What the New House Sales Commission Rules Means for Flippers

NAR-offices

March 29, 2024

Flipping

News

It’s all over the news this week: After a lengthy legal battle, The National Association of Realtors has been forced to ban the longstanding practice of a seller’s agent setting compensation for a buyer’s agent. Winners and losers are already being called out; but what does the sales commission ruling mean for real estate investors like you? Let’s investigate!

The Context

Previously, listing agents included the buyer’s agent fee in their negotiations with sellers. This resulted in sellers paying out around 6% of the final sale price: roughly 1% in closing fees, 2%-3% for the listing agent, and another 2-3% for the buyer’s agent. But, some people started to ask: Hey, why is the seller obligated to pay a buyer’s cost?

The Ruling

The fact that sellers were forced to pay the buyer’s agent, and couldn’t negotiate—and that that fee was based on a % of home value felt like a racket. The court agreed that mandating sellers to pay buyer agent fees was unfair. Now, sellers are no longer obligated to cover buyer agent commissions. What will happen next, as market forces step in?

Will Listing Agents still Advocate for Buyer Agents?

Now that the listing agent doesn’t have to price in the buyer’s agent, there’s a diminishing chance that they will. As soon as the first agent in the neighborhood stops charging the seller for a buyer’s agent commission, every other listing agent will have to do the same, to remain competitive in getting clients. After all, no seller wants to pay extra.

Will Home Prices Come Down?

Once the seller is paying less fees, they can stand to sell the home for less and make the same profit. So will home prices come down? That’s what many people are hoping for, but it’s not guaranteed. House prices are based on sales comparisons, and as such, it’s unlikely sellers will undercut market value significantly. We’ll have to wait to see what the market does.

What Will Buyers Agents Do?

Buyers agents aren’t going to work for free, so they will now have to convince the buyer to cover their 2.5%. If they are successful, well, the buying power of the buyer suddenly goes down. And if they are unsuccessful, there will be a bunch of people out there trying to buy houses without an agent—and failing. The NAR always claimed that a buyers agent commission actually helped buyers succeed—that’s probably true: Every home sale has challenges; buyer agents push through the challenges.

Ideally, Buyer Agents will adapt by offering more value (ie. a-la-carte services like contract reviews) to justify their fees.

What Happens to Real Estate Investors on the Buy?

This all depends on what kind of RE investor you are…

• Investor-agents should break even, or benefit. They’ll make up for commission loss in the negotiations, and could now compete against weaker offers.

• Savvy local investors are fine, if they deal with a listing agent directly, and hire temporary help for paperwork.

• Investors who buy from wholesalers, with no agent, are also unaffected.

• New or out-of-area investors that are purchasing on-market properties might be most impacted. They are the one who have to rely on agents for local knowledge, deal negotiation, and paperwork.

What Could It Cost Them?

Investors are already cash-strapped when it comes to cash to close. They might soon have to pony up another $10-15K to pay their buying agent. And they can’t even borrow that extra sum from the lender, because it’s not house value, it’s costs. Maybe they increase their purchase offer with the agreement that the seller pays the buyer agent, but either way, it’s more costly to them.

What Happens to Real Estate Investors Selling?

The good news is, when it comes time to sell the property, flippers stand to do better than they were doing in the past! On the one hand, they now have the option to reduce the listing price of their house commensurate with their commission saving, moving the property faster off the market. They could also do better financially, if their market dictates that house prices don’t drop based on the new landscape.

There is a possible downside, too. Flippers sell homes that appeal to first time home buyers—that is, in areas where the median home price is below the national average. So if those buyers are feeling pinched, it could have a broader negative impact on the market.

In short, it’s too early to say the true effects of this new legislation. But one thing seems sure: it doen’t hurt flippers to get a real estate agent’s license right now, or to start looking at wholesaler deals.

 

Disclaimer: This article is for informational purposes only and is not legal, financial or investment advice. To obtain advice tailored to your particular circumstances, you should consult a licensed professional advisor. Tell us if you found this post helpful!

 

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One response to “What the New House Sales Commission Rules Means for Flippers”

  1. This is misleading information. As a licensed REALTOR®, I can tell you it has NEVER been mandated that the seller pay all the commission fees (generally 6%). Yes, it became the standard, but has always been negotiable. This was seen during COVID when there were numerous offers being made. Many sellers offered 2.5% and sometimes even lower. Saying this is good or bad for investors selling a property is really not true. As a REALTOR®, myself and my clients could very well be less incline to buy a home if the seller isn’t willing to negotiate some or all of the commission. This particularly hurts first-time home buyers who cannot afford the etra 3% and, of course, buying agents. However, if presented correctly, as REALTORS® on either side, we can explain that we do A LOT OF WORK to earn that commission, of which, we do not get all of it ever. Even if your brokerage offers 100%, you are paying out of pocket for something in order for to even get that commission.
    Please make sure you are relaying the correct information to the public.

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