A Home Buyer’s Odyssey: Adapting to New Real Estate Commission Rules

TLDR; New rules mean homebuyers may need to pay their agent’s commission out of pocket, which can’t be financed. Explore options like seller or lender concessions to cover costs, and be ready to negotiate. Plan ahead to manage expenses and focus on finding the right home.

No breaks for the weary home buyer

Let’s face it, we’ve all been on a bit of a real estate odyssey for some time. It has been a hot minute since interest rates started rising in early 2022 effectively putting the brakes on home sales.

At the beginning of 2024, talk of lowering rates intensified and then later cooled as our economy remained strong.

Odyssey – A long journey full of adventures. A series of experiences that give knowledge or understanding to someone.

Now that the Fed has started lowering rates for the first time in two and a half years, a new potential obstacle in the home buyer’s quest has arisen; negotiating buyer’s agent real estate commissions.

Facing the potential to pay real estate commission for the first time, home buyers may need to come up with even more cash to cover the costs of purchasing a home.

Why home buyers may want to pay attention

Two new policies from the National Association of Realtors (NAR) went into effect in August 2024 which affect MLS listings and behavior for Realtors working as a buyer’s agent:

1. Offers of compensation will be prohibited on Multiple Listing Services (MLSs).
2. Real estate buyers must sign a written agreement; which includes compensation, before they can tour a property.

If you’re a home buyer, and responsible for paying your buyer’s agent commission, this means you’ll need to know how to pay for this fee because real estate commissions cannot be financed. In other words, you cannot add this cost to your mortgage loan amount. No exceptions!

How home buyers can pay their real estate commissions

If you’re stretching to get to closing with limited funds, how do you begin to tackle this additional cost? Thankfully, there are some options and strategies you can take to take possession of your next home.

1. The traditional way where the seller takes the responsibility for the commissions – This is business as usual where the home seller covers your buyer’s agent commissions. It remains to be seen how much sellers will pay to cover buyer’s agent commissions. Expect it to be influenced by what else, location, location, location.
2. Seller concessions used towards closing costs – A seller may offer a concession to help facilitate a successful sale. Often, these seller concessions are offered along with an increase in the purchase price to offset the concession. This is all good so long as the sales price of the property is equal to or lower than the appraised value. (see considerations below)
3. Lender concessions used towards closing costs – Similar to seller concessions, a lender concession is a credit at closing that can be used to cover closing costs. Again the idea here is that this helps free up cash to cover non-closing costs (i.e. buyer’s agent commissions). This often can be accompanied by a slight increase in your interest rate to help offset the concessions offered by the lender.
4. Pay the fee out-of-pocket at closing in addition to closing costs – Sometimes, it may be straightforward to negotiate a buyer’s agent commission structure you are comfortable paying out of pocket. For example, If you’re selling an existing property, the cash proceeds from that sale could be used to cover these costs.

It may take some negotiating to get it right

Real estate transactions are more complicated than many appreciate. They are. Actually getting to closing on time fails more than you think because of the nature of the transaction and parties involved.

Consider working with a well-trained expert real estate agent and mortgage broker to ensure the best possible chances of your success. If done correctly, you’ll enjoy focusing only on actually moving. That was meant to be humorous. (Moving isn’t fun so why take the chance of having to focus on the transaction on top of packing?)

A good real estate agent and mortgage broker can help you devise a plan for financing and covering, closing costs and any commissions you agree to cover.

9 Considerations for negotiating your home purchase

I recommend keeping these considerations in mind when financing the purchase of your next home.

Stay focused on the property, not the commission

Even though you will be asked to sign a buyer’s-agent agreement that lays out general expectations of how your agent will be compensated, it’s important to consider the terms of each offer when negotiating your contract terms.

The buyer’s agent agreement details the amount your agent will expect to be paid. How that payment is funded is determined by the terms of each offer. Meaning, the buyer’s agent commission could be paid in any of the four ways outlined above.

Somewhere between you wanting to spend as little as possible and the seller wanting to retain as much as possible from the sale of their real estate is a set of terms acceptable to both parties. Notice, I said acceptable.

Regardless of how your buyer’s agent is compensated, remember that their fees are just a component of the sale. It’s always been there, now it’s up to you or your agent to negotiate how that fee is paid.

Also, don’t lose track of the bigger picture. Keep in mind that this fee is a one-time expense. If your dream house needs a new roof, would you walk away if the seller wasn’t willing to cover that expense? Same goes for them paying your buyer’s agent commission.

It’s all negotiable and in the end, getting the house you want is what matters most. Don’t settle!

Continuing your success

We may have seen the last of the days where sellers pay 6% commissions (not including closing costs) to sell their home.

There’s more than one path for maximizing your borrowing power and limiting out-of-pocket expenses so why wait to put your plan in place, even if you’re not planning to move for several months.

I recommend having a plan for covering the costs of buying a home BEFORE you start looking at properties. Your perfect house could show up at any time so why not be prepared for success when it does?

Getting prequalified is complementary and won’t impact your credit score but it will improve your ability to take action when the right property comes on the market.

Until next time.

All my best,
Bryan