Sometimes, I have to laugh at how small our worlds can be. For agents and investors, there has been lots of talk about the new NAR rules regarding commissions for agents. If you aren’t an agent, you probably aren’t privy to some of the chatter between licensees, and that has been more than comical. I’ve heard everything from unbelievable hubris to complete ignorance about how the changes will or will not affect people’s livelihoods.
The funny thing is, most of the public hasn’t heard anything about these changes. They don’t know how commissions are currently paid, and they aren’t thinking about it now, either. They just want to buy and/or sell their home and know they need help to do it.
I’ve spoken to dozens of new clients about this over the last few weeks, and most of them shrug it off and tell me that they haven’t heard about any changes and will just pay whatever fees we agree to, exactly as they had expected to in the first place.
What’s Going On?
As for those of us in the real estate world, ostensibly, you’ve at least heard rumblings about changes regarding compensation for agents, but nearly every news article, blog, forum, and social media post I’ve read has conveyed a solid lack of comprehension regarding what is actually changing. If you aren’t sure what the deal is or what has or has not changed, I’ll explain.
Regarding commissions, how much they are, and who pays them, literally, nothing is changing. I know—you were going to sell your property and are all excited because you don’t have to pay a buyer’s agent any longer. Guess what? You never had to pay a buyer’s agent.
As a buyer, you might have been having a mild panic attack because you heard that you have to pay your agent cash out of pocket, but that’s also not necessarily true. At least, it’s no more true today than it was five years ago.
The only tangible thing that is changing is how commission payments are disclosed to consumers. That’s it.
Lazy buyer’s agents who brought no value to their clients used to be able to sucker people into working with them by telling their buyers that they worked for “free.” This was obviously a lie since their goal was to get paid, and rightly so, but that was dishonest.
There’s always been a misconception regarding how real estate commissions work. The script has always been that the seller pays both their agents’ commissions. That’s just a dishonest way that buyer’s agents have tried to sell their “services” for years. When a property closes, who brings the down payment and loan to the deal? Certainly not the seller.
So, who is really paying those commissions? That’s what these changes are all about: clarity regarding where those payments come from and who is paying them.
What Will Change for Buyers and Sellers?
In reality, you should be seeing a couple of changes in how deals play out for both buyers and sellers.
For sellers
For sellers, your agent never should have told you that you are required to pay a buyer’s agent commission—that’s never been the case. The way it should be presented is that you can:
- Offer to pay a set compensation for a buyer’s agent if you choose,
- Ask buyer’s agents to make their compensation part of their client’s offer,
- Or you can just offer no compensation of any kind.
This is the same as it was before, but consumers weren’t always provided with all those options, even though they always existed.
Until a few weeks ago, agents could see what kind of compensation sellers were offering. Even though it’s an ethical violation, it is well known that some buyer’s agents would steer buyers to listings that offered higher compensation and not show them properties that offered lower compensation.
Now, all MLSes nationwide no longer publish compensation information on their listings. The buyer’s agents now simply need to call the listing agent and ask them what type of compensation the seller is offering, if any.
For buyers
For buyers, a couple of changes regarding your experience are on the way. Buyer’s agents are required to disclose to you how they will be paid before they show you any properties, and they are required to have you sign a form attesting that you’ve had that conversation with them and understand how they’ll be paid. Exactly how they can or will be paid is not changing; it’s simply that they have to disclose that information up front, and they can’t hide behind the lie that the seller pays all the commissions and they work for “free.”
Don’t start stressing out about having to save up another 3% to pay your agent when you are buying a property. Nothing about the way you pay your agent is actually changing. Sure, you can pay them with cash out of your pocket if you like, but that was an option before.
You might be offering on a property where the seller has included compensation for your agent in their pricing, just like before. You can also make an offer that includes commission for your agent as part of the deal, just like before.
I could go into all kinds of boring details about how retail prices of real estate already include value that compensates for commissions, but that’s boring and irrelevant. Just know that you don’t necessarily have to come up with more cash—just negotiate with your agent about how they will be compensated and move forward just as you would have before.
For clarity: Your agent’s commissions have always been 100% negotiable. There’s no “standard” commission structure and never has been.
You can pay your agent $0, an hourly rate, for every door they open, for every open house, or you can pay them a percentage of the sale price. Heck, you can just agree to a flat fee of any kind. It’s always been that way—no changes there.
How Am I Handling All This?
To be completely honest, I had no idea that this was an issue in so many states. I work and live in Idaho, and we’ve actually had these types of disclosures built into our buyer’s representation agreements for decades now. As this news story unfolded, it was a real shock to me that other states didn’t all require buyer’s representation agreements or disclosures regarding how agents were compensated. That would make it pretty easy for lazy agents to hide behind that idea that their client doesn’t have to pay them.
How does that change how my team will operate day to day? Honestly, not much.
As mentioned, when we work with buyers in Idaho, we’ve always had to disclose how our commissions were paid, and the buyer’s rep contract that we use has always stated that if the seller didn’t pay us, our client would. Guess how many people have complained about that over the years and hundreds of transactions we’ve done? Zero. We work hard to bring real value to our clients, and your agent should too—and they should be paid fairly for that expertise.
The only functional change we are making is that initial disclosure regarding compensation before we show a property. It’s now required for every Realtor in the U.S., and your buyer’s agent should be doing that too. In Idaho, we’ve always been required to disclose a consumer’s rights to representation before we have any meaningful business dealings with them, so now, we just add to that conversation about the different ways we can be compensated. No big deal.
Final Thoughts
So many agents are worried about how this will affect their business, and rightly so! If all you have done is buy Zillow leads and open doors for prospective buyers, you aren’t adding any real value to the buyer experience. You should be worried because it will be very difficult to explain to your clients why they should pay you.
I’m actually pretty excited about these changes. Don’t get me wrong—I don’t love the extra paperwork, but I think this will clean up the industry a bit, and the agents who have been getting by on their good looks and shiny cars might be going away.
It will be more important than ever before to show your clients that you offer true value, because you’ll have to justify to them why they should pay you before you even open a door. I firmly believe you’ll see higher-quality service and more effort from agents in the near future.
That’s a good thing for real estate, and it’s a good thing for agents too. Just don’t expect to see an immediate drop in prices or think you’ll be able to get an agent to work for “free.” However, I think you can certainly expect much higher-quality experiences and significantly better service from agents in the very near future. Stay tuned.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
