So, you heard that there is a big lawsuit about to get settled with NAR... Here's everything you should know about real estate agent commissions in 2024.
What's all this about a lawsuit involving real estate commissions?
It's chatter and chaos all over the web as the National Association of Realtors (NAR) is about to settle on a lawsuit regarding perceived commission price-fixing due to the appearance of "standardized commission rates" being published in MLS (multiple listing services). The populace's general sentiment seems low regarding realtor trustworthiness and in regards to if they really earn their pay, so let's dive into what a real estate agent can do do for you and why it might be REALLY helpful to have one on your side!
And while I don't doubt that many things are about to wildly change with the increase of AI and other converging technologies entering every market, including real estate, I personally don't see that as a worthy excuse to completely diverge from the way things have traditionally been done in the industry.
Articles that claim that commissions have been fixed to 5 or 6 % (combined buyer & seller agent commission fees) for a specific city or area are simply not telling the truth.
The first thing that you should know is that real estate agent commissions are always negotiable by law. But before you get too excited about this, you should also understand that you will typically get what you pay for in this industry. I advise exercising caution when considering "discount brokers" and non-traditional ways of selling your home. And although not in any way required, there may be natural consequences if a seller decides not to offer a reasonable buyer's agent commission when selling their home.
Real estate agents still need to pay their bills like everyone else, and like most freelancers, they have running overhead costs as well as uncertainty in regards to when the next pay check will come in. Think all real estate agents are greedy? Well, it might surprise you to see how much a real estate agent makes on average in your state. In fact, the yearly total number of transactional "sides" (transaction involvement resulting in a commission) for each real estate agent (nationally) has, on average, recently dropped by almost half!
While real estate commissions in all locations across the US are always negotiable, it's not uncommon for a specific brokerage, real estate team, or an individual real estate agent to state their personal commission price and for this to be relatively non-negotiable. (So basically, it's legal for someone to price their own work as long as they don't tell their neighbor how to price his.)
What about the elephant in the room, are you going to mention it?
Yep, I sure am. So why are real estate commissions paid as a percentage of the purchase price and not as a flat fee? Commissions typically make more sense when structured as a percentage of the purchase price rather than a flat fee due to several factors:
Alignment of Interests: When commissions are based on a percentage of the purchase price, agents are motivated to secure the best possible deal for their clients. Naturally, a seller's agent is going to be motivated to get his seller top dollar for his home when the agent's own commission is correlated to that selling price! Buyer's agents are also incentivized to negotiate the best possible price for their clients and have vested interest in securing a fair deal that satisfies their clients' needs. Realtors, as members of the National Association of Realtors (NAR), are held to a high moral code that emphasizes placing the interests of their clients above their own. This commitment means that buyer's agents are tasked with prioritizing their clients' financial well-being and negotiating the best possible price. Their loyalty lies firmly with their clients, as mandated by the ethical standards set forth by the NAR.
Fairness and Flexibility: Structuring commissions as a percentage allows for greater fairness and flexibility. Properties vary widely in price, and a flat fee might disproportionately burden buyers or sellers of lower-value properties. On average, more expensive properties tend to stay on the market longer, due to having a pool of fewer qualified buyers, meaning that the listing agent will likely need to work longer marketing and discussing the property with potential buyers. Buyer's agents may experience the same issue, as some buyers take longer than others to find the right property and this may result in lots of extra work and showings for the agent.
Risk and Effort: Real estate transactions can vary significantly in complexity and effort required. A percentage-based commission compensates agents proportionally to the amount of work and risk involved in a transaction. This encourages agents to invest time and resources into properties regardless of their selling price, ensuring consistent service quality for clients.
Reflecting Market Conditions: Real estate markets are dynamic, with property values fluctuating over time. A percentage-based commission adjusts naturally to changes in market conditions, aligning with the overall value of properties. In contrast, a flat fee may become outdated or inequitable as property prices evolve. If the flat fees aren't high enough in proportion to the local cost of living, then real estate agents could effectively be forced to quit working in the role and the real estate market could turn into a Wild West, which would not be in the best interest of most buyers and sellers.
Client Investment: Clients often perceive agents as more invested in their success when compensation is tied to the transaction's outcome. A percentage-based commission reinforces this perception, as agents stand to gain more when they achieve favorable results for their clients, fostering stronger relationships and trust.
It's also important to mention that it's very rare for the real estate agent to make 100% of their commission split (as in: seller's agent / buyer's agent) as income for the time spent they spent on the transaction. Not only do they have MLS, Realtor association dues, and other fixed and running business costs, but they also pay their brokerage, possibly a real estate team or employees they hire, and they oftentimes make arrangements to pay for marketing and related services (such as photography) rendered for their clients.
So how do agent commissions get paid?
We have two parties, the buyer and the seller and they would both like representation in a real estate transaction, but since their motives are not aligned (the seller wants to sell for the highest price possible; the buyer wants to buy for the lowest amount possible), it makes sense for them to each have their own real estate agent who acts in their best interest - much like how you wouldn't usually wish to share a lawyer with someone on the other end of a lawsuit... (Now, there are some exceptions to the rule, but I will address those in a separate post.)
