Is REBNY Breaking Brokers with Real Estate Commission Changes?

Just when you think you have New York real estate figured out — a curveball. In a recent update, the Real Estate Board of New York (REBNY) decreed that compensation (commission) to a buyer’s agent must now come directly from the home seller, not the seller’s agent. The buyer agent is free to negotiate, accept, or reject the offer. If the seller refuses altogether to offer compensation to the buyer agent, the agent could then work out a compensation arrangement with their buyer directly.

For decades, real estate sales have operated fairly consistently. Everyone — even people not working in the industry — seems to have at least a cursory understanding of how the system works. A homeowner wants to sell, or a buyer wants to search, they engage with a brokerage, the price is set, and commissions are built in. It’s been generally understood that the buyer carried no risk relative to the broker commission being paid. It would come from the seller’s proceeds.

The percentage would vary and could always be negotiated but in New York it has been accepted that 4% to 6% of the sale price — depending on the county — was the cost of doing business with a broker. But that is changing.

Technology, Transparency, and Efficiency Are Fueling Changes

With the rise of online platforms and more user-friendly technology, ordinary consumers are more informed about the costs and activities associated with buying or selling property. Educated consumers demand transparent breakdowns of commission structures and exactly what services are being provided by agents for those fees.

Discount brokerages also offer the option to pay a fixed fee or a reduced commission rate in exchange for fewer services and reduced agent involvement. Cost-conscious sellers are attracted to this option, especially with interest rates so high and inventory so low.

Whether true or not, there is a growing perception that agents and brokers are doing less so they should earn less. Everyone has the Zillow app and can track trends. Everyone becomes “an expert”. Consumers feel empowered to go it alone or at least negotiate commission. Agents and brokers need to hone their elevator pitch and work harder than ever before for business.

Negotiation and Customization, Historically

It’s always been this way. Standard (read: expected) commission rates are automatically factored in at 2% to 3% on each side of the transaction, but they’ve always been typical, not mandatory. And historically, the best brokers have been worth the money. They work hard to earn that commission, while high-volume brokers could afford to cut rates — along with service. The best and most business-savvy brokers and their agents will likely continue to do well in the revised structure. Smaller and independent shops may unfortunately and inevitably suffer.

It used to be that a buy-side broker — whether established or new — would be able to meet a potential buyer and say in all honesty that there is no reason to not engage because the seller would be paying the fee. Buy-side transactions were a way in for up-and-coming brokers developing their business. But that model is on shaky ground.

The Real Effect

Changes from REBNY and the broader real estate governing bodies are reshaping traditional commission models and encouraging a more dynamic and client-centric approach to real estate transactions. Every broker and every agent will be affected. But when the dust settles, the best brokers who do the right things the right way will survive — and thrive.

There’s another group to consider; agents for whom real estate is a side hustle. We now will likely start to see newcomers think twice about entering the game while established brokerages withstand lower commissions coupled with increased volume — the volume abandoned by brokers who close up shop when they cannot compete.

The evolution of commissions is likely to continue. Market forces, technological advancements, regulatory changes, and consumer preferences will shape how commissions are structured and perceived. The most nimble and innovative brokers and agents will rule the new day.

I will be watching developments closely and I invite all brokers, buyers, and investors to message me directly at afriedman@friedmanvartolo.com for additional thoughts and professional guidance.

-Adam J. Friedman, Esq., Friedman Vartolo Managing Partner