Lower Real Estate Commissions and the Rise of Home Warranties

For years, homeowners and real estate professionals considered a 6% realtor’s commission as one of the standard expenses associated with selling a home. That’s no longer the case as of the March 2024 ruling. In legal proceedings that have broad implications for the real estate industry nationwide, the National Association of Realtors agreed to a settlement that includes more than $400 million in damages and significant changes to rules and guidelines on real estate agent commissions.

Signs have been pointing to a shakeup in the real estate industry for years. Costly fees and commissions have become increasingly unsustainable as home prices have inflated throughout much of the United States, and real estate stakeholders have found themselves embroiled in legal problems. Last year, a real estate ruling on commissions in a Missouri court found that the National Association of Realtors collaborated with brokerages to maintain high commissions.

While some interested parties in real estate view the imminent changes with skepticism, many economists and consumer advocates argue that homeowners and prospective homeowners will likely benefit from more competition among brokers and less expensive transaction costs. Below is some additional information on the implications for the future of real estate commissions and how new ways of doing business could impact the home warranty space.

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The Traditional Real Estate Commission Model

A significant portion of a real estate agent’s income typically comes from commissions. When a home sale is finalized, the seller traditionally pays 6% of the sale price to be split by the buyer’s and seller’s agents. This process for real estate transactions emerged many decades ago when organizations like the National Association of Realtors began to facilitate the standardization of real estate practices across the country.

A commission fronted by the home seller might seem like a reasonable enough way for realtors to be compensated for their work, but many have argued that the rigid 6% figure has become increasingly untenable. Critics cite several concerning points:

• Burdensome Costs 

Real estate prices have steadily ticked higher, with a steeper climb in many areas since 2020. Pinning realtor fees to home prices has meant that commissions have skyrocketed as well. If a home sells for $400,000—just shy of the average home sale price in America at the moment—a 6% commission means that $24,000 is due to the brokers. For the average homeowner, that’s no small sum. 

And can you deduct real estate commissions from capital gains? Realtor fees are usually classed as selling expenses, so what you pay in commission costs may not count toward the taxed capital gains. But even so, high commissions pose a financial burden.

Remember too that the steep commission fee is just part of a slew of costs associated with selling a home, from closing costs to moving expenses. If a seller buys another property to move into, there are also mortgage and other bank fees, inspection and appraisal costs, property and transaction taxes, possible HOA fees, down payments, and so on. 

• Lack of Market Competition

Critics also point to the lack of competition that the traditional real estate commission structure perpetuates. If all or most transactions involve a 6% commission fee, brokers have less incentive to adjust their practices to attract clients. 

• Unfriendly Consumer Practices

High commissions that directly correlate to home prices can lead to trends that fail to support consumers. Brokers are incentivized, for example, to market higher-priced homes that are more likely to be out of reach for aspiring homeowners.

Also, because sellers know they have to front a significant amount of money for real estate agents representing both parties, commission costs tend to become priced into home selling prices. In other words, home sale prices are bumped higher and the commission costs are indirectly passed along to buyers.

• Questionable Breadth of Service

A standardized real estate commission suggests a standard degree of service, but that is not necessarily the case. Some transactions require more or less of a broker, and some agents provide substantially more support for their clients than others. Also, digital resources available today have empowered home buyers and sellers, giving them access to materials and resources that otherwise came from real estate agents. This variability in the value agents provide has made the fixed percentage for a commission questionable.

The Emergence of Discount Brokerages

If a 6% commission split between the buyer’s and seller’s agents is a thing of the past, then how do real estate commissions work today?

It will take some months or even years for real estate experts to assess the market and understand more completely the ramifications of the changes to real estate practices mentioned above. But one possibility is that more brokerages and agents will adopt some of the practices discount brokerages have used in recent years.

Discount brokerages emerged as more and more homeowners found traditional brokerages to be too expensive. A discount brokerage can save home sellers money in fees and other expenses, but typically offers real estate services that are more limited in scope.

Some discount brokerages charge a flat fee to facilitate a home sale, while others charge 1% to 4% of a home’s sale price. A few brokerages take a hybrid approach, charging a flat fee until a home’s value exceeds a specific figure, then requiring a percentage of the balance of the sale price. Consumers might expect to see more brokerages following similar models in the future.

Challenges and Opportunities for Discount Brokerages

Discount brokerages may allow sellers to walk away with more money in the bank, but they are typically able to do so by curtailing some of the services that more traditional real estate brokerages offer. Every home seller’s situation is different, but some potential drawbacks of discount brokerages include:

• Less Personal Attention

A discount brokerage is often able to get an agent to agree to a lower commission by offering a large pool of potential clients. With more transactions to manage, your agent may have less time to attend to your questions and requests than a local agent at a traditional brokerage would.

• Obscured Costs

Discount brokerages advertise lower costs, but some fees may be obscured. For example, a discount brokerage might entice clients with a 1% or 1.5% commission fee for the seller’s agent, but the seller could still be on the hook for the buyer’s agent’s commission fee as well.

Marketing materials and listing fees could also begin to inflate the cost. While you will probably still save money with a discount brokerage, the savings aren’t always as dramatic as you might hope.

• Limited Expertise

Agents with discount brokerages may cast a wider net, and greater geographical coverage could hamper an agent’s ability to understand the nuances of the market in a specific town or neighborhood. Agents working with traditional brokerages might have more experience in your local real estate market, making them more efficient at marketing a property, finding interested buyers, and negotiating a better selling price.

• Fewer Resources

Discount brokerages can keep costs low by forgoing services that home sellers might expect as part of the real estate sale process. Home staging, professional photography and videography, printed marketing materials, and recurring open houses are just some of the services that discount brokerages might upcharge for, if they even offer them at all.

The Role of Home Warranties in Real Estate Transactions

Home warranties have become increasingly important in the context of real estate transactions, and the new rules established by the National Association of Realtors may accelerate this trend.

A home warranty, in ensuring the repair or replacement of essential home systems and equipment, is a valuable asset for home buyers, sellers, and realtors alike. Real estate agents have embraced home warranty plans because they entice buyers, improve client satisfaction, generate more referrals, and boost earnings. If the new normal in the real estate world requires agents to distinguish themselves in a competitive field, they are likely to continue investing in warranty coverage to support potential clients.

Benefits of Home Warranties for Buyers and Sellers

If home warranties do become more prevalent in the months and years to come, home buyers and sellers alike stand a lot to gain. With the guarantee of convenient and dependable home appliance and system repairs, sellers can more easily attract buyers and justify higher listing prices. Prospective buyers should look for properties with home warranty coverage as well. For new homeowners, warranties provide the peace of mind that expensive home equipment is protected for a time after moving in, minimizing the possibility of further financial stress after a costly home purchase.

Regardless of your role in a real estate transaction, Liberty Home Guard has the plan and resources you need. We have policies expressly designed to support home buyers and sellers, and our plans are customizable to ensure you get precisely the coverage you need—no more and no less.

If you’re a real estate professional, you can join our national network and get exclusive access to our Realtor’s Portal for resources that will help you build your business and referral network. Reach out to our team by calling (866)-936-9559.

Home Warranty
Provider In America

Give buyers and sellers the best protection
at great prices!

• Request proforma invoices and submit orders for new policies.
• Elevate your business.
• Manage your policy in our Realtor Portal!

Become A Partner Today