New real estate rules come into effect, affecting buyers and sellers

New rules for the residential property market mean that from Saturday, anyone in the market to buy or sell a home will face unfamiliar processes, and possibly some confusion.

The ‘practice changes’ stem from a 2023 legal decision on how estate agents are compensated.

Traditionally, when a home sells, the seller pays a commission of roughly 5% to 6% that is split between the buyer’s and seller’s agents. The lawsuit alleges that this structure has helped keep commissions higher than they otherwise would have been. It also means that the seller has to pay the agent representing the other side of the deal, a practice that many observers see as inappropriate.

“A lot of this industry doesn’t make sense from a common sense standpoint,” said Stephen Brobeck, a senior fellow at the Consumer Federation of America, who has been advocating for broker commission changes for decades. “The main argument has been that it’s not fair for sellers to pay both the listing agent and the buyer’s agent.”

Now, the seller will need to decide whether to pay the buyer’s broker, and how much. Whatever the decision, that information can no longer be included in what’s known as the Multiple Listing Service, or MLS, the official real estate data service used by local broker associations.

However, whatever the seller decides about compensation may be communicated to him personally via phone or text message, announced via social media, a lawn sign, or other informal means.

Meanwhile, buyers will be required to sign an agreement with their broker before they can begin showing homes. The buyer and agent must agree, in writing, on how much the agent can expect to receive from the buyer.

There’s some latitude in exactly what that means. A recent explanation of the rules from the National Association of Realtors says they must be “objective (e.g., $0, X flat fee, X percent, X hourly rate)—not open-ended (e.g., the buyer’s broker’s compensation cannot be whatever the seller offers the buyer).”

“Anytime we have the opportunity to have a conversation with a consumer about the value we bring to the transaction, the services we are going to be able to provide them in what is likely to be one of the largest financial transactions of their lives, we expect to get paid for it and it is completely negotiable, and that is a good thing,” said Kevin Sears, president of the National Association of Realtors.

The group is a powerful Washington lobby with more than 1.5 million member agents — about 85% of the country’s real estate agents.

“The more educated and empowered the consumer is, the more conversations we have with consumers, the better off everyone is,” Sears said.

Many elements of the new practices will be familiar to many real estate agents, buyers, and sellers. Many states have long required buyers to sign a brokerage agreement before the process begins. The emergence of alternative brokerage models, such as Redfin, means many homeowners are realizing they have options beyond the traditional method of paying 3% to the listing agent and 3% to the buyer’s agent.

But questions about what the changes will mean in practice are frustrating clients across the country. What happens if a buyer has the money to reimburse their broker a certain amount, but falls in love with a home that could cost them more than the commission? On the flip side, what happens if a particular home seller turns out to be willing to reimburse the buyer’s broker as well?

Many real estate agents say a process that was supposed to bring transparency only creates more confusion.

“Now a buyer’s agent has to go to every listing they’re going to show to see what the commission is,” said Aaron Farmer, owner of Texas Discount Realty in Austin.

In Austin, where the pandemic market is booming turned sharplyAs unsold inventory piles up, Farmer believes it’s natural for sellers to want to compensate buyers’ middlemen, as a way to sweeten the deal. However, that may not be the case everywhere, and Farmer also worries that ego could get in the way of smart business decisions in some transactions.

Andy DeFelice, owner of Exclusive Buyer’s Realty in Savannah, Georgia, believes first-time buyers will lose the most from the rule changes. She believes many who are strapped for cash may also struggle to come up with the money needed for the commission, forcing them to negotiate on their own.

“Don’t force our clients into a situation where they have no representation in the biggest deal of their lives,” DeFelice said. “If you’ve never done it before, it’s not easy. There are many steps to buying a home.” Do you know a good termite inspector, a good insurance agent, a good lender?

DeFelice says she’s confident the industry will weather what she calls the Saturday deadline “hiccup” and adapt relatively quickly, but others expect bigger changes to come.

“For consumers, things aren’t going to change much in the near future,” Brobeck told USA TODAY. “But it’s like a dam that’s leaking. I’m pretty confident that in five years the industry is going to look very different.”

The farmer from Texas Discount Realty agreed.

“I’m already seeing a lot of people say, ‘I’m going to get out of the industry, I don’t want to deal with the changes,’” he said. “The way I’ve always looked at it is if there are fewer agents, it helps the industry. You can lower commission rates that way and get more volume.”

Andrea Riquier covers the housing market.