A significant legal settlement has fundamentally altered the structure of real estate transactions, shifting the long-standing practice of how agent commissions are paid. This change now requires buyers to sign representation agreements before making an offer and opens new avenues for both buyers and sellers to negotiate agent fees.
For decades, sellers typically paid the commission for both their agent and the buyer's agent. The new framework creates a more transparent system where fees are discussed and agreed upon directly, empowering consumers to potentially lower their transaction costs.
Key Takeaways
- A recent legal settlement has changed the traditional real estate commission model, creating new negotiation opportunities.
- Buyers must now sign representation agreements, which specify the agent's fee, before submitting offers on homes.
- Sellers are no longer automatically expected to cover the buyer's agent commission, making all fees subject to discussion.
- Strategies such as getting pre-approved for a loan, defining service needs, and handling multiple transactions with one agent can strengthen your negotiating position.
The New Rules of Real Estate Commissions
The traditional model of real estate commissions has been upended. Previously, sellers were generally responsible for a total commission, often around 5-6%, which was then split between their agent and the buyer's agent. This structure offered little transparency or room for buyers to negotiate the fee paid to their representative.
Following a major legal settlement, this system has been dismantled. Now, the compensation for a buyer's agent is no longer predetermined by the seller. Instead, buyers must enter into a formal agreement with their agent that outlines the services provided and the exact commission rate they will pay.
Background on the Commission Shift
The changes stem from antitrust lawsuits against the National Association of Realtors (NAR) and major brokerages. The lawsuits argued that the previous commission-sharing system inflated costs for consumers. The resulting settlement aims to increase competition and transparency in the industry.
Understanding Agent Fees and Justifications
In competitive markets like the Bay Area, real estate agents often request a commission of 2.5% to 3% from their client. Agents state that this rate reflects their expertise, extensive market knowledge, and the significant time invested in guiding clients through the complex buying or selling process.
It is also important to understand that the agent does not keep the entire commission. A portion of their fee, typically between 15% and 30%, is paid to their brokerage. This overhead cost can influence an agent's willingness to reduce their rate, as it directly impacts their net earnings.
Effective Negotiation Strategies for Homebuyers
For buyers, the ability to negotiate an agent's commission is a new and powerful tool. An agent's willingness to negotiate often depends on the certainty of a transaction closing. Here are several ways buyers can improve their bargaining position.
Demonstrate You Are a Serious Buyer
Agents invest considerable time and resources into clients who may never complete a purchase. According to East Bay agent Matt Castillo, this uncertainty is a key reason for standard commission rates.
"You might be working with someone for a year, and they may never buy," Castillo said, explaining the risk agents take on.
To show an agent their time will be well spent, buyers should take proactive steps. Securing a pre-approval for a home loan is the most effective way to signal seriousness. It confirms your budget and demonstrates that you are financially prepared to make a purchase, making an agent more likely to consider a reduced fee.
Clearly Define the Services You Need
Not every buyer requires the same level of service. Some may want an agent to attend every open house, while others prefer to search independently and only need an agent for the final negotiation and closing process. If you require less hands-on support, you can use this as a point of negotiation.
Kyle Henry, a real estate agent in Burlingame, notes that clarifying expectations can lead to savings.
"That’s a good way for clients to negotiate, is defining what services they need from an agent," Henry explained.
By specifying a limited scope of work, you may be able to secure a lower commission rate that reflects the reduced time commitment from the agent.
Negotiation Tactics for Home Sellers
Sellers also have new opportunities to manage their costs. While they are no longer expected to cover the buyer's agent fee, they can still negotiate the commission paid to their own listing agent. The same principles of seriousness and defined service needs apply.
Price Point and Commission Flexibility
If you are buying or selling a high-value property, you may have more leverage to negotiate a lower commission percentage. Because the agent's total earnings will be substantial, they might be more willing to accept a rate below the standard 2.5% or 3%.
Combine Transactions for a Better Rate
One of the most effective strategies is to use the same real estate agent for multiple transactions. If you are selling your current home and buying a new one, entrusting both deals to a single agent means they stand to earn two separate commissions from you.
In this scenario, many agents are willing to reduce their fee on one or both transactions as an incentive to secure your business for the dual deals. This creates a mutually beneficial arrangement.
Advanced Approaches to Commission Discussions
Beyond the basics, consumers can use market knowledge and strategic positioning to their advantage. Stephen Brobeck, a senior fellow at the Consumer Policy Center, offers advice for navigating these new conversations.
For Buyers: Frame the Negotiation Around Your Offer
If an agent is hesitant to lower their fee, buyers can push back by highlighting how it affects their competitiveness. Brobeck suggests asking, "Won’t that put my offer at a disadvantage if another buyer has successfully negotiated a lower rate?" This question reframes the commission as a factor that could impact the seller's net proceeds, making your offer more appealing.
For Sellers: Keep Compensation Negotiable
Brobeck advises sellers to instruct their listing agent not to advertise a specific commission rate for the buyer's agent. Instead, they should simply state that compensation is negotiable. When a buyer's agent requests a certain rate, the seller can then offer a slightly lower amount, such as a half-percentage point less.
"Many buyer agents will accept that, and they will amend their agreement with the buyer," Brobeck said. This approach puts the seller in control and can lead to significant savings.
Ultimately, the key is to shop around and understand the prevailing rates and services offered by different agents in your market. Being informed and prepared to discuss fees directly is the best way to ensure you are receiving competitive terms.
