Changes on the Home(buying) Front

Elisheva Braun

A class action lawsuit filed by homeowners.

The $418 million of Chicago-based NAR, National Association of Realtors.

Buyers and brokers quietly panicking.

This feature isn’t about the sellers, or the NAR, or even the national housing crisis.

This is about us—me and you and the people we love—and our hope to own a forever home.

The way it was

Once upon a time, there was a husband, a wife, and three kids. They needed a home. So they went to a realtor and asked him for help finding a cozy little house for their family. The realtor showed them one house, but it was much too big. He showed them another that was much too far. Finally, he showed them a home that was just right. And so, the father and mother paid the down payment, the closing costs, and the mortgage fees. And they lived happily ever after.

Up until now, when someone bought a house, the realtor did the hunting, research, and general handholding.

Who paid the realtor’s fee? Officially, the seller.

The listing agent would negotiate a commission with the seller and would then list the home on the MLS (Multiple Listing Services), offering a percentage of his commission as an incentive for a buyer’s agent to bring a buyer.

The MLS is where brokers share property information of homes they are listing.

The listing agent and the buyer’s agent split the commission: 5 or 6 percent of the home purchase price. When a house sold for $600,000, for example, the listing agent walked away with $18,000, or about 3 percent, and the buyer’s agent with approximately 2 percent at $12,000. That total commission would be debited from the seller.

The lawsuit felt around the country

In a homeowners’ lawsuit against NAR, lawyers claimed that the organization engaged in anti-competitive behavior and collusion to control commission rates in real estate transactions.

In November, a federal jury in Missouri found the NAR and two brokerages liable for $1.8 billion in damages for conspiring to keep agent commissions artificially high.

The NAR agreed to settle and change the way it has been doing business. The settlement is over 100 pages long; however, it contains two main changes.

By August 17, listings on the MLS won’t be allowed to include that “offer of compensation,” and sellers will no longer be required to pay the buyer’s agent. Sellers still may pay if they feel that it is a benefit to them to do so, but they are not allowed to advertise this on the MLS.

Additionally, buyers will be required to sign an agreement with a buyer’s agent before seeing any houses. This agreement will outline how much the buyer will pay the agent in the event that they are not compensated by the seller directly (more on this later).

Already, several local sellers have declined to pay the buyers commission, as “Soon, that’s going to be standard.”

The impact of these upcoming changes on the housing market, affecting buyers, sellers, and agents remains to be seen. However, there’s ample room for speculation, discussion, and reasonably accurate predictions.

One thing we know for sure. As realtor Zalman Rokowsky puts it, “This subtle change is going to throw things off.”

Realtors react

“Some realtors are panicking quietly. A lot of them believe commissions will be slashed from 2 percent to 1 percent as buyer’s agents compete for buyers. That would be a substantial cut and would likely drive a lot of talent out of the industry,” Zalman says. “Others believe that the smaller agents won’t be able to compete, and this will help the larger agents gain an even bigger piece of the pie.”

Either way, all realtors have good reason to worry. As cold cash replaces mortgage money, it’s likely that brokers’ commissions will decrease. “People just won’t be able to afford the commissions. The realtors are going to feel it.”

One of the biggest challenges to the new system will be the lack of uniformity; the fact that two houses can hit the market on one block with one offering buyer’s commission and one not offering is going to create much confusion.

Some buyers may end up choosing to only see houses that are offering to cover their agent’s commission.

On the other hand, “Many realtors are taking a wait-and-see approach. They believe that agents are a necessary part of the system (see sidebar) and that they’re getting paid a fair market value. The sentiment is that there are a lot of unknowns, but ultimately, things will hopefully balance out,” Zalman shares.

Real estate professor Norm Miller feels the same way. He told Newsweek, “At first, I thought we would see a slew of firms trying to compete for buyer representation based on new models and new fees, with a menu of services. But based on the subscriptions I have from training firms and larger brokerage houses, I now see that the industry will try, for as long as possible, to maintain the status quo.” Miller added, “There are breakaway firms with lower fees on the seller side, but this has been true for many years.”

“When the settlement came out, everyone panicked, but most brokers aren’t talking about it anymore. It’s very hard to predict the ramifications of such a big disruption, so people just aren’t thinking about it. We’re not prepared,” a broker adds.

