Recently, have you considered buying or selling real estate? Have you recently completed a transaction? Have you noticed a significant difference in the commission paid to real estate agents compared to before? Friends who frequently follow real estate news should already know that a new commission system has been in effect since August 17 this year. Even before the new system took effect, the market began to show some changes. For those who are still unclear about the new system or don’t understand how it works, today we will explore the new commission system and things you should know!
Although the new commission system has been implemented, there are still many people who may not fully understand the situation. How is the commission paid now? How much should be paid? As a buyer, do I need to fully pay the buyer’s agent commission? Or can the seller help with part of it? It is quite normal to be confused because the new system has only been in effect for a few weeks, and everyone is still adjusting to these new rules. Moreover, due to varying market conditions across the United States, there are significant differences in how commissions are handled.
In simple terms, there are two changes in the rules now: first, listings on MLS can no longer display the commission offered to buyers. Second, agents must disclose the commission fees before providing services to buyers.
Previously, the buyer’s agent’s commission was usually paid by the seller, and buyers had minimal room for negotiation or discussion. The percentage for the transaction, such as 4%, 5%, or even 7%, was generally determined by the seller and the seller’s agent, depending on common practices in the area or negotiation outcomes. After the transaction was completed, the seller’s agent would then share or distribute this commission with the buyer’s agent.
However, under the new system, buyers now have the responsibility to pay the buyer’s agent commission. Does this put buyers at a disadvantage? Does it mean that sellers are not obligated to pay the buyer’s commission and can happily save money? Actually, it’s not that simple.
If a seller chooses not to pay the buyer’s commission at all, a dilemma may arise: the buyer’s agent is likely to immediately remove your listing from their inventory and direct clients to another seller willing to pay some commission.
As a result, the seller may lack buyers, especially in a slow market with poor sales, leading to disadvantages like low offers, low inquiries, and possibly selling the property at a lower price or lingering on the market for a prolonged period.
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In essence, the commission system has not changed fundamentally. Real estate agents still rely on earning commissions to make a living, and the commission ultimately comes from the funds buyers use to purchase homes. The change lies in who pays the commissions for both buyers and sellers, which used to be the seller who received the sale proceeds and then paid the seller’s agent to distribute. However, after the new system, the payment and who will pay the commissions can be negotiated and discussed by both parties.
While the requirement for sellers to pay the seller’s agent’s commission is relatively straightforward, sellers must also consider whether to bear the burden of the buyer’s commission, in addition to how much to pay, which should be factored in accordingly. How to consider this will be illustrated through actual case studies later on.
On the buyer’s side, now they are responsible for paying the buyer’s agent’s commission under the new system, although they can also receive it from the seller. However, completely passing the burden to the seller may be more challenging, as the current market trends lean towards a seller’s market, making it difficult to achieve. The proportion to be negotiated will also be explained through real-life examples later.
Honestly, the new system has a significant impact on buyers, as previously they rarely needed to be concerned with commission payments, as it was handled by the seller. However, now that buyers have to pay the commissions themselves, they need to be more cautious when selecting agents.
When buyers now request agents to show them properties, they may encounter a new hurdle. Agents may ask buyers to sign an agreement or contract agreeing to pay commissions before taking them to view properties. This was less common in the past but has become a prevalent situation today.
For example, Redfin requires buyers to sign a simple agreement when requesting to view a property for the first time, agreeing to the maximum commission percentage the agent can charge. However, buyers are not obligated to commit to that specific agent immediately. This open agreement allows buyers to consider other agents. But if the same buyer approaches the same agent for a second viewing, a formal contract would be required to establish the agent’s representation of the buyer.
Whether all real estate brokerage companies follow this practice is not clear-cut. Some buyers have reported being asked to sign a detailed contract right away when requesting to view a property, comprising up to 12 pages. This direct approach can be overwhelming for buyers, as signing a contract, especially without having met in person, can seem abrupt.
