How Will New Commission Changes Affect Home Prices?
Introduction
The real estate industry has yet again been delivered monumental change. The entire system of commission structure has been changed, and misinformation abounds. In situations like these, click bait moves stage center and leads the charge of algorithms that many use to stay informed. We did an earlier video that covered the topics below.
- Brief overview of recent changes to real estate commission structures.
- Explanation of why these changes were implemented and by whom.
- Introduction of key questions regarding the impact on home prices and market dynamics.
- Overview of the New Commission Changes
For a detailed breakdown on Real Estate commissions and the new changes, please check out this video….
Now let’s take a look at the possible impact these changes will have on both buyers and sellers going forward.
Potential Impacts on Home Sellers
Net Profit: There is a notion floating in the greater marketplace that reduced commissions could lower overall selling costs. On paper that may seem true, and pretty obvious. But at the heart of most transactions, the seller isn’t trying to solve for the lowest selling costs. The seller is trying to solve for the highest net profit, as that is typically what defines a successful transaction to most sellers.
As sellers continue to strive to yield the highest net profit, and in tandem begin reducing or eliminating buyer’s agent commissions, they could also be shrinking the pool of available buyers. This is actually a bad move for the seller who wants to yield the most profit. This reduction in demand, due to the now inflated costs that buyers will take on, could very well reduce the overall price the property sells for, which results in less net profit. Less demand equals a lower sale price, in most cases.
Let’s use an example. Say a seller is putting a property on the market at $1,000,000 and decides they aren’t going to cover the buyer’s agent commission. The average buyer’s commission in Los Angeles is about 2.5%. That means more than likely the buyer will now have to pay their agent the additional $25,000 for their services.
If the buyer originally planned on putting 20% down on that $1,000,000 home, they would have gotten a loan for $800,000 and paid $200,000 down. But since the buyer now is responsible for paying their own agent, they will only have $175,000 left for a down-payment. And if the buyer is trying to avoid a PMI by putting down 20%, then they can only get a loan for $700,000 now.
The $25,000 reduction of down-payment equates to a $100,000 loss in buying power.
By deciding not to paying the buyer’s agent, the seller has taken a large group of buyers out of the pool, and in turn reduced demand. The more demand, the higher the sale price. It’s basic economic theory.
A New Negotiation Point: Seller strategies will also likely adjust based on the new commission changes. Sellers no longer have to agree to a set commission, which means commission becomes a negotiation point just like any of the other terms in an offer. Some sellers may decide to not offer any commission at all. Others may decide that they will “entertain paying commission to agents” up to a certain threshold. Others may decide to make their home highly marketable and outright offer to cover the buyer’s agent commission.
The biggest change will be with the sellers that choose to negotiate commission as a term of the agreement. A very likely scenario in the new world would be that the seller receives offers on their home, and then calculates their net profit based on the different commission requests attached to each offer. They will weigh that against the other terms in each deal to figure out holistically which deal is the “best” to accept.
Buyer’s agents and buyers may also strategize on how much buyer’s agent commission they should request, to make the most competitive offer, and then sort out any remaining owed commission between themselves.
Does the Seller Really Make More? Will Home Prices Drop?
Under these fresh rules, sellers get a chance to only cough up cash for their listing agent, potentially slicing commission fees down the middle. Sounds like a win for cheaper home prices, right? Well, not so fast.
In the cutthroat arena of home selling, lower commissions don’t necessarily mean sellers are going to pass savings along. Why drop prices when you can pocket a little extra in a market where buyers are climbing over each other to bid? Not to mention, most sellers don’t arbitrarily throw a sale price on their home without a lot of guidance from their listing agent.
See, agents typically create what is called a Comparative Market Analysis, in which they use recent homes sales within a close proximity to determine the probable market value for your home. Here lies the rub. The homes they will use to determine market value will most likely have followed the old commission structure where the seller was responsible for total commission offered. So sale price won’t necessarily factor in the lower commission and the seller will pocket more.
So does the seller end up making more? No likely. From a more holistic perspective, the seller will many times be purchasing a replacement home after the sale, and will potentially have to pay buyer’s agent commission. So the seller won’t truly pocket that extra cash they saved in not paying the Buyer’s agent.
Potential Impacts on Home Buyers
Now, for the buyers out there dreaming of a price drop, this could be your moment—maybe. For home prices to come down in the short terms, sellers would need to be gracious enough to pass the savings along to the buyer. The problem with that scenario though, is that the buyer will likely have to pay their agent directly, which will end up being harder on the buyer’s pocket than purchasing the property at the traditional price. Why? Look back at the earlier explained example of the million dollar home and the loss of buying power.
Even if prices do come down somehow, competition will likely increase due to a more broad buyer pool that can afford the home, and bidding wars will ensue ala circa 2021. On the flip side of that, if you are a buyer in a less competitive market, there is a scenario where you might see lower prices prevail. Only time will tell.
Long-Term Effects on the Real Estate Market
There is industry speculation that over time these changes may affect home pricing. This is based in the theory that the market will dictate the true value of a buyer’s agent’s services and commissions will normalize based on this value. Where buyer’s agent commission has traditional averaged 2.75%, it may reduce to 2.5% average over time or it may go up to 3% if enough buyers have horrific experiences going at it alone and realize the value an experienced professional brings to the deal.
Again, these trends will take time to glean.
Conclusion
Striking the right balance between commission structures and fair market pricing is key. While lower commissions can save you money upfront, it’s crucial to ensure you’re not sacrificing quality service or market expertise. A skilled agent can negotiate better deals, potentially offsetting any savings from a discounted commission. The goal is to maximize value—both in terms of service and sale price. For young professionals with high net worth, the smart move is finding that sweet spot where you get top-notch representation without overpaying. In the end, it’s about getting the best return on your investment.
