Decoding the Changes in Real Estate Commissions

Decoding the Changes in Real Estate Commissions

Summary:

• Real estate commission changes for buyers are now in effect.
• Here’s how the changes in real estate commissions impact buyers.
• Here’s how they impact sellers.
• The silver lining to the commission changes.

On August 17, the changes in real estate commissions took effect. It’s been causing a great deal of confusion. Try not to rush to any conclusions or feel overwhelmed just yet. The residential real estate market does not move quickly. It will be some time before we know if these changes actually reduce housing prices.

What you can expect right away is that agents will be following the new rules even if some of them are flummoxed at first by the complexity.

First, some context: A Kansas City jury found the National Association of Realtors (NAR) guilty of conspiring to inflate agent commissions. The jury ruled that the defendants violated the Sherman Antitrust Act of 1890 and now seller and buyer commissions are decoupled. Commissions are now negotiable as a result of the lawsuit, but I like to remind everyone that they always were. What changes immediately is who pays the commission as seller and buyer agents are decoupled.

What does the change in commission structure mean for buyers?

How does this impact buyers? If you are in the market, expect to be asked to sign a buyer agreement immediately. Agents will not be showing properties until they have an executed agreement. The exception is if you are attending an open house without representation.

Perhaps you feel confident that without a buyer’s agent you can locate a property, glean the in-depth knowledge needed to make a wise decision, negotiate the price and terms and get to the closing table successfully. In that case you might save yourself money on the overall closing costs — but it could come at the expense of your time and mental health.

Navigating a complicated NYC transaction for the first time can be a stressful journey and it helps to have someone knowledgeable guide you through the process and explain best practices along the way.

“Julia and her team were with us all along navigating a quite complicated process,” said Elena Kudravtseva. “She responded to zillions of our queries and requests without any delay and always ready with professional advice.”

One buyer from the West coast was quite confident in her ability to purchase without representation a few years ago. When I caught up with her six months after her sale, she told me it was not easy, and she regretted going it alone. Clearly there is a reason realtor fees in New York City are worth it to many savvy buyers.

If you do choose to work with an agent, you will negotiate that fee up front. It is imperative that you understand what services you will receive in exchange for that commission fee — and that you have options for what type of commitment you make to the agent. Is it just for all properties, just a few properties or a one-time showing fee? The choice is yours.

Yet buyer beware. In the past it was easy to switch agents in NYC if you were not happy with your representation. We did not use binding agreements. Countless times I have encountered a buyer who had begun looking at properties with an agent they liked, who was responsive and engaging, but ultimately didn’t have the market insights and knowledge the buyer felt they needed to make an informed choice.

Real estate is local. Understanding the nuances of a neighborhood comes from experience, not the Internet. Freshly licensed agents are well versed in anti-discrimination laws but unless they are backed by a senior agent or come from a real estate background, their value is limited to opening doors at first.

You should expect to pay for knowledgeable advice and guidance from a buyer’s agent just as you expect to pay any service professional. 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 which are not initially apparent. Agents do much more than simply locate the right property for purchase. An experienced agent will be happy to discuss the full suite of services they offer and how they benefit you and your real estate investment.

Are you selling a property?

Sellers now have a choice regarding the buyer agent commission. They are not obligated to pay it and their listing agent cannot point out to them that such a decision might make their property less competitive. Listing agents using an MLS cannot list what the seller is offering to pay the buyer’s agent. The buyer’s agent must reach out to the listing broker in advance of showing the property to find out if the seller is paying the commission or not.

If you are selling a property and not offering to pay the buyer’s agent’s commission and the buyer has signed an agreement offering to pay their agent’s commission, the buyer will be on the hook to pay their agent at the closing. The buyer can ask you as the seller to pay that commission when submitting an offer purchase.

What goes into the buyer’s pricing analysis might surprise some sellers. 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. To purchase a New York City property, buyers 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.

The Real Deal Behind the New Rules

Apart from these new regulations, 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 (every building has its own policies). 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.

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.

At first glance, the new changes to laws about real estate commissions could mean that buyers or sellers can save on commissions. But will these changes ultimately lead to lower housing prices? We shall see over time. But according to top economists, the run up in housing prices nationwide is complex, not largely attributed to commissions but rather supply and demand.

The one silver lining to these new commission regulations might be the transparency they bring to the marketplace. It’ll help buyers and sellers alike understand the role of their agent in depth. Because as all top agents know, it takes far more than a designer suit and looking good on camera to help buyers and sellers transact successfully.