While this may not be deemed wrong, as the new rules prevent buyers’ agents from directly receiving commissions from sellers, agents must ensure the buyer’s willingness to pay the commission before continuing their services. However, this change requires adaptation from buyers, who may question why they now need to sign such agreements when it wasn’t a necessity before: “Why do I have to sign this agreement now? Does signing mean I have to pay this much? The house prices are already high; now I have to pay the agent’s commission too!” These may be concerns for many buyers. If you still don’t fully understand, it’s essential to quickly adapt to the changes brought about by the new system.
According to a survey commissioned by Redfin in February, nearly 30% of homebuyers in 2023 did not know how much commission their agent received, with around 20% unsure of who paid their agent.
So, how much commission should buyers reasonably pay their agents? There is no fixed answer to this question, as commission rates vary based on local factors and negotiations between buyers and agents. Generally, the commission rate falls within 1% to 2.5% of the purchase amount.
For instance, in California where property prices are generally high, with Silicon Valley properties easily exceeding a million dollars, a 2.5% buyer’s commission on a $1 million property would amount to $25,000. Therefore, many local buyer agents may not charge that high a commission and may operate around 1%. Nonetheless, the actual rate depends on the agent’s experience and the services provided.
If a reputable agent is sought, their fees may be higher. An experienced agent once stated that if buyers wanted to pick an agent through interviews, she would decline to represent them. Therefore, high-profile individuals or well-known figures may not conform to average commission rates.
Assuming a 2.5% buyer commission, even with the buyer’s consent, does the entire 2.5% have to be paid solely by the buyer? Not necessarily. Some sellers are willing to offer buyers a certain percentage or fixed amount of commission to attract buyers. For instance, if a seller offers 1%, the buyer only needs to cover the remaining 1.5%.
One should note that due to new regulations, listed properties cannot specify on the MLS platform how much commission is offered to buyers. Therefore, to determine whether a seller is willing to provide commission, the buyer’s agent needs to inquire directly with the seller’s agent.
In a market where supply exceeds demand or during the off-season, sellers are more likely to proactively offer commissions to buyers to attract more offers. Conversely, in a competitive market, sellers may withhold commissions as they have ample interest from potential buyers. It’s essential for consumers to rely on experienced agents’ market sensitivity to gauge market conditions since discerning a market’s heat can be challenging for an average consumer.
In a case in Philadelphia, a listing with a $350,000 price tag had the seller’s agent suggest offering a 1.5% commission to attract more bids. They eventually received 12 offers, with half of the buyers requesting a 2.5% commission. Among them, the two highest offers only required a 1.5% commission. Ultimately, this eased the negotiation process.
In another case in Washington D.C., although most sellers were still willing to pay commissions to buyers, one scenario stood out. Despite the seller offering a 2.5% commission, one buyer, to stand out among many offers, waived the commission offered by the seller and opted to pay the buyer’s commission themselves. This showcases the cutthroat nature of the market, where those with capital have an advantage.
Looking at a case in Salt Lake City, the seller’s agent received several inquiries from buyer agents asking, “How much commission can you provide?” The seller’s agent always replied, “It depends on your bid; higher bids allow us to offer more money to the buyer’s agent.” Later, one buyer hoped the seller would pay a 3% commission, but their bid was low and included requests for the seller to cover transaction costs. In the end, the seller agreed to pay a 3% commission but required the buyer to revise their offer. The buyer eventually increased the purchase price and waived the transaction costs.
In high-end property transactions, negotiating commission payments is an ongoing process as even a 0.5% difference can amount to tens of thousands of dollars. Astute agents always ensure they secure the best deal for their clients. For a luxury listing in Orlando, Florida, initially offering a 2.5% buyer’s commission, negotiations ultimately settled on a 2% commission.
Overall, in most regions, sellers are still willing to provide commissions to buyers. However, both parties must engage in consistent communication, negotiation, and bargaining, unlike the fixed patterns of the past. In other words, it adds a bargaining chip for both parties, enabling them to influence or attract each other mutually. ◇