On Paper

A new requirement to sign an agreement protects realtors from being uncompensated in deals where the seller doesn’t offer buyer’s commission.

There will be three types of agreements:

• Single show agreements: The realtor can show the buyer only one house.
• Nonexclusive agreements: The buyer can work with a number of agents.
• Exclusive buyer agreements: The buyer only works with this agent.

In each of the above three structures, one point is clear: If the seller doesn’t compensate, the buyer will step up to the plate and offer an agreed-upon percentage, flat fee, or per-hour rate.

Agreements also include a timeline, which is typically six months to a year. If the buyer hasn’t purchased a house within that period, the contract is up.

As part of the exclusive agreement, if a buyer discovers a house independently — whether it’s off-market, through another realtor, or via a listing agent while still under contract with their broker — they’re obligated to pay their broker the agreed-upon commission. Zalman speculates, “I think that the better agents are going to only be willing to work under an exclusive agreement. Buyers will not be able to switch agents as easily as before. The lesser agents will have less leverage and may be willing to sign a non-exclusive agreement.”

This, of course, benefits agents. “They’ll finally be able to focus on finding homes for their clients without looking over their shoulders, worrying their clients will use another agent. Buyers will also gain.

With the pay structure changing, buyers will feel more like clients. Agents will have to work harder to prove their worth.”

Moving the goalposts

Realtors aren’t the only ones who’ll be affected by the change. Buyers will bear the brunt of it.

Until now, it felt to buyers like their agents were free, though of course, they weren’t—the price of the house was higher to compensate for the commissions. With sellers no longer required to pay the buyer’s agent’s commission, guess who will have to foot the bill?

That’s right, the buyer.

With the current housing market at all-time highs and interest rates still uncomfortably high, this could not have come at a worse time.

Esti and her husband Shlomo just had their first baby. Having watched too many older siblings and friends get stuck in basements for a decade too long, Esti is determined not to wait. Eight months into their search for a home, the couple learned of the new curveball.

“We only heard about it when the broker we’re working with nonchalantly mentioned what’s coming,” Esti tells me. “It took a few weeks for the ramifications to register. Oh my gosh—homebuying just became $15,000 more impossible!”

Homebuyers, not known for having extra wads of cash on hand, will have to pay the lump sum at closing.

“When you put a bid on a house, you figured out the max you can pay. You threw out the number and hoped it would stick,” Esti says. “From now on, we’re going to have to start counting the commission with the purchase price. I assume that the buyers coming up with crazy numbers and outbidding everyone will come up with the cash for their brokers. The other 95 percent of the population, those of us who have to count our dollars, are going to be left in the dust.”

At the same time, from Esti’s perspective, it’s going to come down to desperation. “We’re young, and we have one baby, so if a price doesn’t make sense for us, we can pass on it. If you desperately need to buy a house, you’re going to have to somehow make it work.”

A changed relationship

This will affect the realtor selection process. A lot of buyers were happy to use broker-dabbler Uncle Steve or Nechama’s newbie daughter-in-law. “I might as well give them parnassah” was the sentiment.

Post-August buyers might be a lot more hesitant. When the several-grand paycheck comes straight from your pocket, hiring tends to be different. When paying out of pocket, they’ll want a realtor they trust to get the job done.

Esti notes that buyers stand to gain.

“The feeling I got from being in the market was that no one is working on behalf of buyers. Realtors are great, but when it comes down to it, by hook or by crook, they want to get to the finish line. If that means driving up prices or outbidding other potential buyers, there’s nothing holding them back. Now, that can change.”

She’s right. Shifting to buyer-paid commissions is expected to make the real estate market more competitive. By separating agent fees from the transaction amount, buyers might have greater flexibility in negotiating commission rates and exploring alternative service providers. This could potentially lead to more competitive pricing and enhanced service offerings among real estate agents.

In fact, proponents of the NAR lawsuit argue that this shift could mitigate conflicts of interest, as agents would no longer have their compensation tied to the purchase price of the property.

Silver linings?

Will home prices deflate to offset the cost?

You don’t need to sit down for this one: Price drops aren’t on the horizon.

