What Homebuyers Need to Know About the New Rules for Paying Real Estate Agents
Prospective homebuyers ready to start house hunting this fall will first have to wade through brand-new rules for real estate commissions.
The changes, which took effect in August and represent a landmark shift for the housing industry, are the result of real estate trade group the National Association of Realtors settling multiple lawsuits about the commissions real estate agents earn when homes are bought and sold.
Previously, it was common for sellers to compensate both their agent and the buyer's agent. They would pay the agent they hired who would, in turn, split his or her commission down the middle with the buyer's agent. While sellers are still allowed to pay the buyer’s agent commission — and real estate pros say many are likely to, especially in competitive buyer’s markets — the settlement removes the nearly universal expectation that they will.
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View RatesNow, buyers will have more say in the commissions they’re paying, after NAR agreed to change how and where agent compensation is published.
“Some sellers are continuing to offer fee splitting, which they already did before. The difference is they can’t say that” in the listing database, says David M. Dworkin, president and CEO of the National Housing Conference, a housing-affordability advocacy group. “The buyer has to ask, and the buyer’s agent will tell them,” he says.
Real estate agent commissions have always technically been negotiable, but consumer advocates say the way the commission structure was codified effectively locked in the price, and the Department of Justice frames the changes that came out of the settlement as beneficial to homebuyers.
Yet while the goal is to lower costs for homebuyers and sellers, the settlement is likely to make the process more complicated for buyers. Here’s what you need to know to make your home search go smoothly.
How the new real estate commission rules affect homebuyers
The settlement effectively dismantles the old structure and gives sellers a better platform for negotiating how much they pay their own agent. One of the biggest changes is the way prospective buyers interact with real estate agents. Before an agent can bring you to a listing so you can see a house in person, you’ll have to sign a contract with him or her. These contracts specify what work the agent will do on your behalf and how much you will pay them.
In high-priced housing markets, making the buyer responsible for their agent’s fee can financially benefit both buyers and sellers. The conventional wisdom is that home sellers tack on the 3% they’ll have to pay the buyer’s agent to the price of their home when they list it. If that dollar amount is backed out of the price in exchange for the buyer paying their agent directly, there are a couple of benefits, says Kumi Hodge, a real estate agent with eXp Realty of California who is based in the San Francisco Bay area.
For the buyer, a lower house price can mean lower property taxes. While tax assessors don’t levy taxes based on sale prices, they do take those numbers into account, especially in areas with fast-rising home values. For the seller, a lower sale price means lower capital gains taxes — a consideration for people in expensive housing markets where even a modest home may exceed the exemption of $250,000 in profit.
But the potential savings also mean more pre-house-hunt research for buyers. If you’re thinking about buying a home, you’ll want to research agents before you ever start looking at home listings.
“What this new law is going to do is push out the newbie agents and part-time agents who don't take the job seriously,” says Matt Laricy, managing broker and partner at Americorp Real Estate in Chicago.
How do you interview a real estate agent?
While you might click with the first agent you contact, experts recommend interviewing multiple agents since buyer's agreements are typically exclusive — that is, you can’t go sign up with a different agent until the first agreement ends.
“If you find a random agent and find out they just got their license last week, you're stuck,” says Nitin Gupta, a broker associate with Competitive Edge Realty in Plano, Texas. “You want to do your due diligence upfront.”
Pay attention to the wording your agent uses, Hodge says. You want someone who quickly and clearly articulates that their fee is negotiable and is the responsibility of the buyer if the seller is not willing to cover the cost. Any vague or confusing language — particularly if it characterizes the agent’s services as “free” to the buyer — is a red flag. “Commission has always been explained poorly” by many agents, he says. “Make sure the agent you're working with is updating their lingo, at the very least.”
Of course, you want an agent who’s good at their job. But if you’re a first-time homebuyer — or if it’s been years since you were last in the housing market — it can be hard to tell who knows their stuff and who might just have an appealing sales pitch.
