Real estate agents taking our NJ real estate broker class recently had lots of questions about this hot topic of “decoupling” commissions. Our clients, coworkers and friends will be asking us what this all means, so let’s take a minute to understand what the government is proposing. If you are just thinking of signing up for real estate school, you should understand the implications.
The plethora of lawsuits against real estate firms, Multiple Listing Services, and NAR has been nothing less than head-spinning in the past year. The multi-billion-dollar jury awards against some of our largest brokerage firms have been appealed, yet more suits have been filed every week, and while real estate agents may be confused at the state of the industry, one thing is absolutely certain:
We will not be compensated the same way in the future.
The US Department of Justice.
The latest iteration of the U. S. Department of Justice’s campaign against the status quo was their decision last week to require real estate brokers to “decouple” commissions. The DOJ’s reasoning is that by requiring buyer-side commissions to be paid by the seller, this increases the seller’s costs of selling his property, and therefore the buyer pays more. If the buyer were to compensate the buyer’s broker directly, the theory goes, then the buyer could potentially negotiate a lower fee than what their broker currently receives from the seller
This the buyer (theoretically) pays X% less for the property because the seller would only be paying the listing broker’s commission, and the buyer could then shop around for a broker who would represent her for a much lower commission than those traditional co-op commissions.
How the Numbers Work Today.
With the caveat that this in no way suggests fixed or standard commissions, let’s do a math example:
Mr. Smith lists his home with ABC Realty under the current system at a 6% commission, with a 50/50 split to a buyer’s broker. The home sells for $600,000. The seller is charged $36,000 total commission, of which $18,000 goes to the listing broker and $18,000 to the buyer’s broker.
How the DOJ’s Decoupled Commissions would (Theoretically) Work.
The DOJ argues that if commissions were decoupled, the following scenario would be likely.
Smith pays 3% commission ($18,000) to ABC Realty, his listing broker. This would allow Smith to reduce the sale price of his home by the $18,000 he no longer has to pay a buyer’s broker, so he sells it for $582,000, still netting the same amount.
Janet Jones may not have qualified for the home at $600,000, but at $582,000, she can buy her dream home, and she goes to contract at that price. Janet shops around for an agent and finds one who will represent her for $6,000.
To summarize, the seller netted $564,000 (sale price minus commissions) under both the current and decoupled methods. The buyer, however, paid $600,000 for her new home under the traditional model, but only paid $588,000 ($582,000 + $6,000) with decoupled commissions.
Questions? Answers?
There are more questions than answers as to how the DOJ’s recommendations would affect the market. For example:
- Would dual agency be able to exist?
- Would the sellers actually reduce their property price by the amount they no longer have to pay a buyer’s broker? Or, when their listing agent shows the current market value of their home is $600,000, would they insist on selling it for market price? If so, the buyers would be paying significantly more after then having to pay their own commissions.
- How will lenders treat the buyer-side commissions paid, which would add thousands of dollars to a buyer’s up-front costs? If they are applying for low-downpayment loans such as FHA/USDA or VA loans, how will the lender treat the minimum downpayment plus the buyer-side commission?
HomeServices study
A 2022 study by HomeServices of America titled, “Be Careful What You Wish For: the Economic Impact of Changing the Structure of Real Estate Agent Fees” found that requiring buyers to pay commissions would have a very negative effect on large segments of the home-buying public, especially on minority and first-time home buyers.
Garden State Real Estate Academy has evening, daytime, in-classroom and online real estate classes that start every couple of weeks. For information on the real estate school’s upcoming New Jersey and Pennsylvania licensing classes, click here: https://www.gsreacademy.com/pre-licensing-courses/
David C. Forward is a licensed real estate broker and instructor and was first licensed as a Realtor® 36 years ago. During his career, David and his business partner sold more than 500 homes in South Jersey. He is now School Director of Garden Real Estate Academy, has won numerous awards for real estate sales, is a much-requested public speaker who has addressed audiences on six continents. His 20th book Zero to Hero: Winning strategies for new real estate agents to become SuperStars just released.
