New rules to how homes are bought and sold could mean an average savings of more than $50,000 to Peninsula home sellers. Photo courtesy Getty Images.

Big changes are coming to how homes are bought and sold beginning Aug. 17 when new rules roll out that will revamp how Realtors get paid commission. 

The changes, which are part of a $418 million court settlement that the trade group the National Association of Realtors announced in March, put an end to the decades-old practice requiring home sellers to pay 5% to 6% of a home’s purchase price to cover the commission for both the listing agent and the buyer’s agent.

For sellers on the Midpeninsula, where the median price for a single-family home is above $2 million – this means an average savings of more than $50,000 in commission fees.

The sudden death of the 6% commission

The Sitzer/Burnett buyer-broker commission lawsuit – a class-action lawsuit filed in Kansas City, Mo., last October on behalf of 260,000 home sellers in the Midwest over the National Association of Realtors’ commission rules – paved the way for the new regulations that will affect sellers, buyers and agents nationwide. 

A federal jury found the National Association of Realtors and some residential brokerages liable for nearly $1.8 billion in damages after determining they conspired to inflate commissions by forcing sellers to make non-negotiable offers of compensation to the buyer’s agent for listings on the Multiple Listing Service. 

What buyers should know

If you are a buyer and your agent is using an Multiple Listing Service, you will need to sign a written agreement with your agent before touring a home so you understand exactly what services will be provided and for how much. Written agreements are required for both in-person and live virtual home tours and must include: 

The amount of compensation the real estate agent will receive and how this amount will be determined. Is it a flat fee, a percent of the home cost or an hourly rate?  Compensation cannot be open-ended or determined by “whatever commission amount” the seller is offering to give to the buyer’s agent. 

A statement indicating that the agent is prohibited from receiving compensation for brokerage services from any source that exceeds the amount or rate agreed to in the agreement with the buyer

A statement indicating that broker fees and commissions are fully negotiable and not set by law. 

Information from the National Association of Realtors.

To resolve the litigation claims against the trade association and more than one million Realtor members, the National Association of Realtors agreed to make changes to its commission process as part of the $418 million settlement agreement.

The association, however, has stressed that commissions have always been negotiable and continues to deny any wrongdoing by its members in regard to commissions. 

“NAR does not dictate commissions. This was true before the settlement agreement and remains true once the practice changes go into effect,” according to a statement by the association.  

What the changes mean to buyers and sellers

Under the new system, the most significant change is how buyers’ agents are paid. While the seller can choose to pay a buyer’s agent, the rules make it crystal clear that sellers are no longer required to offer any compensation to a buyer’s agent. 

Buyers now will be required to negotiate directly with their own agents and must enter into signed agreements that outline how they will compensate their agent (flat fee, hourly rate or other arrangements), the amount they will pay and what services they want their agent to provide. Written agreements will be required before a buyer and their agent can do any in-person or live virtual home tours. Buyers do not need a written agreement if they are just speaking to an agent at an open house or asking them about their services.

There are also changes to how and where real estate professionals may communicate with each other about offers of compensation. These offers are no longer allowed on Multiple Listing Service platforms, which are private databases created, maintained and paid for by real estate professionals and provide property listings to Zillow, Trulia, Realtor.com and others.  

Individual agents and real estate companies, however, will still be able to reference compensation on their own websites. 

“These changes will bring more transparency and more clarity for home sellers and buyers,” said Jennifer Branchini, regional vice president of the National Association of Realtors for California, Hawaii and Guam. Branchini, who served as last year’s president of the California Association of Realtors, manages the Compass real estate office in Pleasanton.

Talk of the industry

The lawsuit and the National Association of Realtors’ subsequent agreement are the talk of the industry — but little of it on the record. Numerous local Realtors, the Silicon Valley Association of Realtors, the Sunnyvale office of MLS, and the Real Estate Research Institute of Hartford, Conn., all either declined comment or did not return messages for this story.

Michael Repka, CEO and general counsel of DeLeon Realty of Palo Alto, had plenty to say, however. He said the 5% to 6% commission structure — including sellers paying 2.5% to agents representing buyers — has been the norm throughout the industry since he joined it in the 1990s.

He said a recent analysis of home sales in Palo Alto valued at between $2 million and $10 million, revealed that nearly 95% of them included the 2.5% fee paid by sellers to agents representing buyers.

Repka said he believes the rule changes will be good for the real estate market. With sellers now looking at paying a commission of only 2.5% to 3.5% on any given transaction, Repka said this could persuade more long-time Midpeninsula homeowners to sell their homes. That, in turn, could put more badly needed housing inventory onto what has been an historically tight market in recent years.

“This new situation results in something that is more fair to the seller,” he said.

The new rules still allow sellers to offer some compensation to the agents of buyers, but the amount paid, if any, is now up to the seller, Repka added. 

“Typically, sellers had no option to pay less than the total commission. Even if the buyer’s agent’s involvement was minimal, or if the buyer discovered the property on their own (without the assistance of an agent), the listing agent retained both sides of the commission,” Repka said. 

This practice, he explained, has been used to encourage agents to point buyers toward properties that offer them higher commission rates. Sellers who didn’t offer 2.5% commission to a buyer’s agent, allegedly risked having their listing “blacklisted” by some real estate agents, according to Repka. 

“In essence, buyers will now have access to information about all homes available for sale, irrespective of whether the seller offers minimal or even no compensation to the buyer’s agent,” Repka said. 

According to the settlement facts outlined on the National Association of Realtors’ website, the association already had MLS policies in place regarding the non-filtering (or removal) of listings based on compensation. The new rules amend that policy “for clarification purposes and to ensure consistency with the proposed settlement agreement.”

Whether the 6% commission has been a longstanding and common practice, depends on whom one speaks to in the industry. 

One veteran Midpeninsula agent, who preferred not to be named, said 6% commissions have never been demanded across the board by agents locally, adding commissions are typically negotiated between home sellers and Realtors — and discounted commission rates are fairly common “to keep transactions alive.”

She said it’s not unusual for agents to “absorb costs” at times for sellers and buyers.

While the new rules provide more transparency and give sellers more options, some say the homebuying process may become more challenging for first-time buyers. 

“At a time when home prices and mortgage interest rates are higher, these new rules place an additional financial burden on homebuyers, particularly first-time homebuyers who are already struggling to come up with a down payment to purchase a home.” Eileen Giorgi, president of the Silicon Valley Association of Realtors, said in a news release from the association. 

New California requirements in the works

On the buyers’ side, Branchini, regional vice president of the National Association of Realtors, said the issue also has attracted the attention of lawmakers in Sacramento. The California Legislature currently is considering a bill that would require written agreements between agents and homebuyers. It would enshrine the requirement in state law, complementing the new industry directives.

Mantill Williams, Washington, D.C.-based vice president of communications for the National Association of Realtors, said 18 states currently have such laws, with several more, including California, now proposing similar legal requirements.

Assembly Bill 2992, authored by Assembly member Stephanie Nguyen, D-Elk Grove, would mandate buyer/broker written agreements — already required for sellers and brokers. The bill is still working its way through legislative committees.

Despite the National Association of Realtors’  widespread coverage, the association’s agreement does not yet cover all brokers in the industry. Officials of HomeServices of America Inc. of Edina, Minn., are still litigating the lawsuit, known as the Sitzer-Burnett vs. National Association of Realtors case. HomeServices of America is the parent company of Intero Real Estate Services, which has local offices in Palo Alto, Menlo Park, Los Altos and Redwood City.

David Goll is a freelance writer who regularly contributes to the Real Estate section.

– Linda Taaffe contributed to this article.