Big real estate change coming next week for buyers, sellers and agents

New rules are coming on Saturday, Aug. 17, that will rock the real estate world. The conventional way of buying and selling a home is over, affecting anyone planning to work with a real estate agent in the foreseeable future. Even realtors are still trying to navigate the new landscape.

The change is related to how real estate agents get paid, and it is part of a legal settlement between the National Association of Realtors and home sellers. If a person is hoping to buy a home with mortgage rates dropping , this is something that could affect their bottom line.

To sort through the changes home buyers, sellers and agents need to know as commission rules change, Straight Arrow News talked to Doug Miller, a real estate attorney and executive director of Consumer Advocates in American Real Estate .

The following transcript has been edited for length and clarity. Watch the full interview in the video above.

Simone Del Rosario: When I was buying a home, I didn't pay my buyer's agent, that came out of the seller's pot. Can you tell me how that's changing? Because that was a big bonus for buyers.

Doug Miller: Well, it appeared to be a bonus, and in actuality, it wasn't. If you had been allowed to see the seller's side of the settlement agreement, you would have seen a secret transaction between the seller and your buyer's broker.

It's always been problematic for anybody to pay someone else's agent, whether it be their attorney or a realtor or any advocate, it's just plain wrong. In fact, it's usually described as commercial bribery when that happens.

What was going on for a very long time was a very complex pricing scheme. Realtors would charge the seller for the buyer's agent, and sellers would ask, 'Well, why in the world should I be paying the buyer's agent?' 'That's just the way it's done and if you don't pay the buyer's agent, you can expect that you will your house will not be shown.' And so sellers would say, '6% that seems like a lot.' And the realtors would say, 'Well, I have to share my fee with a buyer's agent.'

So sellers were forced into it. Buyer agents loved it because, like here in Minnesota, the split is typically 2.7% goes to the buyer agent, regardless of their experience [or] expertise. There's absolutely no negotiation.

You hear the standard talking point by realtors that all brokerage fees have always been negotiable, and they have all these great talking points that actually are nonsense. The buyer broker fee has never been negotiable between the buyer and the buyer broker. And it's never really been negotiable between the buyer broker and the listing broker. It's been artificially high.

Simone Del Rosario: What do buyers have to do now that these changes are coming? What do they need to know when they're going out to buy a house and picking an agent?

Doug Miller: Buyers who negotiate with their buyer agent and negotiate a lower fee with their buyer agent are much more likely to be successful in negotiating a transaction with a seller.

The reason for that is most buyers can't afford a buyer broker fee or an attorney's fee, and what they'll typically do is ask for a credit from the seller. It's really no different. The money is coming out of the seller's pocket and going to the buyer broker, perhaps eventually, and so it affects the seller's net the same way.

The difference is, the buyer who negotiates a better fee is going to have an offer that's much more appealing than a buyer who just lets the buyer broker collect their standard 3% or whatever it might be.

So if you have somebody who negotiated, on a $500,000 house, for example, let's say a $5,000 fee with a buyer broker – which I still think is high – versus someone who negotiated a 3% or $15,000 fee, and they both ask for seller credits – one's asking for $5,000, one's asking for $15,000 – it's pretty easy to guess, assuming all else is the same, which offer the seller is going to accept.

Simone Del Rosario: So you're saying the way this will shake out is that sellers will still end up covering the cost by way of a negotiation between the two sides.

Doug Miller: When the buyer writes an offer, they should include a seller credit if they want their some of their closing fees, or the buyer brokerage fee or an attorney's fees covered. So it should work out exactly the same, except that the amount of the commissions will be lower.

And it has always driven me crazy when I see these talking points that somehow, by lowering commissions, it's going to cost consumers more. That's the heart of their argument. And they're coming up with some pretty crazy arguments to try and stand by this price-fixing scheme that they have.

Simone Del Rosario: Depending on where you are in the country, if you've bought a home in the last five, six years, there are a lot of situations where the competition has been so high that people are waiving contingencies left and right. Wouldn't this be something else that would be waived? A seller would say, 'I have this buyer who will pay their own agent so I'm going to accept that offer instead.'

Doug Miller: And again, it will come down to the situation where the buyer who negotiates the best deal with their buyer agent is going to have a much more competitive offer.

Simone Del Rosario: The way it worked before, home sellers were essentially tied to this 5% to 6% commission that they were responsible for. As you said, sellers felt unfairly burdened by paying the expenses of agents on both sides of the transaction. What do sellers have to look forward to now?

Doug Miller: Well, they're not going to hear, 'The reason why my commission is 6% is because I have to share with a buyer broker,' that's gone. They're not going to hear, 'Well, my fee, my half of this commission is 3% because, look, we're paying the buyer broker 3%.' They were using that 3% to jack up their fee.

And so now, if somebody is paying $5,000 on the buyer side, I think you're going to see a lot of sellers question the value of listing agents as well. So maybe what we will see going forward, it might take a year or two, but my hope is that we're going to see fees to sell a home drop to maybe what we see in other countries, 1% or 2%.

It makes no sense that if you have a $4 million house, that you're paying $240,000 in commissions. I've done transactions in that realm and I just give the entire fee back to my clients when that happens. It's outrageous for the services you're getting. And it causes all kinds of other problems as well. There's admin fees. They capture these buyers and sellers in a way that they can't get out.

That's one of the other changes, by the way, is buyers are going to need to sign buyer-broker contracts with the [agents] before they start working with them. And buyers need to be very, very, very careful. And so do sellers, for that matter.

Most of the fee agreements in this country are drafted by a bunch of competitors behind closed doors. Show me another industry where that happens. It's completely wrong. It's anti-competitive by definition.

Simone Del Rosario: How is this going to affect real estate agents? For the people who make their living in this industry, what does it look like when this change takes effect?

Doug Miller: For realtors, it's going to be the realtors who are more experienced, the realtors who have a better education, and the realtors who really understand what it means to be a fiduciary, an agent of someone else, they're going to put themselves in your shoes.

Agents at big companies can't do that and they engage in things like dual agency or designated agency, where the brokerage firm represents the buyer and the seller in the same deal. Those kind of relationships should never exist.

Realtors who are really taking to heart that they now have to compete, not just on service, but on price, I think they're going to see that consumers are going to be a lot more careful.

A buyer who is hiring a buyer's agent isn't going to pick someone who's a dual agent and can't negotiate on their behalf, because that's what happens, they can't. They're not going to pick a buyer agent who is with a big company and the broker has access to the confidential negotiating information of the buyer and seller. Why would you expose yourself to that kind of risk?

Instead, I think buyers, before they spend all this money on a buyer agent, are going to want to know that that agent is truly in their corner.

So I think we're going to see agents moving to smaller firms. I think the agents who really know what they're doing are going to do well, and agents who are new and don't know what they're doing, well, I'll tell you what, this is where internships or apprenticeships might come in really handy, getting more education in real estate.

Right now, in my state, you don't even need a kindergarten education to sell real estate. [You] take a 30-hour class on how to pass the exam. So agents who really differentiate themselves by getting more education, getting more experience, and pledging absolute fidelity to their clients are going to be the agents who succeed.

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