For years, the process of buying and selling a home in the U.S. has followed a predictable pattern: sellers would pay a commission that was split between the buyer's and seller's agents, typically amounting to 5% to 6% of the home's sales price. While this structure provided a level of consistency, it often came with hefty fees that could total tens of thousands of dollars, especially in an era of soaring home prices. Many, like Jim Xiao, found these realtor fees excessive and largely inflexible. "It felt like an expected, fixed amount," he recalls, noting that attempts to negotiate often resulted in a firm "no" from agents.
However, the rules governing real estate commissions are undergoing significant changes. Following a high-profile lawsuit settled by the National Association of Realtors in August, new policies have been introduced that impact how agents are compensated. This lawsuit was initiated by a group of home sellers in Missouri who contended that the association's rules compelled them to incur excessive fees.
In 2023, Jim Xiao faced similar challenges when assisting his parents in purchasing two homes in Augusta, Georgia, without employing a buyer's agent. Despite his efforts to negotiate a credit equivalent to the typical 2.5% commission for a buyer's agent, the listing agent retained the entire 5% commission. As a lawyer, Xiao perceives the commission structure as flawed, stating, "The higher the price, the more money they make," which he believes misaligns the incentives of the buyer's agent. "Your agent should be representing you and trying to help you get the best deal possible," he asserts.
When Xiao decided to sell his condo and purchase a new home for his family, he approached the situation differently. He sought out an agent willing to accept a 1.5% commission for selling his condo and a flat fee of $10,000 for assisting him in the home purchase. This shift reflects a growing trend among consumers seeking alternatives to traditional commission structures.
The new regulations are set to fundamentally alter the landscape of real estate transactions across the nation. Key changes include:
Agents are required to inform buyers and sellers that their fees are negotiable. Buyers must sign an agreement with their agent outlining how they will be compensated, which may include the possibility of the buyer covering the buyer's agent fee if the seller does not. Agent compensation offers can no longer be displayed on online platforms known as multiple listing services (MLS).These new rules create opportunities for brokerages that operate on a flat-fee basis. Rob Luecke, CEO of ShopProp Realty, a flat-fee brokerage operating in nine states, notes that many home buyers and sellers feel trapped into using agents rather than hiring them at a reasonable fee. "Our goal is to eliminate commissions or significantly reduce them, empowering home buyers and sellers," he states.
The potential savings for clients can be substantial, particularly in the high-end market. For example, ShopProp represented a buyer who purchased a $10.2 million home in Atherton, California, an area known for its high property values. Typically, a buyer's agent would earn a 2.5% commission on such a sale, amounting to approximately $255,000. Instead, the buyer received a rebate of $247,000, only paying a flat fee of $7,995 to ShopProp. "That client was so happy that he even gave ShopProp a $1,000 bonus," Luecke shares.
ShopProp has experienced an average growth rate of 26% per year. While their revenue per sale is lower than traditional brokerages, their business model focuses on high volume. However, this volume-centric approach does come with certain limitations: their full-service package for home sellers includes just two open houses. In contrast, a higher-fee concierge service provides a dedicated agent for tasks such as repairs, staging, and cleaning. ShopProp also offers some services, like MLS listings, free of charge.
Traditional commission-based agents argue that their higher fees are justified by the level of service and localized expertise they provide. Leanne Liang, an agent with Redfin in the East Bay area of California, emphasizes the importance of local market knowledge. "In areas with multiple housing micro-markets, buyers can greatly benefit from agents who understand the nuances of their specific locations," she explains. Liang advises potential buyers and sellers to interview agents from both traditional and flat-fee brokerages to determine which option feels right for them.
Despite the recent changes in commission regulations, there has been little immediate impact on broker fees. Data from Redfin highlights that buyer's agent commissions averaged 2.4% in the first quarter of this year, a slight increase since the settlement but a decrease compared to the previous year. Notably, for homes priced between $500,000 and $999,999, commissions fell from an average of 2.42% to 2.29%. For homes exceeding $1 million, the decline was even more pronounced, dropping from 2.36% to 2.17%.
Jim Xiao acknowledges the concern that lower-priced agents may offer minimal service. However, he found the realtor he worked with to be exceptional, stating, "She did everything, if not more, compared to what other realtors had done in the past." By opting for a flat fee structure, Xiao saved $14,000 during his home purchase, funds he allocated towards closing costs. He asserts that consumers do not need to be legal experts to secure better deals: "It takes informed consumers who are confident enough to explore other options," he concludes.
