Suppose you sold a home for $400,000 below the real estate industry’s well-established norms. You probably paid $20,000 to $24,000 in agent commissions that your listing agent shared with the buyer’s agent.
Were their services worth the price? For years, that question was hardly asked. Commissions were an assumed part of the transaction, unofficially non-negotiable.
Not anymore. A recent settlement agreed to by the National Association of Realtors (NAR) disrupts the traditional commission model and is likely to force agents to compete on prices and give home buyers and sellers more bargaining power.
What does the NAR settlement mean for you if you buy or sell a home? We will explain.
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What is the NAR settlement?
In 2019, a group of Missouri home sellers filed a class-action lawsuit against the National Association of Realtors, alleging violations of antitrust rules and alleging that the association’s practices inflated commissions. A jury last October sided with the plaintiffs, awarding a nearly $1.8 billion verdict against the powerful trade group, which represents about 1.5 million real estate agents.
To settle this lawsuit, along with several similar cases, NAR denied any wrongdoing but agreed to pay $418 million to people who sold homes in recent years. The group also agreed to two rule changes:
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When agents list homes on the Multiple Listing Services (MLS) databases, they are no longer allowed to include the buyer agent’s compensation.
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Buyers will be able to negotiate their own agents’ salary and formalize it in a signed contract.
Read also: How to sell your house without a real estate agent
Does the deal kill the 6% commission?
No. Historically, the total commission on home sales was 5% to 6% of the sales price — split between the listing agent and the buyer’s agent — and the agreement does not directly change how much real estate agents will earn in commissions. And NAR is adamant that it “does not set commissions, and commissions were negotiable long before this settlement,” according to a website post.
But to list a home on the MLS, agents have historically had to include buyer’s commissions. While it has always been possible to advertise a commission of less than 2.5% to 3% on the MLS, listing agents have often cautioned sellers against doing so because buyer’s agents can “steer” their clients away from properties that advertise lower compensation. Or they can filter listings on the MLS to show only those with at least 2.5% commission. Fear of governing is a “strong deterrent” to salespeople who might otherwise reduce commission offers, according to the U.S. Department of Justice, which has an ongoing antitrust investigation into NAR’s practices.
Meanwhile, potential buyers have had no incentive to negotiate the commission down because the sellers are paying that price. Many economists argue that buyers do pay for commissions because they are baked into the sale price of the home. But since the money doesn’t come directly out of their pockets, buyers have long been blissfully unaware of commissions, with some believing agent services are free.
Under the new rules, buyer agent commissions cannot be listed on the MLS. Meanwhile, buyers would need their own agreement specifying compensation before working with an agent. (Sellers can still cover the cost of the buyer’s agent’s commission, but we’ll get to that shortly.)
Overall, the new rules are expected to make commissions more transparent and competitive in the real estate industry.
“I think commissions will go down,” said Sophia Gilbukh, assistant professor of real estate at Baruch College’s Zicklin School of Business in New York City. “Even if the compensation structure remains collaborative, commissions will become more salient to buyers and sellers, and they will be more likely to negotiate with their agent.”
Read more: 12 questions to ask when buying a home
Does the NAR settlement ban agents from advertising commissions?
No. Agents will still be allowed to discuss and advertise commissions. They simply won’t be able to do it via the MLS, which is largely unseen by buyers and sellers.
“Buyer’s agent compensation may be publicized on brokerage and individual agent websites, individual real estate websites, social media and other advertising resources that brokerage firms and their agents engage,” said Debra Dobbs, real estate agent with The Dobbs Group of Compass in Chicago.
Sellers could still use the MLS to advertise concessions to buyers, including help with closing costs. But the offer cannot be conditional on a buyer working with or paying an agent.
How could the settlement change real estate commissions?
More competition is likely to drive commissions down, with the unofficial 5% to 6% no longer factoring into the process.
But the rule changes could also prompt agents to offer non-traditional prices for their services. More agents could offer flat fees, hourly rates and a la carte rates instead of taking a commission that is a percentage of the home’s sales price.
“As listing agents, we may need to get more creative in how we market our services and differentiate our value proposition to sellers,” said Jim Gray, a Keller Williams agent in Rochester, NY. preparation, photography, marketing, showings, negotiations and closings in separate packages and pricing models. We need sharp negotiating skills to explain why our extensive expertise justifies hiring us instead of just paying a minimum to be listed on the MLS.”
Buyer’s agents could also charge for individual services such as home tours, negotiation and help with paperwork, rather than charging a flat percentage. Such changes can ultimately save money for buyers and sellers.
A recent working paper by economists at the Federal Reserve Bank of Richmond found that a cost-based commission model could save Americans about $30 billion in real estate commissions each year, a savings of about 30%.
