I recently received an email from an agent at Sotheby’s, a prominent real estate brokerage with 1,115 offices located in 84 countries and territories worldwide, and I thought it was worth sharing. The email likely originated from Sotheby’s senior management and was then distributed to agents, who could choose to send it to their prospective clients.
The email offers a solid recap of the current situation with real estate commissions following the price-fixing verdict. What’s particularly exciting is that this is the first time I’ve seen a real estate brokerage openly encourage clients—both sellers and buyers—to negotiate lower commissions. This is a significant shift in the industry!
However, there’s also a point in the email that I disagree with, which I’ll discuss later.
One of the reasons I decided not to sell my previous house in early 2024 was that I didn’t want to be among the last homeowners paying a 5% commission before changes in the real estate commission structure take effect on August 17, 2024. I knew these changes were on the horizon, and I thought it would be wiser to wait.
Additionally, with declining mortgage rates, a strong stock market, a tech and AI boom, and significant local economic growth on the west side of San Francisco, I decided it was better to hold on.
Now, let’s dive into the email from Sotheby’s.
Commission Changes In The Real Estate Industry Begins
For decades, buying or selling a home followed a predictable pattern. At the close of escrow, sellers typically paid a 5% to 6% commission, split evenly between the seller’s and buyer’s agents. But, hold on to your hats because things are about to get a shake-up! Commission rates should now fall to 4%.
What's New?
Starting August 17th, new industry rules are coming into play that could change how commissions are negotiated. The goal? To give consumers more negotiating power and potentially lower both commissions and home prices. But, as with any big change, there are a few bumps to watch out for.
Why the Change?
Critics argued that the old system kept commission rates high and reduced competition. Buyers' agents were often “steered” toward homes with higher commissions, and sellers weren’t always asked if they were okay with the standard rates.
Research shows that in other countries, real estate commissions are often about half of what they are in the U.S.
This point was one of the points Mike Ketchmark, the lead trial attorney made. You can listen to my interview with Mike below to get a great overview of why a lawsuit was brought against the real estate industry for price fixing.
How Will This Affect You?
More Transparency and Negotiation: Buyers will now sign an agreement detailing their broker’s payment before hiring them. Sellers can still choose to cover these costs, but it’s all about more clarity and power for you to negotiate.
Possible Upfront Costs for Buyers: If sellers opt not to pay the buyer’s broker, buyers might need to pay these fees themselves. This could mean having more cash on hand when purchasing a home.
Potentially Lower Home Prices (Where I Disagree): With sellers potentially paying less in commissions, home prices might dip slightly. Imagine saving a few thousand dollars on your next home purchase!
What To Expect From The New Rules
No More Commission Listings on MLS: Seller agents won’t list buyer broker commissions on NAR-affiliated MLS. This means more direct negotiation between you and your agent.
Flexible Business Models: New models may emerge, like agents offering flat rates for specific services, making it easier to customize your real estate experience.
More sellers will need to decide whether to pay a higher commission for a top-tier agent or save money by hiring a mid-tier agent. Everything is negotiable.
How to Navigate the Changes
Negotiate Commissions (Biggest Surprise): Aim for a 2% commission or less for both buyer and seller agents. Review all contracts carefully to ensure you’re getting a fair deal.
Leverage Seller Concessions: If needed, you can negotiate with sellers for concessions to cover agent fees, keeping more money in your pocket.
More sellers will need to decide whether to pay a higher commission for a top-tier agent or save money by hiring a mid-tier agent. Everything is negotiable.
Real Estate Brokerages Are Willing To Lower Commissions!
Isn’t this one of the most hopeful messages you could receive from a major real estate brokerage? Sotheby’s is actively encouraging its clients to negotiate for a commission rate of no more than 2% on each side.
If the seller still chooses to cover both the listing agent's and the buyer's agent's commissions, which most will likely do initially, the total cost for the seller could drop to 4% or lower. While 4% is still a significant amount, it's a considerable reduction if it becomes the new standard.
I’ve NEVER seen a real estate brokerage openly support a commission of just 2% for both the seller and buyer. Since I started buying and selling real estate in 2003, the lowest total commission I’ve encountered was 4.5%.
Even in July 2024, when I interviewed five real estate agents from different brokerages about selling another rental property, only one was willing to budge on the commission. That agent offered a 4.75% rate but eventually agreed to an incentive-based commission structure when it became clear I would walk away.
As recently as early August 2024, real estate brokerages were instructing their agents to hold firm on at least a 5% commission rate. They are hoping consumers, who don't regularly buy and sell houses or read personal finance sites, will accept the old pricing structure. But now that new real estate commission laws are set to take effect on August 17, 2024, brokerages are changing their approach.
