How New Real Estate Commission Rules Impact Buyers and Sellers

What Is The Impact For Buyers?

The primary change for buyers is the way their agent's commission is handled. Previously, the seller paid the commission for both their own agent and the buyer's agent. This commission was pre-negotiated and published in the Multiple Listing Service (MLS). Starting in August  the MLS will no longer publish the buyer’s agent commission. This means the commission will be determined separately in negotiation by the buyers agent and with the seller and less transparently. 

The Current System

Up until now, the seller has traditionally paid the commission for both their agent and the agent that brings them a buyer. This commission is pre-negotiated between the listing agent and the seller. Once determined, the commission for the buyer's agent is published in the MLS with the listing. This means that any agent can take a look at the listing and see what commission the seller is going to pay. This has always been negotiable and has always been down to the seller to determine how much they offer. Sellers in Sonoma County have traditionally offered either 2.5% or 3%.

By doing this, the seller incentivizes thousands of agents who have access to this information to bring them a buyer. The buyer's agent only needs to be a member of that MLS to be assured they will be paid upon closing if they bring the buyer. The good side of this system was it was incredibly simple to simultaneously have thousands of agents working for the seller, increasing the odds of a fast sale for top dollar.

Another advantage is, generally speaking, the seller typically would have cash available at closing to pay for agent services while the buyer often has little to no cash at closing to pay for representation.

What Are The Downsides?

Of course, there are significant downsides, which is the reason why everything is changing. First, the seller usually felt compelled to offer a standard commission rate for the buyer's agent as there was fear if they did not, their house might sell for less or not at all. This also left the buyer with little to no leverage on what and how their agent gets paid.

While the buyer wasn't directly paying their agent, the commission was still indirectly paid by the buyer as it was built into the sales price. Whenever any seller is looking at the price they are going to sell their home for they SHOULD be looking at the net amount to them after commission and all costs associated with selling the home. The reality is that a lot of sellers look at the price it is listed for or rather the value of the offer. But more about that later.

The biggest problem with the current system is, since the buyer's agent does not have to convince their client, the buyer, how much they should be paid for their services, that agent may not be as compelled to deliver value beyond an executed purchase agreement and closed escrow.

What’s Changing?

Starting in August, the MLS will no longer be publishing any commissions that are offered to the buyer's agent. That does not mean sellers won't continue to offer something to the buyer's agent; it just won't be as visible and an agent representing a buyer will no longer be able to assume the seller will pay the buyer's agent 2.5% or 3% as was previously the case.

The other, even bigger change is that both the Realtor Association and brokerages, in my case W Real Estate, will require that buyer's agents enter into an agency agreement with all buyer clients. No exceptions. 

Buyers' Agreements Will Be Mandatory

If you have ever sold a house, your agent will require you to sign an agreement that essentially locks you into a period of time where this agent gets to exclusively market your property and represent you to sell the home for a predefined fee or commission. If you have ever purchased a home or are actively working with someone to help you find a home, you may just be realizing you don’t have and have never had an agreement like this with your agent; they showed you some homes and wrote an offer (or twelve), then somehow got paid at closing. Going forward, buyer's agents will be required to make you aware of what they're charging, sell you on the value they offer, and get you to sign an agreement just like the listing agents always have.

Up until now, while buyers' agreements have always existed, I have always worked with clients on a trust basis so getting buyers to sign an exclusive agreement is going to be a big change. But it is a big change that I am looking forward to and that I believe will ultimately benefit consumers the most.

As with many things in life, the 80/20 Rule exists in real estate with 80% of the realtors making 20% of the commission and 20% of the realtors making 80% of the commission in the real estate industry. What’s more the 80% that make little or no money will likely quit the industry between the first month and the twenty-fourth month.

These changes will definitely result in many agents dropping out of the market and the more competitive and successful agents who have been used to working hard, to win customers, and demonstrate their value will likely benefit. As a top-producing agent I know that I can offer more value and better service than most of  the competition. I see more homes, see more deals and know more ways I can save clients money. It’s like anything, the more you practice the better you get so I like to feel that I have learned a thing or two.

With the old system, buyers just had to say to an agent, “Sure, you can show me this house,” and before they knew it, they had committed themselves to an unproven entity. Going forward, I love the idea that I get to explain my entire value proposition to a buyer instead of just being the first person available to open a door. It is a Win, Win all around.

One of the reasons I have always been an entrepreneur dating back to when I set up my own market agency is that I back myself to provide a service that clients value and are happy to pay a premium for.

It won’t change that much but it will mean that we will now spend longer explaining how we work, the services we offer, and the value we bring, and then we will be asking buyers if they want to work us and if they do they will need to sign a buyer's agreement before we onboard them as a client. That agreement will state how much I charge for my services.

I will still provide free content via my website but I will now tier my content so only signed-up clients will get access to some specific resources and be made aware of off-market properties. For example, I have a website where I put only vacation rental-eligible properties and I also send a weekly email to people who are actively looking for a vacation rental. Starting next month, only buyers who I have onboarded will get access to that. I’m actually excited to work more closely with fewer buyers who I know are committed to me and vice versa.

Agents Need To Demonstrate Their Value

It’s funny, I have never really thought too much about the specific areas where I add value because I came into the industry 4 years ago, won agent of the year out of 250 agents in my brokerage in my third year, and then last year teamed up with one other agent to become the largest team in Sonoma County.

