Real estate commissions just changed in a major way and there's a lot of confusion in the market right now. It's true that we're in the midst of a major change up that will likely have long-term impacts on the market. However, just because things are changing doesn't mean you have to miss out.
With the proper guidance, you can navigate the new buyer's agent rules with confidence and still get a great deal on the home of your dreams. In this guide, we'll be unpacking everything you need to know about the new law on real estate commissions and explain how it may impact the future of the market.
In the past, unless otherwise negotiated, it was traditionally the seller's responsibility to pay the commission for both the buyer's agent and their own. It would be deducted from the sale's profits at closing, and most sellers simply accepted the arrangement as a normal cost of doing business.
This made it a no-brainer for buyers to seek representation because they would receive the guidance of an expert without having to pay anything out of pocket. But, a landmark lawsuit against the National Association of Realtors recently changed everything.
In May 2023, a federal judge found the NAR guilty of conspiring with several large brokerages to artificially inflate real estate commissions. The NAR eventually reached a settlement, agreeing to pay $418 million in damages and institute new realtor commission rules.
According to the new rules, home buyers now need to pay a commission if they wish to be represented by an agent. The seller will still be responsible for paying their own agent, but it's no longer the norm for them to foot the bill for both commissions. However, that doesn't mean you can't negotiate to have the buyer's real estate commission included in the overall package, which will be discussed later on.
While these new real estate rules will mean an added cost for buyers, it's important to understand how broker relationships work and why it's wise to seek representation, even if it means paying out of pocket.
Ultimately, agents have a fiduciary responsibility to act in their client's best interest. If the seller is the one who hired the agent, that agent has a duty to work toward satisfying the needs of the seller.
As a buyer, if you go directly to the listing agent without seeking your own representation, you could easily get the short end of the stick because the broker isn't required to look out for your needs the same way they are for the seller. Even if they seem friendly and helpful, their goal is to get the best outcome for their client, which may not align with what's best for you.
While many buyers may not like the idea of paying a commission out of pocket, the new model has many advantages that could have positive impacts. That being said, there are disadvantages as well, especially for buyers at the lower end of the market. Here are some of the major pros and cons of the new real estate agent commission law.
The new commission law for realtors could have serious impacts for both buyers and sellers. Here are a few real-world examples of how the impacts may affect those without the proper guidance to make informed decisions.
According to Mukul Lalchandani, founder of Undivided, "I saw one case, where an agent was only offering 1% in commission. The place was initially priced at around $4M and continued to sit on the market for an extended amount of time before eventually dropping to $3.2M, last I checked. To save about $80,000 in commission, they dropped their price by $800,000. The math does not add up. Don't focus on the small details, focus on the bigger picture."
The new rules on real estate commissions could also be detrimental to inexperienced buyers who lack the knowledge and expertise needed to make informed buying decisions on their own.
Mukul says, "I cannot tell you how often I get buyers that send me listings that are too good to be true. A 3-bed in the heart of Manhattan for $350k. And it's been on and off the market for 24 months. They love it, and I tell them to stay away.
They don't realize that it may be that the building isn't being operated correctly, or it's an unreasonable co-op board, or they have severe financial problems. The list can go on and on, but if you don't have an expert by your side who knows the lay of the land, you may end up making a really costly mistake, more expensive than the 2 or 3% or whatever fee your agent would charge you. It's a fraction of what you will be spending.
Are you willing to risk hundreds of thousands or millions of dollars and gamble that you hope you are making the right decision? I wouldn't. I'm an agent, and I hire agents when I want to buy a property, because I may not know the local area, and I want to make sure my best interests are being met."
Whether you agree or disagree with the real estate agent commission fee law change, it will undoubtedly have long-term impacts on the industry for years to come. Here are a few of the most likely outcomes.
Even though the new real estate commission law change means that it's no longer the seller's responsibility to compensate the buyer's agent, that doesn't mean it can't be negotiated.
It's still possible to convince the seller to package the buyer's commission into the entire deal if you have some leverage. That's where having an experienced agent with keen negotiating skills and market knowledge can come in handy and potentially pay for itself.
In situations where this isn't possible, you can ask the seller to increase the property's purchase price by an amount equal to the buyer's agent commission, so you can lump it into your mortgage. However, for this to work, the property will need to appraise for at least that amount to qualify. An experienced agent can help you negotiate the right price to get the most value.
Understanding the new buyer commission rule changes if one thing but actually buying a home in NYC is a whole different story. But don’t worry, the experienced agents at Undivided are here to help.