Why Real Estate Brokerages Are Becoming More Open to Lower Commission Rates
It’s clear that real estate brokerages and agents have finally accepted that the business landscape is changing permanently. Consequently, more brokerages and agents are choosing to comply with the new rules rather than risk further lawsuits.
Remember, Keller Williams, HomeServices of America, and the National Association Of Realtors were all sued and lost. Now that there’s a legal precedent for real estate price-fixing, it’s easier for lawyers and consumers to sue brokerages or agents for further price collusion.
Sotheby’s doesn’t want to be sued after August 17, 2024, for price fixing. A lawsuit could potentially wipe out years of profitability. Imagine the internal emails and text messages that would need to be subpoenaed regarding commission discussions in court. The findings could put Sotheby’s or any other brokerage sued out of business given the NAR settled for $418 million.
Instead of resisting the law, Sotheby’s has wisely decided to comply with the new real estate pricing regulations. By getting ahead of its competition, it’s likely to win more business. Even if the standard commission rate drops 20% from 5% to 4%, increased business volume could make Sotheby’s more profitable.
The brokerages and top agents that adapt to the new laws will be the big winners. Those that cling to the old, now-illegal practices will likely go out of business.
Home Prices Won’t Decline Due to Lower Commission Rates
I disagree with the statement, “With sellers potentially paying less in commissions, home prices might dip slightly.”
Home prices are determined by demand and supply, which are influenced by job growth, income growth, inventory, and construction pipeline. Lower commission rates act as a catalyst to increase transaction volume.
Lower Commission Rates May Increase Supply
On one hand, lower commission rates might encourage more sellers to list their homes. After I sold a home in 2017 and paid a 4.5% commission, I swore I wouldn’t sell another property until commission rates dropped to 4% or lower. It felt like a farce to pay the buyer's agent a 4.5% commission while he was hammering down on my asking price by $25,000.
So, perhaps I will eventually increase supply, which could put downward pressure on prices. But unlikely. My goal, like that of most savvy real estate investors, is to hold onto properties for as long as possible, even if commission rates drop to 0%.
Think about long-term stock investors in the S&P 500. Do you think they’d sell their holdings just because online trading commissions went to zero? Of course not. They buy and hold for the long term to build great wealth.
The same principle applies to real estate investors, especially since there are also transfer taxes, staging costs, and other fees beyond commissions. Even with real estate commissions coming down, the cost to sell a house is still too high.
If you don't have to sell your property, don't. In 10 years, you will be glad you held on. In 20 years, your young children will be thrilled that you invested in real estate so cheap when they couldn't.
Lower Real Estate Commission Rates May Increase Demand More Than Supply
On the other hand, lower commission rates might attract more buyers. If buyers know less money is going to agents, a new wave of buyers might enter the market seeking deals. However, the increased demand could easily outweigh any savings on the purchase price due to lower commissions.
Sellers will act in their own best interests and try to retain any commission savings below the previous 5% standard.
Let’s say the average commission rate a seller now pays is 4%. It would be irrational for sellers to lower their asking prices by 1% on average. Instead, they’ll likely list their homes at prices from the 5% commission era and hope to pocket the commission savings.
What will likely happen is an increase in dual agency, where the listing agent also represents the buyer. This arrangement allows the seller to save on the buyer's agent commission, and the buyer might be able to negotiate a purchase price reduction equivalent to that commission.
If you are a veteran buyer, then letting the listing agent represent you to potentially save is a smart way to go.
Real Estate Consumers Are the Ultimate Winners
The real winners of the NAR settlement are real estate buyers and sellers. When transaction costs decline, consumers win.
At the margin, homeowners are the bigger winners than buyers because they get to save at least 1% on real estate commissions. Over time, the real estate commission savings will likely increase. Conversely, the losers are the NAR and any brokerage or agent unwilling to accept that commission rates are coming down and resistant to change.
In 2012, I realized that institutional equity trading commissions were heading toward zero due to electronic trading. As a result, I felt that the return on effort for working in equities was declining. No matter how well I performed, I wouldn’t be paid as much as my colleagues in the past. So, I did the rational thing and left.
I could have tried to reinvent my career by taking on a different role within my firm. But by then, I was also tired of working in finance and wanted to focus on writing for Financial Samurai. Real estate agents must also adapt or face obsolescence.
Negotiate Lower Real Estate Commission Rates
For real estate buyers and sellers, know that commission rates are dropping. Sotheby’s, one of the largest brokerages in the country and world, is now recommending a total commission rate of no more than 4%. To stay competitive, other brokerages will follow suit.
