Department of Justice | Rule Changes on Real Estate Commissions
The National Association of Realtors and the Department of Justice (DOJ) reached a landmark settlement that has fundamentally altered how real estate commissions are structured. These changes, intended to increase transparency and foster competition, have led to significant challenges and unintended consequences for both buyers and sellers in the real estate market.
This essay provides an overview of the previous commission structure, the DOJ’s goals with the new rules, and the early challenges and unintended consequences resulting from these regulatory changes.
The Old System
Historically, real estate commissions were negotiated between sellers and their listing agents, with a total commission—typically 4% to 6% of the sale price—shared between the seller's and buyer's agents. Importantly, the seller generally covered the entire commission.
The portion of the commission allocated to the buyer’s agent (commonly referred to as the "co-op commission") was publicly advertised on the Multiple Listing Service (MLS). Critics argued this system encouraged price-setting and disincentivized agents from showing homes with lower co-op commissions. This practice was seen as limiting competition and potentially inflating costs for both buyers and sellers.
DOJ Regulation: The New Rules
The DOJ’s new regulations aim to "decouple" the buyer’s and seller’s commission structures, promoting fairness, competition, and transparency in the real estate market. Key elements of the changes include:
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Prohibition on MLS Co-op Commission Listings: The MLS can no longer display the commission offered to buyer’s agents. This was designed to prevent agents from prioritizing listings based on their potential earnings rather than the client’s interests.
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Mandatory Buyer Agency Agreements: Buyers must now sign formal agreements with their agents, outlining how the buyer's agent will be compensated. Previously, sellers typically paid the buyer’s agent’s commission (around 2.5% of the sale price). Under the new system, many sellers are refusing to cover this cost, shifting the burden onto buyers.
While the changes are intended to modernize and create a more consumer-friendly market, the rollout has been met with confusion, inconsistent application, and, in many cases, increased costs for both buyers and sellers.
Unintended Consequences
Despite the DOJ’s intentions, the new regulations have led to several unintended outcomes. These include greater complexity in transactions, opportunities for misrepresentation, and higher overall costs for consumers.
Listing Agent Commissions
Previously, listing agents charged a typical fee of 5% to 6% of the sale price of a property, with a portion, usually half, shared with the buyer’s agent. Under the new system, many listing agents are now advertising a reduced commission rate of 3% to 5%. However, these lower fees no longer include compensation for the buyer's agent - they are charging you more for their half of the work. As a result, buyers will now frequently submit offers that include an addenda requesting their agent’s commission—often 2.5% to 3%—to be paid by the seller at closing. This has caused total commissions, in some transactions, to climb to 5.5% to 8%, far exceeding previous levels.
Recommendation: Sellers should be cautious when signing listing agreements and avoid committing to rates higher than 2.5%, as this fee no longer includes a buyer’s agent commission.
Buyer Agency Agreements
Buyers are now required to sign contracts with their agents before receiving any services, including viewing properties. These agreements define the terms of compensation, which often range from 2.5% to 3.5% of the purchase price. Some agents include restrictive terms that are difficult to cancel and may require buyers to continue paying the agent’s fee even if the relationship is terminated.
While some sellers may agree to cover the buyer’s agent’s fees, others refuse, leaving buyers responsible for the cost at closing. This has created confusion and increased financial burdens for buyers.
Recommendation: Before signing a buyer agency agreement, ensure that you fully understand:
- Cancellation Terms: Can the agreement be terminated, and if so, under what conditions?
- Fees: What are the exact costs, and how will they be paid?
- Impact on Purchase Price: Will the seller cover any portion of the fee, or will it be entirely the buyer’s responsibility?
Conclusion
The DOJ’s changes to real estate commission rules were designed to increase transparency and reduce costs. However, the early implementation has led to confusion and higher expenses for both buyers and sellers. Many agents and brokerages have exploited the lack of clarity, further complicating transactions.
To navigate this evolving landscape, buyers and sellers must be vigilant, ask critical questions, and carefully review agreements to avoid unexpected costs. While the new rules may achieve their goals in the long term, the immediate impact has highlighted the challenges of adapting to a new commission structure in a complex and entrenched industry.