However, when I think about some of the value I have added in just the last month here are a couple of examples:

• I started working with a couple who lost out on a house (that I secured for another client) and within 2 weeks I found them a home and managed to negotiate it for $85k under the asking price when my clients thought they would have to pay close to the asking price.
• I had a client get an offer accepted on a $2m+ home and through the course of escrow negotiated an additional $65k off due to a nuance with the septic system which if the seller's agent had been smart about it could have been avoided. My client was the beneficiary and the seller lost out on $65k!

It’s situations like this which hopefully make clients feel I bring real value to the table by being hardworking and diligent.

Paying For Buyers Agents

If we write an offer, we have a few ways that can we will get paid. We can write a commission agreement with the offer stating that the seller will be providing a credit towards buyer’s closing costs which will be baked into the price. 

The other alternative is that the buyer will pay us and we will adjust the price accordingly. 

As with sellers, the key for the buyer will be to look at the net cost of buying the house taking into account the purchase price, and the closing costs which may include the buyer's agent commission.

Of course, there will be some challenges ahead during this transition that you should be aware of. Let's say you are interested in a house listed for $1,000,000 and the seller is not offering any commission for the buyer's agent. Let's say your agreement with me is that I am to be paid 2.5% for my services at closing. This means that potentially this $1,000,000 house will cost you $1,025,000 with commission. When we are looking at what the house is worth, and we are looking at comps we will need to determine if for an identical house that sold for $1,000,000 included the commission or not. It just means running comps could be a little more complicated.

What Is The Impact For Sellers?

The Current System 

Today, the typical practice is for the seller to pay the commission for both their own agent, the listing agent and the buyer's agent. This commission, which has always been negotiable,  is negotiated between the seller and their agent and is then published in the Multiple Listing Service (MLS) along with the property listing. This is the system every realtor uses to get information about a home. 

This arrangement incentivizes many agents to bring buyers, thereby increasing the chances of a sale with the hope that buyer demand drives the highest price. While commissions have always been negotiable, they are often perceived as being fixed, contributing to concerns about inflated costs. The buyer indirectly pays the commission as it is built into the home's sale price, although the payment technically comes from the seller's proceeds at closing.

Up until now, the seller has traditionally paid the commission for both their agent and the agent that brings them a buyer. This commission is pre-negotiated between the listing agent and the seller. Once determined, the commission for the buyer's agent is published in the MLS with the listing. This means that any agent can take a look at the listing and see what commission the seller is going to pay. This has always been negotiable and has always been down to the seller to determine how much they offer. In Sonoma County it has traditionally been either 2.5% or 3%. 

The only thing that has changed is that the buyers agent commission will now be decided separately from the listing agreement and it won’t be published on the MLS. Nothing else has changed. You will still need an agent to sell your home and you will still need an agent to buy your home. The only thing that may change is how both sides get paid.

So Will Sellers Now Pay Less Fees?

Despite the settlement, sellers are not currently choosing to pay less than traditional commission fees. Even though the new rules don't kick in until August, sellers have always had the option to offer minimal commissions, but they typically don't. Sellers view paying commissions as crucial for selling their properties, much like staging or prepping a home. They worry that not offering standard commissions could hurt their home's marketability. 

Additionally, since concessions and commission fees are visible to buyers and buyers agents through disclosures and marketing, sellers feel pressure to stick with the usual rates to ensure their property is attractive to potential buyers. So while a seller can no longer publish the commission payable to a buyers agent on the MLS, they can let a buyers agent know that they are offering $x in concessions as part of the sale via email, text, a property website or other marketing channels. It’s clearly important to know when a buyer is considering how to structure an offer for a property.

Asking whether sellers will pay less in fees is asking the wrong question. The question should be will the seller get less money in their pocket at the end of a sale? The simple answer to that question is almost certainly not.

First of all we need to understand the different ways in which a buyers agent will get compensated. 

If  a seller is  selling a house for $1m there are a couple of scenarios:

The first alternative is that the buyer makes an offer of $1m for the home but makes a request for a credit of $25k towards closing costs (which would be used to pay the buyers agent $25k). Again the net to the seller is $975k

The other alternative is that the buyer submits an offer for the home for $975k without any request for compensation to the buyers agent because the buyer is paying the buyers agent directly. In this scenario, the sellers net is still $975k excluding closing costs and the cost of the home to the buyer is $1m excluding their closing costs.

However we look at it the numbers are the same to the seller but traditionally sellers are trained to think that the highest headline purchase price is the best offer. That is no longer going to be the case. In fact, I’ve been in a situation where the seller and listing agent chose an offer with the highest headlein price but because our offer waived the buyers commission the seller ended up choosing the offer which gave them less money in their pocket. 

There is no question that comparing offers and negotiation deals is going to be more complex but in my mind complexity is a good thing for agents that are doing 30, 50, 75 deals a year.   we write an offer, we have a few ways that can I will get paid. We can write a commission agreement with the offer stating that the seller will be paying the commission which will be baked into the price. 

In Summary

No one really knows how this will play out and the extent to which things will actually change. The big thing that will change is we will need every buyer we are working with to sign a buyers agreement in the same way we currently do with sellers. Apart from that, any other changes will depend on whether sellers feel they still need to offer to pay buyers agent commission as part of most effectively marketing the home. So far, even though every seller can choose today what they will pay, 99% of all sellers are still offering 2.5% or 3% to buyers. I think we will only really know in 12 months how this is going to shape things moving forward.