What’s now up for negotiation between the seller and buyer is the amount of commission savings below 5%. It’s up to both parties to negotiate the best terms for themselves while making compromises to get the deal done.
I believe that performance-based real estate commissions are the future of the industry. For agents confident in their skills, which most are, a performance-based structure will be a welcome approach to selling or buying property. The higher the price a listing agent secures for a property, the greater their commission. Conversely, the lower the price a buyer’s agent negotiates for their clients, the larger their reward.
In America, we champion meritocracy! Agents confident in their ability to deliver exceptional value will embrace this evolving way of doing business
Reader Questions And Suggestions
Have you received a similar e-mail from a real estate agent, providing suggestions to negotiate for lower commission rates? If so, please share. What type of real estate commission changes or attitude shifts are you noticing in your area? Do lower commission rates make you want to sell or buy?
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It’s intriguing to see a major brokerage like Sotheby’s openly address commission negotiation, marking a potential turning point in real estate practices. This move could empower more clients to seek better deals, reflecting a shift towards greater transparency and fairness in the industry.
I am a retired Licensed Real Estate Agent. I only did commercial property, representing buyers, sellers, landlords and tenants – but never both sides. The commission structure for this part of the industry was that each side of any transaction individually compensated its representative. The amount was normally a percentage (anywhere from 1.5 % to 2.5%, and frequently simply a flat fee.
I recently sold my house in New Mexico, using a well known national agency. Although the state mandates that R/E commissions be “negotiable,” I was presented with a 6% commission – “take it or leave it!” Furthermore, the State applies Sales Tax on the commission and allows the agent to pass this through to the client – AKA “double dipping.”
Did you leave it? What happened with your New Mexico house?
What’s your opinion of Redfin? We used Redfin as first time home buyer in 2011 and found it to be a good experience all round. We’ve noticed the stock is down quite a bit, but almost everyone I know used them or Zillow to at least research homes when home buying. If we were to sell our home and buy a new one through them, it looks like the total cost would be 3.5-4% commission haggle free. I know realtors seem to hate Redfin with a passion, because its transparency and Tesla model of the home buying process is not good for their real estate sales business. But with the new buyers fees and idea of having to sign on with a realtor to even see a house being quite the culture shock for some… do you think it will push more buyers toward Redfin?
I love Redfin’s user interface. It also has more accurate real estate pricing estimates too than Zillow.
There is some snobbery by real estate agents against Redfin unfortunately. And this bias against Redfin may unfairly taint the property and negatively affect the final sales price. So this is something to take into consideration.
But I’ve seen just fine sales with Redfin.
I went to a Redfin open house. The “agent” didn’t get up from the sofa and just sat texting on her phone. Never said anything. We were the only party in the house. You’d have to be an idiot to list your house with Redfin agent.
This is such a great post on this topic. Well explained!!
This is an important change for buyers since in many states, without a signed contract with an agent, buyers have been operating without legal representation in the eyes of the court. They also have been blind to the amount of money their buyer’s agent/broker was being paid. The advantage of the old way to buyers has been their ability to wrap the commission amount into the purchase price and thus their loan.
For many (most?) transactions this will continue to be the case – buyers will not have or want to use surplus cash to pay the agent so will ask for their agent’s commission to be included in the purchase price. The idea that buyers have built and will continue build the commission into their loan also debunks the theory that sellers have been paying the buyer’s agent’s commission all along, doesn’t it?
At the end of the day, the seller should continue to be focused on maximizing net proceeds and the buyer should continue to focus on getting the most home for the money. Commission is part of the equation for both sides but often isn’t and won’t be the factor determining the the best outcome.
FYI – Your statements that this is a new ‘law’ is not accurate. Real estate laws are set state by state and those have not changed as a result of this settlement. The ‘rules’ within the National Association of Realtor members are what has changed. I know it’s a nit-picky thing, but that’s how real estate is, it’s very nit-picky and specific.
I’m a licensed real estate broker in 2 states and have been a (forced) member of NAR since 2002. I’m a huge proponent of new and creative ways to satisfy the market for both buyer and seller services. Since 2005 one of my real estate companies has been offering unbundled listing services and for a flat fee of only $399 they can market their property on MLS and Realtor.com. I’m very hopeful that with these recent changes, my business model will finally get the respect it deserves. I think the ‘traditional’ 5% or 6% commission structure is antiquated and has no basis for existence in the past 20 years. It’s time for it to go.
Be well and have a wonderful day.
PJ
It’s a new way of doing business. Every real estate agent and brokerage must decide whether they want to risk getting sued after the settlement with NAR, KH, Homeervices or not.
