A Big Change Coming to Home Buying and Selling

We’re about to enter an entirely new era in home buying and selling. A settlement in a federal antitrust case will soon end the standard way of paying for a home sale that has been in place for decades. The net effect is that the cost of buying and selling may come down a bit, as it is expected that real estate agents will collect billions less each year in sales commissions.

But while the overall cost will come down, home buyers will likely now be on the hook for the cost of having a pro help them navigate the process, which is not a closing cost that buyers have directly paid in the past.

Under the old system that is scheduled to be phased out by July, sellers agreed to pay 5% to 6% of the final sale price as a real estate commission; their agent then split the commission with the buyer’s representative. Not only was that 5% to 6% high (it is typically much lower in other countries), but it meant that the seller bore all of the cost.

Now I want to be clear: that doesn’t mean buyers didn’t indirectly pay plenty. Even though buyers didn’t have to pay any of the commission costs in cash as a closing cost, the reality is that home prices effectively baked in all or part of the cost, as a way for sellers to recoup the commission cost.

Under the new rules, sellers will pay their agent and only their agent. Given the only way to currently get your home the widest audience is through the multiple listing service which requires representation through a real estate agent/broker, sellers will still need to pay the commission. But because that fee will no longer be split with a buyer’s agent, the seller can expect to pay a lot less to hire someone to help them market their home for sale. For example, if the standard in your area was 6% and half of it was shared with the buyer’s agent, the same listing might now cost a seller 3% because the seller’s agent will not split the fee with a buyer’s agent. In strong seller’s markets that gives the seller a chance to net more from the sale. In a softer seller’s market, it might enable sellers to set a slightly lower price given they are not paying such a large commission.

The story is a bit more complicated for buyers. To repeat: under the new system, the seller will not foot the bill for a buyer to have an agent. That means it will fall to the buyer to pay the agent. Or the buyer can skip having an agent and negotiate directly with the seller and seller’s agent. This strikes me as a potentially dangerous situation for first-time homebuyers. When you’re a home-buying rookie, the value of an agent can be especially important in helping you navigate the search, the offer process, and renegotiating when home inspections find costly issues. But let’s be real: first-time buyers are already hard-pressed to come up with the down payment and closing costs. The prospect of now having to also pay a 2%-3% fee to an agent is just more pressure on already-stretched first-time buyers.

And it’s unclear how all of this will play out. I think we just need to be patient as the industry digests this seismic shift. As I noted earlier, the old commission system is currently scheduled to end in July. But given all the moving pieces to settling a federal anti-trust suit, that could be extended. Moreover, I think we will begin to see entirely new approaches to how buyers and sellers can hire representation. 

The end of the old system should also usher in an age of better transparency, where both buyers and sellers clearly understand that all fees are negotiable, and a marketplace where agents and brokers are more upfront about that fact.

But for now, let’s just wait and see how the U.S. residential home market adapts to the end of the seller-pays-all commission structure. You can be sure I will update you as things progress.