Proof The Real Estate Industry Is Finally Lowering Commissions

I recently received an email from an agent at Sotheby’s, a prominent real estate brokerage with 1,115 offices located in 84 countries and territories worldwide, and I thought it was worth sharing. The email likely originated from Sotheby’s senior management and was then distributed to agents, who could choose to send it to their prospective clients.

The email offers a solid recap of the current situation with real estate commissions following the price-fixing verdict. What’s particularly exciting is that this is the first time I’ve seen a real estate brokerage openly encourage clients—both sellers and buyers—to negotiate lower commissions. This is a significant shift in the industry!

However, there’s also a point in the email that I disagree with, which I’ll discuss later.

One of the reasons I decided not to sell my previous house in early 2024 was that I didn’t want to be among the last homeowners paying a 5% commission before changes in the real estate commission structure take effect on August 17, 2024. I knew these changes were on the horizon, and I thought it would be wiser to wait.

Additionally, with declining mortgage rates, a strong stock market, a tech and AI boom, and significant local economic growth on the west side of San Francisco, I decided it was better to hold on.

Now, let’s dive into the email from Sotheby’s.

Commission Changes In The Real Estate Industry Begins

For decades, buying or selling a home followed a predictable pattern. At the close of escrow, sellers typically paid a 5% to 6% commission, split evenly between the seller’s and buyer’s agents. But, hold on to your hats because things are about to get a shake-up!

What’s New?

Starting August 17th, new industry rules are coming into play that could change how commissions are negotiated. The goal? To give consumers more negotiating power and potentially lower both commissions and home prices. But, as with any big change, there are a few bumps to watch out for.

Why the Change?

Critics argued that the old system kept commission rates high and reduced competition. Buyers’ agents were often “steered” toward homes with higher commissions, and sellers weren’t always asked if they were okay with the standard rates.

Research shows that in other countries, real estate commissions are often about half of what they are in the U.S. This point was one of the points Mike Ketchmark, the lead trial attorney made. You can listen to my interview with Mike below.

How Will This Affect You?

More Transparency and Negotiation: Buyers will now sign an agreement detailing their broker’s payment before hiring them. Sellers can still choose to cover these costs, but it’s all about more clarity and power for you to negotiate.

Possible Upfront Costs for Buyers: If sellers opt not to pay the buyer’s broker, buyers might need to pay these fees themselves. This could mean having more cash on hand when purchasing a home.

Potentially Lower Home Prices (Where I Disagree): With sellers potentially paying less in commissions, home prices might dip slightly. Imagine saving a few thousand dollars on your next home purchase!

What To Expect From The New Rules

No More Commission Listings on MLS: Seller agents won’t list buyer broker commissions on NAR-affiliated MLS. This means more direct negotiation between you and your agent.

Flexible Business Models: New models may emerge, like agents offering flat rates for specific services, making it easier to customize your real estate experience.

How to Navigate the Changes

Negotiate Commissions (Biggest Surprise): Aim for a 2% commission or less for both buyer and seller agents. Review all contracts carefully to ensure you’re getting a fair deal.

Leverage Seller Concessions: If needed, you can negotiate with sellers for concessions to cover agent fees, keeping more money in your pocket.

Real Estate Brokerages Are Willing To Lower Commissions!

Isn’t this one of the most hopeful messages you could receive from a major real estate brokerage? Sotheby’s is actively encouraging its clients to negotiate for a commission rate of no more than 2% on each side.

If the seller still chooses to cover both the listing agent’s and the buyer’s agent’s commissions, which most do, the total cost for the seller could drop to 4% or lower. While 4% is still a significant amount, it’s a considerable reduction if it becomes the new standard.

I’ve NEVER seen a real estate brokerage openly support a commission of just 2% for both the seller and buyer. Since I started buying and selling real estate in 2003, the lowest total commission I’ve encountered was 4.5%.

Even in July 2024, when I interviewed five real estate agents from different brokerages about selling another rental property, only one was willing to budge on the commission. That agent offered a 4.75% rate but eventually agreed to an incentive-based commission structure when it became clear I would walk away.

As recently as early August 2024, real estate brokerages were instructing their agents to hold firm on at least a 5% commission rate. They are hoping consumers, who don’t regularly buy and sell houses, will accept the old pricing structure. But now that new real estate commission laws are set to take effect on August 17, 2024, brokerages are changing their approach.

Why Real Estate Brokerages Are Becoming More Open to Lower Commission Rates

It’s clear that real estate brokerages and agents have finally accepted that the business landscape is changing permanently. Consequently, more brokerages and agents are choosing to comply with the new rules rather than risk further lawsuits.