With precedent set, I’m betting the industry will not want to risk going back to the old ways. And Sotheby’s is one example of change.
It’s pretty rich that you think sellers should benefit and not need to drop prices. It’s generally very clear that sellers have increased prices to cover agent commissions. I say this as the owner of about 20 houses, as a part-time side hustle to my real job. But I’m also a buyer. I assure you — I’m not paying any commissions. Not happening in a million years. Any offer we make will include a reduction for whatever the buyers agent wanted. And we have always gone through the selling agent anyway. So it will be theirs to lose, in our case.
It’s not only pretty rich, but rational as a seller. Both the seller and the buyer will battle to capture the commission savings. And that is how negotiations and agreements are done.
Sure. I’m not the buyer who will ever pay what has traditionally forever, been something the seller pays. I need next to nothing from a buyer’s agent. The seller must have the listing agent (of course, those could be flat rate and cheap).
I’m sure the next time you’re in the market as a buyer, you’ll reconfigure your general outlook on who “should” pay.
As a side note, my guess is that Sotheby’s isn’t being generous here. They are probably trying to promote 2% as the new norm. They know their commissions are going down. So why not try to make the new unwritten customary number 2%, before those with other ideas make it 1% or even a flat rate of 2K in certain scenarios? I mean anything goes and everything is on the table now. We shouldn’t let Sotheby’s or a group of RE companies tell us what the new bottom will be.
I have practically zero need for either listing or buying agent. So I would be aggressive on either side of any deal. Also helps that I don’t need to buy or sell.
Lastly — sorry that I came off strong right away! This was an excellent article, which I plan to share. I just don’t agree that sellers should be the big winners here. Both buyers and sellers should win. I do expect prices to go down, since current prices include agent fees. And that’s already happening for other reasons anyway. This should push them down further in my view.
No problem.
Both sides will win as the cost to transact comes down. But given sellers have historically been the ones to pay and control commission payment, it stands to reason the sellers will win more at the margin than buyers. Maybe the ratio is 70/30 on who wins. But it’s definitely not going to be 50/50.
Today I received an offer for a property as asking price. In the “other” section it specified that seller would pay buyer’s firm 3% commission. Strange was to ensure buyer doesn’t have to pay agent.
I only partially agree with the 2% or less recommendation for both sides. If selling, I would offer 2% for a condo or for a home in a lower end neighborhood. I would offer 1-1.5% for a higher end (costlier) home. Not sure why a higher end home would yield more commission than a home in the ghetto? Fixed fees (of menu based options) would be the last step to making some sense of the real estate commissions. This is a right step and I see it as a win for Americans.
Hi Sam, I’m kind of surprised as a seasoned real estate investor the lowest rate you’ve paid is 4.5. I realize you state you negotiated afterwards to be incentivized structure, but how much more incentive do you need if your listing fee is based on the most amount you get for my house. Further, your average Joe reading your column is not savvy to the term “dual agent” no matter how self explanatory it may sound. As you were irritated paying a buyers agent to negotiate against you, as well I would take issue paying a listing agent, whom the seller has a fiduciary responsibility, to try and represent me. No thank you. This new rule fails to hit the most important transparency… How much is the listing firms co-broke to the selling firm. Everyone wrote this as price fixing, when in fact, no one, not even the buyer’s agent knew what was negotiated between the seller and the listing firm to offer to the buyer. The MLS was the only market place that allowed that transparency. But now that’s gone. What a travesty. At least before with it being openly advertised on the MLS, seasoned investors knew, that should the choose to negotiate a deal with the listing agent, the offered compensation could immediately be deducted whether it be 1/2 the 6% or 1/2 the 4%, and you knew exactly how much that was. Now, all gone. Your guess is as good as mine, and good luck getting the listing agent to tell you, that’s just not in their best interest. The logic on this is simply unfounded. And to think prices will come down over this is a joke. Market demand dictates prices, pure and simple. Supply and demand don’t care bout no commission. Ask any FSBO. They’re all trying to pocket the commission, and in most cases over price their home doing so. All to stick more money in their pocket, and 9 times out of ten, won’t buy the next house they buy as a FSBO for the exact same reason. Comical. I’ve been investing in real estate for 27 years. I can honestly say this is the dumbest thing I’ve ever seen in an effort to mask an attorney big grab as a savings for buyers and sellers. The super hot market over the previous rate hikes (which don’t directly effect mortgage rates) have super inflated prices. When buyers start believing they’ll have to come out of pocket to pay their agent, the market, even as rates drop, will slow down. And it will be columns and predictors like this that will hag their hat on I told you so, when prices adjust. Just were for all the wrong reasons.