Read more: What do real estate agents do and do you need one?
Do buyers have to pay their agent’s commission?
Buyers will need to negotiate commission with their agent when they sign a contract. However, this does not necessarily mean that buyers must pay the agent’s fee. When the buyer makes an offer to a seller, the question of who pays the buyer’s agent can become another point of negotiation.
A home buyer in a hot market may find it difficult to persuade a seller to pay their agent’s costs. But sellers can agree to foot the bill if they would otherwise be forced to accept a lower price.
“It’s hard to know how this will shake out, but it’s conceivable that the buyer’s agent commission will become a concession that the seller offers to attract more buyers,” Gilbukh said.
One wrinkle, however, is that commissions generally cannot be financed in a mortgage under Frannie Mae, Freddie Mac and Federal Housing Administration (FHA) guidelines. Under current rules, a buyer looking to finance closing costs would likely have to get a personal loan, which has a higher interest rate than a mortgage. That would increase their debt-to-income ratio, which in turn could make it harder to get approved for a mortgage.
Stephen Brobeck, senior fellow at the Consumer Federation of America, an advocacy group that has called for commission decoupling, believes government lending rules should be changed to allow buyers to include commissions in their mortgages.
“Before commissions can be included in mortgages, buyer agent compensation will likely be in flux,” Brobeck said. “We believe that most sellers will continue to be willing to provide financing to buyers to pay their agents. In some cases, this will be in the form of sellers agreeing to raise their list price, and thus the commission may be included in the mortgage loans.”
What would this mean for first-time buyers?
Paying an agent’s commission can be especially difficult for first-time home buyers, who often struggle to save cash for a down payment such as it is.
“If banks and lending institutions do not find a way to include their agent’s compensation in the purchase price, first-time home buyers will face a significant financial burden that may prevent them from purchasing a home or [result in them] renouncing representation,” Dobbs said.
First-time home buyers often lack access to cash and liquid assets, plus they usually don’t have an established relationship with a real estate agent.
“I think this makes them more likely to explore agent services alternatives to the traditional model that are likely to emerge,” Gilbukh said. “For example, an a la carte service where buyers can pay per view for each property they wish to visit. Or a flat-fee service to help buyers prepare and offer and/or close the deal.”
But some observers worry that price-conscious first-time buyers may be tempted to skimp on essential services.
“There is a legitimate risk that buyers are underinvesting in professional representation across all phases to save a few bucks,” Gray said. “This leaves them more vulnerable to potentially costly missteps during complex processes such as negotiating inspection items, securing optimal financing terms or managing contracts.”
Will the NAR Settlement Agreement Bring Home Prices Down?
Perhaps the most burning question surrounding the preliminary NAR settlement is: Will lower commissions lead to lower home prices?
Housing experts generally believe that any resulting drop in house prices will be modest.
“Reduced transaction costs will help bring prices down a bit,” Gilbukh said. “I also think it allows people to move more often because it will effectively lower moving costs.”
It’s possible that more competition would have a greater impact on the price of more expensive homes, according to an Urban Institute report. This is because many costs of marketing a home are relatively fixed. In other words, you will incur similar costs whether you are selling a $200,000 home or a $2 million home. So an agent may be inclined to lower their commission on a more expensive home.
Lack of housing supply is the main driving force behind stubbornly high house prices. The lack of affordable housing has been a problem for more than a decade, but was exacerbated by the pandemic. Recently, high interest rates have driven many homeowners who locked into the bottom rates in 2020 and 2021 to stay put instead of selling and taking out a new mortgage at a significantly higher rate.
Researchers at the Urban Institute wrote that the “deep housing shortage” will outweigh any savings from lower fees. “As such, fee reductions will not significantly affect housing affordability, so policymakers should continue to focus on increasing housing supply to make homeownership more attainable in the long run,” the authors wrote.
Another problem, according to Brobeck, is that house prices generally have the buyer’s agent commission built into the list price. But what happens when the 2.5% to 3% no longer automatically goes to the seller?
“If it’s not removed and buyers end up paying this commission, then they will effectively have been charged twice, with the seller receiving the main benefit,” Brobeck said.
Additionally, if the buyer and their agent cannot convince the seller to reduce the price accordingly, buyers may end up paying even more.
“This is one of the reasons why in the future it will be even more important for buyers to hire highly competent buyer’s agents,” said Brobeck. “Many lack this competence.”
Read more: Is it a good time to buy a house?
I recently sold my home. Do I get a share of the $418 million?
Possibly. As with any class action lawsuit, a large portion will go to lawyers, but millions of people who sold homes are expected to qualify for part of the settlement, including those who sold their homes as far back as 2014.
To find out if you are eligible, go to realestatecommissionlitigation.com.