A correction to an earlier version of this article has been appended to the end of the article.
The standard 5% to 6% broker commission on home sales may soon become a thing of the past, which could mean big savings for Bay Area home buyers and sellers.
The change in how commissions are priced, set to take effect nationwide in mid-July, is the result of a recent landmark settlement by the real estate industry’s largest trade group to level the playing field for buyers and sellers to negotiate lower rates. According to some analysts, it could slash fees by almost a third.
In the Bay Area’s outrageously expensive housing market, experts say fees could drop by potentially tens of thousands of dollars as real estate agents face increasing competition for the still-lucrative commissions, calculated as a percentage of a home’s final sale price.
“Younger, hard-working Realtors will be willing to offer a much lower number because, with home values so high, that’s still a big commission,” said Louis Mirante, a housing policy expert with the pro-business group Bay Area Council.
The net effect: The region’s astronomical home prices, which typically factor in commission fees, could soften a bit, Mirante said, though it’s not yet clear by how much.
To survive in this new paradigm, agents may need to work harder to justify their rates by honing their expertise or offering new services. On the flip side, more could start offering flat fees, or discounted rates for basic services such as writing up a contract. Meanwhile, a growing crop of startups from the Bay Area and beyond see a prime opportunity to replace them altogether.
“Agents are really going to have to up their game to showcase their value,” said Ken DeLeon, a Silicon Valley broker specializing in luxury homes.
What exactly is set to change? Last week, the National Association of Realtors agreed to a $418 million court settlement to end its practice of directing home sellers to offer to pay the commission for buyers’ agents.
Right now, sellers generally pay both their agent and the buyer’s agent a fee of around 2.5% to 3% of the sale price. For a $1.1 million home — the typical cost in the Bay Area earlier this year — that could come to about $66,000. Generally, the charges are baked into the listing price.
Critics say the realtors association has conspired to keep fees artificially high by requiring that sellers’ agents advertise buyers’ agent fees alongside listings in the main database of homes for sale. That not only discourages negotiation over rates, critics argue, but incentivizes agents to steer buyers toward homes with higher commissions.
Realtors respond that rates have always been negotiable and that successful agents build their reputations by getting clients the best deal.
Still, many acknowledge the new rules could be a seismic shift for the industry.
While sellers will continue to be able to pay buyers’ agents, many agents are expected to start contracting directly with buyers, potentially giving house hunters more leverage to shop for a better rate.
DeLeon said since more buyers could start paying those fees out of pocket, they’ll be more likely to want an experienced agent who knows the ins and outs of a local market. He said the days of dabbling in real estate to make a quick buck off the Bay Area home market may be numbered.
“Using your third cousin, using the family friend, is going to become a lot more rare,” he said.
To set himself apart from other agents, DeLeon said he often helps buyers find a mortgage lender, insurer or contractor to help with a home remodel. And when acting as the seller’s agent, his firm is trying something new: offering a buyer’s agent a flat fee, starting at $10,000.
In the latter case, if the buyer’s agent wants more, the buyer can pay the difference. Otherwise, DeLeon is prepared to represent the buyer for the listing free of charge. Despite the low margins, DeLeon said he’s seeing more than a dozen offers on some properties.
Some agents, however, worry shifting how commission fees are paid could hurt first-time homebuyers already straining to afford the Bay Area’s hefty down payments and closing costs.
Under the current structure, buyers can effectively cover commissions with their mortgage. But if sellers are less likely to agree to cover the buyer’s agent’s commission, agents say the added upfront cost could push homeownership further out of reach for some.
“They simply don’t have the cash on hand to compensate their agent, regardless of whether the sale price is lower,” said Oakland agent Felicia Mares.
Matt Parker, a long-time broker, wants to help overwhelmed home seekers by giving them the tools to buy a property without hiring an agent at all.
His new company, Alokee, based in Walnut Creek and Seattle, seeks to automate the home buying process — from making an offer to filling out the paperwork to close a deal — through its online platform. Buyers either pay a $10,000 fee or select services a la carte.
Parker said he got the idea for the startup after representing a young Silicon Valley couple who seemed to barely need his help finding a home. He’s betting there are a lot more buyers like that out there.
“They’re already identifying homes, they’re already letting themselves into homes, and what they really need is a boost as far as getting an offer off,” he said.
Alokee isn’t alone. Fledgling companies such as Los Angeles-based Arrivva and Beycome in Florida offer similar services.
It remains to be seen how significant the demand for such startups could be, but with the traditional agent-buyer model now in flux, Parker expects more entrepreneurs to test the market.
“There’s a huge blue sky that’s opened up,” he said.
Correction: March 20, 2024 An earlier version of this article incorrectly reported that Matt Parker is a Bay Area broker. His company, Alokee, is a broker based in the Bay Area.