Thanks for sharing. Every reader becomes more savvy and knowledgeable with every read. I’m just glad there’s more transparency and rates are finally falling significantly.
What’s your background and how are you negotiating your real estate selling commissions from 2017 and before?
Cheers
Hi Mark,
I agree completely. What’s killing me if prices do adjust it will be due to a minimum of one of the three factors that got us into this housing situation in the first place: mortgage rates, supply and demand yet the “powers that be” will likely attach it to lowered commissions. I have seen over and over that lowered commissions could have a marginal impact on housing prices, if that. What will more than likely end up happening for sellers that opt out of buyer agent commissions (which today is the first day of this new structure and multiple emails in with new listings – every one of them so far, the seller is not only offering out buyer agent commissions, they are staying course within the “norm range.” That could change as time rolls forward, but the reality is Northwest MLS began offering sellers the option of buyer agent commissions back in 2019 and in most instances sellers continued to pay. With all the press about this it may change a bit, but at the end of the day we are talking about an industry where it’s generally only the top agents that don’t experience some level of struggle. If you’re interested in the Hudson Valley real estate market, I publish a newsletter, The Brick, with the next one coming out by tomorrow. You can also see it through link in profile on my IG account at HudsonValleyNest if you would like to take a read. I’m working on it now.
The last sucker to pay a 5% commission to sell gotta shut the door and lock!
Do you know that the majority of homesellers still have no idea they are overpaying due to the legal settlement. Sad.
Good on real estate brokerages for spreading awareness and doing the right thing.
Smart move by Sotheby’s real estate brokerage. It’s not smart to risk facing a large lawsuit when so many other brokerage firms have already lost and paid hefty penalties.
Sotheby’s and other brokerage houses that have not yet been sued should take the NAR settlement as a clear warning, sign that they could be next they continue to price collude and not make changes.
And the reality is, consumers who paid a 5-6% commission can still sue real estate agents and their brokerages to get back their money, given the NAR price fixing ruling.
Sam you’re always timely in your articles and I appreciate your viewpoints.
If you’re buying in a state where you’ve already bought and sold a couple of houses, you really don’t need an agent. While a buyers agent does add a lot of value to the first time home buyer, they add less and less value each subsequent purchase approaching a limit of zero. I plan on buying our next home without an agent representing us and requiring the seller to allow their agent to serve in a duel agency role for the 3% they were already paying him/her/”they”(!). Seller wins, I win, sellers agent gets what they were already getting.
Where I am struggling to make up my mind is what to do when I am the seller. Eventually we’ll sell one of our properties, and the debate is between paying one of several of our past agents 1% just to put it in the MLS and show it (a take it or leave it proposition) vs the full 3% to list it. For sure, I will decline any offers that require me to pay the buyers agent. They’re on their own now. With the shoe on the other foot with me as the buyer, I’m happy to be on my own to compensate my agent, if I ever use one again as the buyer.
If I were buying in a different state than Texas, which would be a first, I would consider paying our buyers agent 3%.
Great point about valuing local market experience. But is that really worth 3% of the price of the home you’re buying? Why isn’t it more like consulting an attorney – and paying by the hour. The whole buyers agent process should be decoupled. There should be people who show houses (bonded, with enough understanding of real estate to answer very basic questions) – paid by the hour. And then pay someone with a buyer’s agent level of experience by the hour for specific questions about local conditions, how to negotiate the offer, concessions, etc.
Thanks for raising awareness on such an important topic. I’m glad to see there are more agents supporting consumers because I’ve encountered some who are incredibly stuck in their ways. Times are changing and those agents need to adapt and change with the times as well. Very pertinent topic and timing, spot on and thank you!
Hi Sam,
Hope you and your family are doing well! Great article as usual, particularly with the timing. Just wanted to give you another data point that agents/brokers are more than willing to negotiate their commission, particularly in areas with abundant agents.
We are moving to North Carolina and just closed on our home yesterday. When shopping around for buyer agents (we bought home remotely), I sent out emails asking prospective agents whether they would be willing to negotiate/match the commission rebate commission rebate equivalent or as close to what Beycome would offer us because we would be easy buyers (i.e. past experience buying properties before so minimal hand holding, we knew which neighborhoods and what property we were going to buy, already preapproved with lender and could potentially pay cash if needed, etc.). There were a few agents (a third out of the ones I reached out to) willing to match the rebate, and we ultimately chose a wife-husband agent/broker combo who agreed to a 1% commission with remaining commission as a rebate to us. The buyer’s agent commission was 2.4% on this deal, so we are getting 1.4% back.
Hopefully other readers are just as successful, if not more, at keeping more of their $ in their pockets with what you are sharing!
A