Buying Real Estate Is About To Get A Lot More Costly For Buyers After August 17th

The real estate industry is on the brink of a seismic shift that will have far-reaching effects on buyers, sellers, and agents. However, it is buyers who will feel the impact most acutely, especially when compared to the traditional way real estate transactions have been conducted. Due to recent commissions lawsuits and the National Association of Realtors' (NAR) settlement from March 15th, new rules will be implemented starting August 17th, 2024, which will dramatically reshape the way real estate deals are structured.

Under the current system, the seller is set up to cover the full transaction commissions - the listing agent receives the entire commission amount from the seller and then shares it with the buyer's agent through a structure called a cooperative compensation agreement, or coop. Although the buyer agent's fee is arguably factored into the purchase price, for buyers who are using financing, it can be rolled into the mortgage, making it less immediately felt and not coming directly out of the buyer's pocket.

The new structure, however, will require buyers who wish to work with a buyer's agent to negotiate and lock in a success fee with the buyer agent, which they will be responsible for out of pocket. This agreement must be entered into prior to looking at homes or at least before partaking in revenue-generating activities like offering and negotiating (this area is still a little murky as settlement terms are implemented state by state).

While buyers have the option to negotiate with the seller to cover all or a portion of the buyer agent's success fee, this can potentially weaken their offer, as any amount negotiated will be deducted from the seller's net proceeds. For instance, a $500,000 offer that includes a $10,000 request for the buyer agent's success fee is, in effect, a $490,000 offer.

This change will bring the cost of representation to the forefront for buyers, potentially leading some to consider working directly with the listing agent to avoid paying the commission. However, this approach is not without drawbacks, as buyers will be left without an advocate in one of the most important personal and financial transactions they will make in their lifetimes. Opting out of expert representation can lead to less advantageous deals and terms, and greater risk, particularly when the other party has professional representation.

While there will be initial turbulence, the industry will adapt to these changes. However, the new process is likely to pose greater challenges for first-time buyers and those with limited financial flexibility. Real estate professionals will need to be prepared to educate clients about not just the value of their services and justify their success fees in this new environment, but also be able to best advise their clients with these new rules changes in mind, raising the challenge for both buyers and buyer agents alike.

As the implementation date draws near, it is essential for both consumers and industry professionals to remain informed and adjust their strategies accordingly. While the path forward may be challenging, those who embrace innovation, prioritize client education, and deliver exceptional value will be well-equipped to thrive in the new era of real estate.