I already published here the costs that the buyer will need to plan to pay upfront / "out of pocket" when making a home purchase. Since these amounts usually add up to a considerable sum, it's no wonder why it isn't a popular practice to have the buyer pay for their own real estate agent services out of pocket. Most simply just don't have the extra cash at hand.
Instead, the seller usually agrees to pay a commission percentage to the listing agent for helping them market and sell their home and also agrees to an additional percentage, which was historically published in the MLS and told the cooperating buyer's agent how much they could expect to receive at closing. Some sellers feel like they are getting the short end of the stick, because they think that they are paying both sides of the commission due to the less-than transparent nature of the transaction, but let's put this scenario under the microscope:
Not burdening the buyer with extra expenses upfront, means a bigger pool of potential buyers for the seller's property and typically this means that the property gets sold for a competition-driven price (a higher price) in a quicker time frame.
Sellers typically mark up their property to cover commission costs. Sure, there's market value to consider, but market value should include these commission costs since most homes are bought and sold with the help of a real estate agent...
Effectively, the buyer pays the commission when they purchase the home since the commission cost is baked into the purchase price.
I hear you saying that it's impossible to know if the commission cost got split evenly between the buyer and the seller that way, but it is important to understand that there are some reasons as to why it has typically been done this way (affordability for the buyer = convenience to the seller). At lease we can see that both sides do make a contribution towards the commission cost.
What happens if the seller doesn't offer enough compensation for the buyer's agent?
When a buyer signs an exclusive agency contract with a buyer's agent, that agent should have their commission price listed on this form, so the buyer IS clearly agreeing to pay this price regardless of what is being offered by the seller. Historically, the amount offered by the seller (commonly 2.5 - 3% for the greater Charlotte area, but remember - the seller doesn't have to offer anything at all) has usually covered the whole cost of the buyer's agent, but there have always been exceptions and those exceptions are starting to become more and more commonplace. Technically speaking, if your agent charges a 3% commission on the purchase price and the seller is offering only 2.5%, then the buyer would still be on the hook for the remaining .5%, to be paid out of pocket at closing. However, many agents have chosen to be lenient regarding this. Still, it's best to be prepared to pay any differences at closing.
The good news is that buyer's agents owe their clients fiduciary services, including loyalty, which means that they must put their client's interest first - that means showing their buyer relevant homes regardless of how much commission is being offered by the seller. So when people talk about agents "not showing homes with low or no commission being offered to the cooperating agent", this is usually done with the client's permission - because oftentimes the buyers don't want to see homes where they would need to pay the buyer's commission out of pocket. Many simply don't have the extra money for that expense on top of other closing costs!
Now that you understand how commission costs are usually paid, you might be asking if you really need to pay them at all:
I am sure you probably already know that real estate agents are professionals who help individuals buy and sell properties. They possess expertise in navigating the complexities of real estate transactions, making them invaluable resources for both buyers and sellers. Here are some reasons why utilizing the services of a real estate agent can be advantageous:
Market Knowledge: Real estate agents have a deep understanding of local housing markets, including current trends, pricing dynamics, and neighborhood amenities. This knowledge enables them to provide valuable insights to clients, helping them make informed decisions.
Negotiation Skills: Negotiating the best deal is a critical aspect of buying or selling a property. Real estate agents are skilled negotiators who can advocate for their clients' interests and strive to secure favorable terms in transactions.
Access to Resources: Agents have access to a wide network of professionals, including lenders, inspectors, contractors, and other industry contacts. This network can be beneficial for clients, as it facilitates the smooth progression of transactions and ensures that all necessary tasks are completed efficiently.
Time-Saving: Buying or selling a property can be a time-consuming process that requires extensive research, paperwork, and coordination. By leveraging the services of a real estate agent, clients can offload many of these responsibilities and focus on other priorities while their agent handles the details.
Legal Protection: Real estate transactions involve complex legal agreements and regulations. A knowledgeable agent can help clients navigate these intricacies, ensuring that all contracts are legally sound and that their interests are protected throughout the process.
Market Exposure: When selling a property, exposure to potential buyers is essential for securing the best offer. Real estate agents have access to multiple listing services (MLS) and other marketing channels, which can significantly increase a property's visibility and attract more interested parties.
In summary, utilizing the services of a real estate agent provides numerous advantages, including their deep market knowledge, adept negotiation skills, and extensive network of resources. By entrusting the complexities of buying or selling a property to an agent, clients can save time and benefit from legal protection throughout the transaction process.
Additionally, agents offer valuable market exposure through their access to listing services and marketing channels, making them essential partners for anyone navigating the real estate market.
Still not sure? Check out this PDF supplied by the National Association of Realtors, so that you can clearly see which services you are buying when you agree to exclusive agency with a real estate agent. If you have questions, please don't hesitate to get in touch!
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