Jarai Howard, a 29-year-old tech worker with a growing family, is looking for his second home in the Dallas-Fort Worth area, but the process has turned into a nightmare.
Howard intended to snag a newly built $700,000 home with the help of a real estate agent. He figured it would be easy since he already bought a home for $200,000 in 2017 and got a sweet 2.2% mortgage rate during the pandemic.
But times have changed – drastically.
The agents Howard met with were asking for up to $25,000 in buyer’s agent fees — something he never had to deal with when buying his first home. One agent even wanted him to sign a contract committing to a 3% commission.
“The answer I got was, yes, it’s completely negotiable, but our standard rate is 3%,” Howard told MarketWatch. “You say it’s completely negotiable, but it seems you’re only willing to negotiate.”
Howard was left feeling disappointed and frustrated. “It says on the form [commissions are] completely negotiable, but it’s really already decided,” he said.
Things are about to get even crazier for home buyers everywhere. Starting August 17, buyers will have to sign contracts with real estate agents before seeing a home. Plus, the commission a buyer’s agent receives will no longer be listed on the Multiple Listing Service.
“It’s the most significant change in real estate in more than 100 years,” Adam Hopson, chief strategy officer at real estate startup Flyhomes, told the media.
The changes follow a $418 million settlement earlier this year between the National Association of Realtors (NAR) and several brokerages after they were accused of inflating real estate commissions. While the industry claims the changes will help consumers, experts are divided.
Ken Johnson, a real estate economist at Florida Atlantic University, criticized the changes, saying they make the market “less efficient” and “not good news for anybody.”
The real estate market is already struggling, with home sales falling to a six-month low in June and prices hitting record highs. Buyers and agents are bracing for confusion.
“In the short term, there will be as much confusion … among agents as among buyers,” said Steve Broebeck, a senior fellow at the Consumer Federation of America. But he added that in the long run, the changes should “save consumers tens of billions a year in lower fees.”
Starting in August. 17, buyers will have to sign contracts detailing how they will compensate their agents. That’s like having to sign a contract with a car dealership before a test drive, Hopson said.
“If they don’t understand the contract or think it’s unfair, they should refuse to sign,” Broebeck advised.
In Texas, Howard experienced firsthand how confusing these new contracts can be. When he pointed out the negotiable commission rate, the agent suggested he get legal help to figure it out.
“I understand this is a whole new process for everybody,” Howard said. “I’m sure in the past, that probably never came up because this whole process is new.”
Under the new rules, buyers will also have to pay their agent’s commission, a cost previously covered by the seller. This added expense may push buyers toward alternative real estate models.
“A service that used to be essentially free to the buyer will suddenly come with a commitment to pay $15,000,” Hopson explained.
David Dworkin, president of the National Housing Conference, compared the end of the traditional commission structure to a “Venus fly situation” that traps homebuyers in bad deals.
For now, analysts expect the changes to cut real estate agents’ annual commissions by 30% or more. Meanwhile, Howard has ditched traditional agents in favor of ShopProp, a company that charges flat fees for their services.
“We have been anti-commission for a long time. I believe it should be free,” Rob Luecke, managing broker and CEO of Seattle-based ShopProp, told MarketWatch. The company operates in six states. “Our goal is, over time, to make it completely free to buy and sell a home.”
“I’m trying to make the biggest purchase I’ve ever had in my life,” Howard said. “I just don’t want to mess it up, so I feel like a real estate agent will be able to check on me, to make sure I don’t shortchange myself out of $700,000.”
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