“It’s unlikely,” Zalman says, “and it’s also nearly impossible to measure. Prices are already going up what feels like $10,000 a week. We won’t know whether they’re rising less because of the new laws. Realize that sellers look around and see what others got for their house and want the same—or more. That’s been going on forever—that’s why house prices are always going up. Most likely, homes will cost what they’ve been costing, with the realtor’s commission on top. There will be a big adjustment as buyers figure out how to make it work.”

Bentzion, a hunt-weary buyer on the market for two years, predicts, “I think August 17^th will come, and for the first few days, the prices might drop by a few thousand dollars. Give it a few weeks, and prices will climb higher than before.”

Will more people forget about the American dream and just rent forever? Is Lakewood the next Manhattan or Boro Park, where buying a house is rare, bordering on unheard of?

“People need houses. I don’t see that changing,” Zalman says. He distinguishes this disruption from recent mortgage rate hikes, when the homebuying market lagged noticeably. “People were waiting for the rates to go back down. But this new structure isn’t a passing change. There’s nothing to wait for.”

On a brighter note, realtor commissions could decline as agents, particularly newcomers aiming to establish themselves, compete for clients.

With fair market forces at play, many brokers may bow out. Only the most aggressive and skilled realtors, or those willing to undercut others, will be left standing.

Ripple effects

Another incoming mess is appraisals.

Similar homes will be sold, some with the buyer’s agent commission baked in and some without. Without uniformity, it will be hard for banks to compare prices and determine what a home is worth.

There will be halachic ramifications too.

Dayan Rabbi Dovid Yitzchok Laskin, who’s actively studying the changes ahead of their implementation, points out, “New she’eilos are going to come up all over the country. When you change the expectations of the buying process, the halachah changes. With buyer-agent agreements in place, there will be more of a Choshen Mishpat between the buyer and his agent. It’s going to be a learning experience.”

Finding cold cash: exploring some solutions

Buyers are already paying tens of thousands in closing costs. Having to pay their brokers cash is a very tough pill to swallow.

Pre-lawsuit, agents’ commissions were paid through the mortgage. The cost was effectively spread over thirty years, albeit with interest.

Rabbi Laskin shares an exciting idea. “There’s a possibility that buyers will have the option of rolling the agent commission into their mortgage.”

This will make coughing up funds a lot easier on buyers.

Zalman highlights another possibility: sellers’ concessions.

He explains, “When a buyer can’t come up with cash for closing, Fannie Mae has a solution in place. Say the buyer owes $15k in closing costs. The seller can raise his price by $15,000. The bank will finance 80 percent of the higher price instead of the original number, and the buyer now has an extra $12,000 in cash—80 percent of the $15k increase.  Keep in mind that this only works if the appraisal comes in at the adjusted higher price.”

Here’s an example:

 

	Initial	With concession
Home Price	$500,000	$515,000
Mortgage	$400,000	$412,000
Closing cost	$15,000	$3,000 ($12k surplus applied to debt)

 

However, Zalman, who is a former loan officer cautions that this idea may not be so simple. Fannie Mae only allows a concession to cover a buyer’s closing costs. As of now commissions are not under that classification.

“Potentially, Fannie Mae could reclassify the buyer’s agent fee as a buyer’s closing cost even though it’s historically been a seller’s cost. Then buyers could ask for a concession for the agent commission. Everyone’s predicting they’ll make the reclassification, but they haven’t done so yet,” Zalman says.

 

sidebar

Why use an agent?

With agent costs on the table, will more buyers choose to go solo?

Ninety-five percent of homes are sold with the help of a listing agent.

When a home is listed with an agent, a secure lockbox ensures controlled access. Realtors, licensed and insured, oversee visits, ensuring accountability for any issues. Without an agent a buyer would not be able to get into the home. Opting for a buyer’s agent also ensures personalized representation by someone who understands your culture and your needs. So it’s difficult to buy a house without an agent.

Engaging a listing agent directly may seem cost-effective. The listing agent is being paid commission by the seller, so perhaps you can save on commission. Listing agents are likely to prioritize the seller’s needs, which means maximizing exposure to many buyers to elevate sale prices. Be aware that some listing agents prefer working with other agents, which could affect your deal. Finally, if you go straight to the listing agent, they will likely ask you to sign an agreement and charge you a commission. After all, showing a house is time-consuming; agents don’t do it for free.