Remember, Keller Williams, HomeServices of America, and the National Association Of Realtors were all sued and lost. Now that there’s a legal precedent for real estate price-fixing, it’s easier for lawyers and consumers to sue brokerages or agents for further price collusion.

Sotheby’s doesn’t want to be sued after August 17, 2024, for price fixing. A lawsuit could potentially wipe out years of profitability. Imagine the internal emails and text messages that would need to be subpoenaed regarding commission discussions in court. The findings could put Sotheby’s or any other brokerage sued out of business.

Instead of resisting the law, Sotheby’s has wisely decided to comply with the new real estate pricing regulations. By getting ahead of its competition, it’s likely to win more business. Even if the standard commission rate drops 20% from 5% to 4%, increased business volume could make Sotheby’s more profitable.

The brokerages and top agents that adapt to the new laws will be the big winners. Those that cling to the old, now-illegal practices will likely go out of business.

Home Prices Won’t Decline Due to Lower Commission Rates

I disagree with the statement, “With sellers potentially paying less in commissions, home prices might dip slightly.”

Home prices are determined by demand and supply, which are influenced by job growth, income growth, inventory, and construction pipeline. Lower commission rates act as a catalyst to increase transaction volume.

Lower Commission Rates May Increase Supply

On one hand, lower commission rates might encourage more sellers to list their homes. After I sold a home in 2017 and paid a 4.5% commission, I swore I wouldn’t sell another property until commission rates dropped to 4% or lower. It felt like a farce to pay the buyer’s agent a 4.5% commission while he was hammering down on my asking price by $25,000.

So, perhaps I will eventually increase supply, which could put downward pressure on prices. But unlikely. My goal, like that of most savvy real estate investors, is to hold onto properties for as long as possible, even if commission rates drop to 0%.

Think about long-term stock investors in the S&P 500. Do you think they’d sell their holdings just because online trading commissions went to zero? Of course not. They buy and hold for the long term to build wealth.

The same principle applies to real estate investors, especially since there are also transfer taxes, staging costs, and other fees beyond commissions. Even with real estate commissions coming down, the cost to sell a house is still too high.

If you don’t have to sell your property, don’t. In 10 years, you will be glad you held on. In 20 years, your young children will be thrilled that you invested in real estate so cheap when they couldn’t.

Lower Commission Rates May Increase Demand More Than Supply

On the other hand, lower commission rates might attract more buyers. If buyers know less money is going to agents, a new wave of buyers might enter the market seeking deals. However, the increased demand could easily outweigh any savings on the purchase price due to lower commissions.

Sellers will act in their own best interests and try to retain any commission savings below the previous 5% standard.

Let’s say the average commission rate a seller now pays is 4%. It would be irrational for sellers to lower their asking prices by 1% on average. Instead, they’ll likely list their homes at prices from the 5% commission era and hope to pocket the commission savings.

What will likely happen is an increase in dual agency, where the listing agent also represents the buyer. This arrangement allows the seller to save on the buyer’s agent commission, and the buyer might be able to negotiate a purchase price reduction equivalent to that commission.

If you are a veteran buyer, then letting the listing agent represent you to potentially save is a smart way to go.

Real Estate Consumers Are the Ultimate Winners

The real winners of the NAR settlement are real estate buyers and sellers. At the margin, homeowners are the bigger winners than buyers because they get to save at least 1% on real estate commissions, but likely much more over time. Conversely, the losers are the NAR and any brokerage or agent unwilling to accept that commission rates are coming down and resistant to change.

In 2012, I realized that institutional trading commissions were heading toward zero due to electronic trading. As a result, I felt that the return on effort for working in equities was declining. No matter how well I performed, I wouldn’t be paid as much as my colleagues in the past. So, I did the rational thing and left.

I could have tried to reinvent my career by taking on a different role within my firm. But by then, I was also tired of working in finance and wanted to focus on writing for Financial Samurai. Real estate agents must also adapt or face obsolescence.

For real estate buyers and sellers, know that commission rates are dropping. Sotheby’s, one of the largest brokerages in the country, is now recommending a total commission rate of no more than 4%. To stay competitive, other brokerages will follow suit.

What’s now up for negotiation between the seller and buyer is the amount of commission savings below 5%. It’s up to both parties to negotiate the best terms for themselves while making compromises to get the deal done.

Reader Questions And Suggestions

Have you received a similar e-mail from a real estate agent, providing suggestions to negotiate for lower commission rates? If so, please share. What type of real estate commission changes or attitude shifts are you noticing in your area? Do lower commission rates make you want to sell or buy?

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