After the National Association of REALTORS® agreed last week to new rules around real estate commissions, a breathless series of conflicting predictions erupted.
A price war is coming, and commissions will plunge, one narrative goes. Buyers will realize they're on the hook for thousands and not use agents at all, another storyline says. Both predictions could be true, but the competing narratives underscore just how complex Realtor compensation is.
How commissions work: When a home seller hires a real estate agent, the seller agrees to pay a commission -- the national average is 5%, with 2.5% going to the listing agent and 2.5% to the buy-side agent. Sometimes the listing agent gets lucky and sells to an unrepresented buyer, keeping the entire 5%.
Who pays the commission? Even this is a bit murky. Agent fees come out of the seller's proceeds at closing, but it's reasonable to assume the seller adjusts the price accordingly, and it's the buyer who ultimately pays it and rolls the extra 5% into the mortgage.
What's changing: NAR's settlement says nothing about the amount of commissions. The biggest change is that listing agents no longer will make offers of compensation to buy-side agents on the multiple listing service (MLS). But sellers and listing agents still can agree off the MLS to pay the buy-side agent's fee. Also, starting in July, a buyer agent must have a written contract with the buyer specifying the fee. Until now, NAR encouraged but didn't require written agreements between buy-side agents and buyers.
Concerns for first-time buyers: Many in the industry worry that first-time buyers -- those who need professional guidance the most -- will be priced out of professional representation. David Dworkin of the National Housing Conference calls them the settlement's "biggest losers." If commissions no longer come out of the seller's proceeds, the thinking goes, buyers won't have $7,500 or $10,000 to pay an agent.
"Most of those buyers are scraping the barrel to the bottom to come up with a down payment," says Dave Liniger, chairman and co-founder of Remax.
For now, buyers can't been able to roll commissions into their mortgages. But industry players widely expect the Federal Housing Finance Agency, overseer of mortgage giants Fannie Mae and Freddie Mac, to change those rules.
"We are talking with Freddie and Fannie to see what can be done," says Lawrence Yun, NAR's chief economist.
Atlanta Real Estate Professional with a career history of consistently breaking sales performance standards
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