to join the party and launched an investigation of their own. The class-action suit claimed that realtor collusion had kept commissions artificially high, leaving buyers and sellers paying millions that could have been negotiated down to something more palatable.
To my surprise and chagrin, earlier this year, NAR settled the lawsuit for a staggering $480 million, with several major brokerages also reaching multi-million dollar settlements. As part of this high-stakes game, the MLS can no longer flaunt what a seller is willing to pay a buyer’s agent as a commission. The California Association of Realtors (CAR) publishes most residential listing agreements and forms used in California, and starting August 17, 2024, CAR has removed the commission paid to buyer’s brokers from the listing agreement. However, this does not prevent a listing broker to draw up their own agreement with the seller where the seller is still agreeing to pay a commission to the buyer’s agent. But hold your horses! The DOJ has made it clear that they haven’t wrapped up their investigation and further rules changes could be on the way.
So What Does It All Mean?
It means that real estate agents can no longer present a dazzling list from the MLS to a buyer or seller regarding what buyer’s agents are earning in commissions. Starting August 13, 2024, sellers now have the option to wave goodbye to paying a commission to the buyer’s agent. While this was technically possible before, it’s now much easier for a seller to offer a commission only to their listing agent and leave it to buyers to negotiate a commission with their own agents.
Moving forward, a buyer-broker agreement is no longer optional—it’s mandatory if a buyer is having an agent show them property! Although, there’s nothing stopping a buyer from representing themselves in a home purchase. Listing agents may even provide self-representing buyers the forms need to complete a purchase.
The buyer-broker agreements are contracts binding the buyer to their agent. The buyer and their agent negotiate a commission and buyer is responsible to pay it. These agreements can be limited to specific properties or exclusive for a short duration, not to exceed 90 days. New rules even allow for the buyer’s agent to ask the buyer for proof that the buyer has the funds to pay the commission plus make the downpayment on a home.
As I said before, sellers are still free to pay a commission to the buyer’s agent; they just can’t advertise it through the MLS or any webpage that has a link in the MLS. Alternatively, if sellers don’t offer a commission upfront to the buyer’s agent, buyers can ask one be paid in the purchase contract.
The unfortunate reality is that first-time homebuyers—those brave souls who have just scraped together a down payment—might find themselves in a pickle, as they may simply not be able to cover both their agent’s commission and the price tag on their new digs. Previously, the commission was conveniently rolled into the purchase price, so it was financed, but now it must be paid upfront if the seller won’t foot the bill. Maybe one day lenders will let buyers wrap commission costs into their mortgage—wishful thinking for now.
With buyers now responsible for their own agent’s commission, it’s likely we’ll see most buyers asking sellers to cover their agent’s commission—can’t hurt to ask! And here’s a fun little plot twist: the commission the buyer’s agent may collect from the seller is limited to what was originally agreed upon between the buyer and their agent unless the buyer decides to modify the agreement. For example, if a buyer negotiates a 1% commission for their agent while the seller is offering 2.5%, the buyer’s agent will be capped at the 1%—leaving the seller laughing all the way to the bank with the spare 1.5%.
What to Do?
For the foreseeable future, I believe most buyers and sellers will continue riding the familiar rollercoaster of the old commission model. Sellers will keep tossing out commissions to the buyer’s agent. First-time homebuyers, in particular, will likely direct their agents to always ask the seller to pay their agent’s commission.
Over time, we might see a new norm where sellers decide not to pay any part of the buyer’s agent’s commission.
In the meantime, whether you’re buying, selling, or simply walking by a real estate office, we’re all adorable guinea pigs in the grand experiment of commission restructuring. A quick word of caution for buyers: when you first meet a real estate agent, be prepared to sign an agency agreement, though this agreement can be as simple as letting them show you a single property. You can date the realtor, but you don’t have to marry them immediately. You absolutely do not have to get roped into an exclusive 90-day contract to initially work with an agent—unless you really, really want to! But be careful, don’t marry two realtors, polygamy is against the law! If you sign an exclusive buyer-broker agreement and then buy a home through another agent, you might have to pay two commissions! Get divorced before marrying someone new; meaning officially end your agency with the first agent before moving on to your new agent love.
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About San Carlos Life
Mark Martinho and Vivienne Kelvin are the hosts of San Carlos Life and have been residents of San Carlos for years. While running San Carlos Life together with an awesome team, Mark and Viv are also in the business of real estate. They are co-owners of Vabrato Real Estate, a luxury real estate brokerage serving the City of Good Living, and the whole of San Mateo and Santa Clara counties.
With over 30 years of combined experience in the business and 95% of their clients coming in from referrals, Mark and Viv take great pride and joy in exceeding your expectations.
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