The Change in Buyer Agent Commission Rules. What Does it Mean to You?
Go Back To Previous PageIn October 2023, the Sitzer/Burnett verdict became a national headline and inspired a series of similar lawsuits revolving around buyer-broker commission rules. A jury in Kansas City found the National Association of Realtors (NAR) guilty of conspiring to inflate agent commissions. Shortly after, a class-action lawsuit was brought against the Real Estate Board of New York (REBNY) for the same issue.
The Department of Justice suggested separating the commission and disallowing sellers from paying it to the buyer’s agent. The real estate commission has always been a hot topic of conversation. These lawsuits specifically target the compensation of buyer agents in contrast to the commission paid to agents who represent sellers.
How will this proposal affect your purchase of real estate in New York City?
It might not be as advantageous as the headlines lead you to believe.
Real Estate commissions have always been negotiable
It’s true: real estate commissions are not set in stone.
New York City does not have a Multiple Listing System (MLS). This always surprises buyers from other parts of the county. In its place is the Residential Listing Service (RLS), which REBNY controls.
This allows member firms to share their listings.
Who sets the amount or rate of real estate commissions?
REBNY has mandated for some time now that listing agents clearly state the commission percentage the seller is willing to pay the buyer’s broker when entering the listings into the RLS. The seller is responsible for paying the buyer’s agent directly instead of the listing agent, who would then distribute the funds.
These efforts were made to create more transparency long before the recent verdict. Additionally, an Agency Disclosure statement is presented to both sellers and buyers to ensure they are aware of who pays the commission.
Some of the top real estate agents in New York City prefer not to mention that commissions are negotiable. The truth is that they have always been and continue to be. However, since January 1, 2024, the process has been more transparent and open. All the listing agreements have made it clear what commission percentage they pay on the listing side and what rate they pay to the buyer’s agent.
Sellers cannot pay the buyer’s agent before signing an agreement and listing a property. However, I am unaware of what other agents are doing regarding their commission agreements.
What drives the commission system?
Intense competition, high property costs, and the complex nature of every deal support the commission system in New York City.
These factors, in addition to legal regulations, are the driving force behind the system. For instance, if you are selling a property in Manhattan, it is probably a substantial portion of your net worth.
Therefore, when it comes time to sell, a rational actor will choose a sales and marketing strategy that generates the highest possible sale price the market will bear. To achieve that end, sellers must reach the largest buyer pool.
Co-brokerage happens in approximately 80% of residential real estate transactions in New York City. Separate agents represent the buyer and seller.
Motivating a buyer’s agent to bring their client to the property is crucial for the seller. To make the property attractive to potential buyers, it is essential to have high-quality photos, accurate listing details, and wide availability. However, setting the right price is also crucial. Sellers should know that a buyer’s pricing analysis considers more than the property’s price. Buyers also look at their available cash; an intelligent seller should understand this.
To buy a property in New York City, a buyer must have considerable cash.
Depending on the specific building’s requirements, buyers must make a down payment of at least 10-20% of the purchase price or potentially more. Additionally, buyers must prepare to cover significant closing costs, ranging from 5-7% of the purchase price, which must be paid in cash at the closing table.
When purchasing a co-op, which makes up about 70% of the housing stock, the buyer must have an additional 12-24 months of housing payments in their bank account after closing. This means the buyer must have enough money to cover their monthly mortgage and maintenance fees for a year or two.
This post-closing liquidity requirement is common and requires more cash than a typical single home purchase. If a buyer also has to pay their agent’s commission, the costs can become too high for some buyers. As a result, some buyers may choose to forgo representation altogether.
In New York City, sellers offer different commission percentages to buyer’s agents.
It has always been the buyer’s agent’s responsibility to understand their payment for each property. I learned this the hard way years ago. Recent lawsuits have potentially made it more common for sellers to offer a reduced commission or no commission to the buyer’s agent.
Buyers who opt for representation by an agent must now pay their agent’s entire commission or contribute to a portion of it. It is important to remember that agents are professionals in the business to make a living, and their services are not provided on a volunteer basis. Their role is often more extensive than initially apparent, encompassing various services beyond just locating the right property for purchase.
Therefore, it is crucial to be aware of the full extent of an agent’s services before engaging them to ensure that you receive the best possible assistance.
Sellers can decide how much they are willing to pay to a buyer’s agent, which has been the norm for some time. However, considering the high cost of buying a property in New York City, it is likely that a seller who wants to reach the maximum number of buyers would prefer to pay the buyer’s agent. This would help to avoid additional financial burdens for the buyer.
Approximately 20% of real estate deals successfully close each year without an agent. However, buyers who choose this route may be missing out on the expertise and guidance of a professional, potentially leading to higher costs in the long run.
NYC gets complicated with Agent Commission Rules
Real estate investors from other parts of the country are often surprised by the complexity of purchasing property in New York City. Last year, my team and I worked with a buyer who had already bought more than 50 properties in his home state. However, he was taken aback by the process in New York City and was grateful for our guidance. Additionally, busy executives relocating for work will require considerable support to ensure a smooth transition.
A particular buyer from the West Coast was quite confident in her ability to purchase a property without any professional representation. However, when I spoke with her six months after her sale, she revealed that it was not an easy process and that she regretted not having professional assistance due to the time it took and the stress it caused.
Many homebuyers in New York City find realtor fees worthwhile, but finding a property with a substantial resale value can be just as challenging as navigating the complex buying process.
We recommend working with a buyer’s agent if you’re planning to buy a Harlem brownstone, an Upper West Side condo, a downtown co-op, or even a new development. Such agents have years of experience and can provide invaluable professional advice to help you make an informed decision. Although you must pay for their services, the time and money you save by avoiding costly mistakes are usually worth the cost.
Buyers need representation
The lawsuits may seem to benefit the buyers, but they have added complexity to buying a home in New York City. Ironically, this has created an even greater need for buyer representation.
If the Department of Justice (DOJ) succeeds in separating commissions that prevent sellers from paying a commission to a buyer’s agent, it would add transparency. However, this might come at a cost to homebuyers. Nowadays, owning a home is beyond the reach of many who aspire to own one. Unfortunately, they have no choice but to rent, and as a result, they are subject to the rental market dynamics that don’t allow them to lock in a more stable monthly housing cost. Owning a home could enable them to build wealth.
The combination of higher mortgage rates, a decrease in housing inventory, and a slower rate of new home construction has led to a rise in housing costs. In a city as expensive as New York, some may wonder if the added expense of working with a professional real estate agent is truly beneficial for the consumer or if other factors are at play.
Georges has been working in Wall Street for the last 16 years trading derivatives with hedge funds. He has been an active real estate investor for over a decade. Georges graduated from HEC Business School in Paris and holds a master in Finance from ESADE Barcelona.
