ICYMI: New real estate commissions
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The average real estate commission in the United States is between 5% and 6%, largely surpassing countries like Germany (4.5%), Australia (2.5%) and Great Britain (1.3%). One might think an uproar for change would happen eventually…and it did!
The Wall Street Journal said it best: “Almost no one pays a 6% real estate commission – except Americans.”
After facing multiple class-action lawsuits claiming their practices inflated real estate commissions, the National Association of Realtors (NAR) paid a whopping $418 million settlement. Additionally, they agreed to change their agent commission fee rules, which went into effect in August 2024.
One of the most notable changes stated that sellers are no longer required to pay the buyer’s agent commission. While this change was meant to benefit sellers and buyers alike by lowering commissions, it doesn’t exactly benefit first-time home buyers. In fact, it’s likely to amplify their disadvantage, especially in competitive markets like today’s.
Before we dive into the new rules, let’s review how things used to be.
Before the new NAR rules went into effect, the seller and their agent agreed on a commission fee (in Indiana, typically 5%-6% of the home value). The commission would then be split between the seller’s agent and the buyer’s agent and paid for by the seller’s home proceeds. For a $300,000 home, a 6% commission translates to $18,000!
Most buyers found themselves in the dark when it came to commissions. They didn’t realize that the fee was negotiable, let alone what it was.
So, what’s new?
The changes that went into effect in August 2024 are as follows:
- Listings on MLS (Multiple Listing Service largely used by real estate agents) will no longer advertise the buyer’s commission.
- Buyers and buyers’ agents must enter into a written agreement that clearly states their agreed-upon fee before going to any showings.
- As mentioned, sellers are no longer required to pay the buyer’s agent commission.
The two overarching goals of these changes are to create more transparency and lower commissions.
Many agree that transparency has improved dramatically with these changes. For example, not listing the buyer’s commission on MLS forces commission conversations and negotiations to occur outside of MLS. Additionally, it keeps realtors from steering clients away from homes with lower commissions. By requiring a written agreement between the buyer and the buyer’s agent, the buyer is more involved in the commission conversation, agreeing on a fee based on the level of service required.
Whether commissions are lowering, however, is still up for debate. According to a nationwide survey by Redfin, buyer’s agent commissions at the end of 2023 (before the new rules were announced) were at 2.45%. Compared to 2.37% at the end of 2024, that isn’t a significant drop.
Additionally, Redfin found that sellers still cover the buyer’s agent commissions. However, more and more sellers are deciding to wait and see what the buyers request in their offer rather than proactively offering to cover the commission. This could change and will likely become dependent on supply and demand.
In a competitive market with a smaller inventory and higher demand, a buyer who offers to pay their agent’s commission makes a more attractive offer in the seller’s eyes. On the flip side, if the housing supply improves and there’s less demand, sellers might be more willing to cover the buyer’s agent commission to lure buyers in.
First-time home buyers
These changes will benefit existing home buyers the most. However, they could add to the already growing list of challenges for first-time home buyers.
They are entering the real estate world for the first time and are subjected to high interest rates, inflated prices, and competition while working to save enough money for a down payment. And now, they need to save up even more to cover their agent’s commission. Using our $300,000 home example above, if the buyer wants to save the standard 20% for a down payment and agrees to pay a 3% commission, that adds up to a staggering $69,000!
So, what can first-time home buyers do to curb these challenges? First, do your research, and don’t hesitate to negotiate. The difference between a 2.5% and 3% commission might not seem like a lot on paper, but it will lighten the load on your wallet. In addition, shop around for a mortgage lender and see what incentives or special offers they might provide for first-time home buyers.
After considering your potential commission expense, determine how much cash you’ll need and how you’ll come up with the money without depleting your emergency fund. First-time home buyers with a Roth IRA can withdraw up to $10,000, tax and penalty-free if the account has been open for at least 5 years. If you go with this strategy, it’s important to weigh whether it’s worth tapping into this coveted retirement fund, especially given the economic environment.
In addition, don’t forget to analyze your monthly cash flow to see how much you can afford because it doesn’t stop at just principal and interest. You must account for taxes, insurance, and even the unexpected expenses of owning a home. Be sure to give yourself some wiggle room, as taxes and insurance will likely increase over time.
Conclusion
The effects of these changes have yet to fully form, so be sure to stay in the know, especially if you’re looking to sell or buy your home. Change in the real estate industry is picking up momentum, and you could have a direct impact on its direction.
Olivia Maynes, CFP, is a Financial Planning Coordinator with Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.bedelfinancial.com or email Olivia at omaynes@bedelfinancial.com.