Real estate pros say there are specific questions you should ask and criteria you should evaluate to get a better sense of how agents approach home-buying and how well-versed they are in negotiating for the buyers they represent.
Consider their level of experience
The first details you should gather about a prospective agent are how long they’ve had their real estate license and what, if any, additional training or certifications they have to bolster their license. While it’s not necessarily a deal breaker if an agent is new — especially if they’re flexible in terms of their fee — find out if they have a team lead they can pull in for guidance if necessary.
Beyond their long-term history, you also want to know if an agent has had a decent amount of recent work. Ask how many homes they have helped people buy and sell in the past year. Experts say it’s important that real estate agents have experience being on both sides of the negotiation table.
Find out if your property interests align with their background
You’ll ideally find an agent whose past sales align with the types of properties you’ll want to look at. To find that match, ask about the price range of the buyers they typically work with, as well as the locations and neighborhoods where they’ve bought and sold.
You should also ask if they specialize in any kinds of properties. This is particularly important in urban markets where condominiums and cooperatives — which each have their own complex set of rules — are common, as well as in areas where most homes are part of homeowners associations. Agents with the right experience can prepare you for any additional hoops you might have to jump through or any extra costs to expect, such as monthly common fees or special assessments.
Make sure you know what you’ll get out of the agreement
Before you choose an agent, you should be clear on what they’ll provide. Ask agents you’re interviewing how much time they will spend with you, how many homes they will show you and how the scheduling process will work.
It’s also a good idea to ask how they typically present offers. In a world where emails and even text messages are common, Americorp’s Laricy says having an agent in your corner who’s willing to pick up the phone is an asset. In that vein, it’s also helpful to know what kind of communication to expect after an offer has been submitted.
What can you ask to negotiate in your buyer's contract?
Once you’ve picked your agent, you still have to complete the now-required paperwork. The Consumer Federation of America has published guidelines to help buyers evaluate the new contracts they can expect to see from agents. The first tip? Push back against anything that’s not in plain language. Make sure the commission amount and structure is clearly specified and that the timing of payments is clear. (Paying the buyer's agent when you close on the home is typical.)
An easy-to-understand contract will help you negotiate key questions, including:
What is your fee?
Although a fee of 2.5% to 3% of the home’s purchase price has been typical for buyer’s agent commissions, there are some early indications that the settlement is leading to more negotiation and lower fees being paid by buyers. Online brokerage Redfin found average commissions earned by buyers' agents dropped from 2.62% in January to 2.55% in July.
You can offer less than that amount, although the less you’re willing to pay, the more that will limit your options — either of agents who are willing to accept a lower fee, or of homes whose sellers are willing to cover your agent’s commission.
You might be able to find a newer, younger agent willing to work for a lower commission, but veteran agents caution that you get what you pay for: A less-experienced agent might accept a lower price for his or her services, but a more experienced agent might be a better negotiator, for instance.
How long is the contract for?
The duration of homebuyer contracts varies considerably depending on the market or type of property.
Kim Sandberg, a broker associate with Ponte Vedra Key Realty near Jacksonville, Florida, says a 60- to 90-day time frame is typical in her area, which has recently seen an influx of people. Gupta, who sells a lot of new construction that may take up to a year to be completed, says his contracts tend to be more in the neighborhood of nine or 12 months, allowing for time to build.
Keep in mind that because it can take a month or more between submitting an offer and closing on a home, agents say it’s common for contracts to include language that specifies that the end date of the contract will be extended until closing once an offer has been accepted.
Is there any flexibility?
Sandberg says that if you’re on the fence, it’s worth asking if the agent will include and honor a cancellation fee in the event that you don’t mesh with them.
What if there’s a dispute?
Stephen Brobeck, senior fellow at the CFA, says buyers should watch out for contracts that force you into arbitration. Look for clauses with language that mandate arbitration or mediation if a dispute arises. “You are essentially giving up your day in court,” he says.
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