The Change in Buyer Agent Commission Rules. What Does it Mean to You?

The Sitzer/Burnett verdict handed down in October 2023 has thrown buyer broker commissions into the national headlines and inspired a series of copycat suits. If you missed the headlines, a Kansas City jury found the National Association of Realtors (NAR) guilty of conspiring to inflate agent commissions. Less than a month later a class-action lawsuit was brought against the Real Estate Board of New York (REBNY) claiming the same. 

Now the Department of Justice has proposed decoupling commission and prohibiting sellers from paying the buy side commission. Real estate commission has always been a popular topic of conversation. These lawsuits are focusing on buyer agent compensation versus the commission paid to agents representing sellers. How it will impact you if you are purchasing New York City real estate?

It might not be as advantageous as the headlines would lead you to believe.

Real Estate commissions have always been negotiable 

It’s true: real estate commissions are not set in stone. New York City does not have a Multiple Listing System (MLS) which always surprises buyers from other parts of the county. In its place there is the Residential Listing Service (RLS) which is controlled by REBNY. This allows member firms to share their listings with each other. 

Who sets the amount or rate of real estate commissions?

For some time now, REBNY has mandated that listing agents clearly state the commission percentage the seller is willing to pay the buyer’s broker when inputting the listings into the RLS. The seller pays the buyer’s agent directly as opposed to paying the listing agent who would then distribute the funds. These efforts were undertaken long before the recent verdict to create more transparency. There is also an Agency Disclosure statement which is presented to sellers and buyers alike, so they are fully aware of who pays the commission.

While the best real estate agents in NYC don’t like to advertise that commissions are negotiable, the truth is they are, and they have always been. Since January 1, 2024, a new level of transparency has been added to the process. All of the listing agreements which my sellers have signed since the beginning of the year clearly state what percentage commission they are paying on the listing side and what percentage they are paying to the buyer’s agent. 

All sellers have the option not to pay the buyer’s agent and this is always discussed in advance of signing the agreement and listing the property. I am not privy to what other agents are doing with regard to their commission agreements, even in my own company, so I can only represent the best practices of my own business. 

What drives the commission system?

Apart from the law, what underpins the commission system in New York City is a high degree of competition, the expense of purchasing property, and the inherent complexity in every deal. If you are selling a property in Manhattan, it likely represents a significant percentage of your overall net worth.

Therefore, when it comes time to sell, a rational actor will choose a sales and marketing strategy which generates the highest possible sale price the market will bear. To achieve that end, sellers need to reach the largest pool of buyers. 

Approximately 80% of all residential real estate transactions in New York City are co-brokered, meaning there is an agent representing the seller and a different agent representing the buyer. 

Motivating a buyer’s agent to bring their client to the property is in the seller’s best interest. Making the property attractive to a potential buyer includes stellar photos, accurate listing details, making it widely available and of course the list price. What goes into the buyer’s pricing analysis might surprise some sellers as it includes more than the price of the property. Buyers also look at the cash they need on hand and a smart seller understands why.

Let’s take a look at how much cash a buyer needs on hand to purchase a New York City property. They are required to make a down payment of at least 10-20% of the purchase price or higher depending upon the individual building’s requirements. In addition, buyers have steep closing costs which are paid in cash at the closing table ranging anywhere from 5-7% of the purchase price. 

When purchasing a co-op (approximately 70% of the housing stock), an additional 12-24 months of housing payments (monthly mortgage plus monthly maintenance fees) are required to be in the buyer’s bank account after closing. This post closing liquidity requirement is common, requiring even more cash on hand than a typical single home purchase. If a buyer must now also pay their agent’s commission, the costs will become prohibitive for some buyers. Their alternative would be to forgo representation altogether.

We see a range of commission percentages offered to buyer’s agents in New York City. It has always been the buyer’s agent’s responsibility to understand what they will be paid for each property. I learned this years ago the hard way. What has changed in the wake of the recent lawsuits is potentially making the practice of sellers offering less commission or even none to the buyer’s agent a more common occurrence. 

Buyer’s who chose to be represented by an agent may now find they are asked to pay their agent’s entire commission or contribute to a portion of the commission. Agents are in the business to make money. It is not a volunteer position despite how much most of them love being helpful. Their role may be different than you imagine, encompassing far more services than are initially apparent. Agents do much more than simply locate the right property for purchase.

Sellers have options regarding how much they pay a buyer’s agent, and they have for some time. However, based on the reality of how much it costs to purchase a property in New York City, a seller who is trying to reach the largest number of buyers is likely to choose to pay the buyer’s agent — and not create an additional financial burden for the buyer.

Certainly, there are approximately 20% of deals which successfully close every year without an agent. Those buyers are potentially getting a better price on the property and saving money — but at what cost?

NYC is complicated

Even the savviest real estate investors from other parts of the country are always surprised by how complicated it can be to purchase in New York City. Last year my team and I worked with a buyer who had purchased over 50 properties in his home state. He was shocked by what it took and grateful for our guidance. What about the busy executive relocating for a job who needs to hit the ground running? They need a great deal of support. 

One buyer from the West coast was quite confident in her ability to purchase without representation. When I caught up with her six months after her sale, she told me it was not easy, and she regretted going it alone because of the time it took and the stress it created.

Clearly, realtor fees in New York City are worth it to many buyers. And while navigating the complicated buying process is one hurdle the other is finding a property which will maintain its resale value.

If you are in the market for a Harlem brownstone, an Upper West side condo, a downtown co-op or even a new development, working with a buyer’s agent will likely continue to be in your best interest. Accessing top notch professional advice earned from decades in the business comes at a price most buyers are willing to bear when forgoing such guidance has consequences. The time and money saved almost always outweighs the cost. 

Buyers need representation

And while the lawsuits, on their surface, appear to be in the best interest of the buyers, I would argue that in New York City real estate, a new level of complexity has been added for those looking to buy a home. Ironically it creates an even greater need for buyer representation.

If the DOJ succeeds in decoupling commissions forbidding sellers to pay a buyer’s agent commission, it will have added transparency but at what cost to homebuyers? Home ownership is now beyond the reach of many who would like to own. With no choice but to rent, there are plenty of would be buyers who remain at the mercy of rental market dynamics rather than locking in a more stable monthly housing cost which would enable them to build wealth. 

Higher mortgage rates, lower inventory and fewer homes being built have all driven up costs. Does adding the cost of professional guidance gained by working with a NYC real estate agent in a city as expensive as New York really help the consumer — or are other forces at play?