ES: Real Estate Commission Changes Around the Corner

In March 2024, the National Association of Realtors (NAR) reached a landmark $418 million settlement after losing an antitrust lawsuit filed by a group of home sellers. As many as 50 million people who paid commissions on homes sold in recent years could receive a small amount from the class-action settlement. The powerful industry group also agreed to change long-standing practices related to sales commissions.

Background

For decades, many real estate agents had little choice but to join the National Association of Realtors (NAR). They were required to follow its rules for local Multiple Listing Services, or MLSs. These databases are used by most brokers to list properties for sale.

Listing brokers usually worked with buyer’s agents. They split the commission paid by the seller. The commission amounts were shared through the MLS. This information was visible only to agents.

Plaintiffs argued that NAR and certain brokers conspired to inflate commissions. This included brokers that required agents to be NAR members. They claimed the industry followed a practice that required sellers to pay commissions to brokers on both sides of a transaction.

According to the plaintiffs, this system helped maintain a national commission standard. That standard was typically five to six percent of the sales price. They also argued that these rates were much higher than commissions charged in many other countries.

Practice changes

Effective August 17, 2024, NAR will implement the following new policies related to how real estate brokers are compensated to handle transactions.

1. Commission offers for buyer’s agents can no longer be required or displayed in the MLS. However, such offers are still permitted.
2. Listing agents may advertise specific commission offers on brokerage websites. They may also share them by phone, text message, or email. Home sellers and their agents will negotiate compensation directly with buyers and their agents.
3. Before touring homes, buyers must discuss compensation with their agents. This process is similar to how sellers work with listing agents.
4. Buyers will be asked to sign written representation agreements. These agreements explain the agent’s services, such as showing properties, negotiating offers, and managing transactions. They also clearly state how much the agent charges.
5. These requirements are intended to ensure buyers understand the costs they may be responsible for paying.

Implications for buyers and sellers

These changes are intended to create more room for negotiation and encourage competition. This could help lower costs for sellers.

Commissions have always been built into transaction prices. In markets where seller costs fall, home prices would likely decrease as well.

Some economists believe commissions could drop by as much as 30%. This could happen if buyer’s agents face pressure from clients to discount their fees. However, savings of this size are not guaranteed.

The impact on real estate commissions will ultimately depend on market conditions. These conditions vary widely by location. Outcomes will also depend on how sellers, buyers, and agents respond to the new practices.

Like other businesses, brokerages have overhead costs. These include rent, liability insurance, marketing, and other operating expenses.

Most individual agents must split their commissions with their brokers. These splits typically range from 60/40 to 80/20 for top-producing agents. Some agents instead pay flat fees to their brokerage.

A buyer’s agent may show properties to clients over days or even months. They may also write multiple offers that never result in a deal.

Many experienced buyer’s agents are used to earning the same commission as listing agents. As a result, they may be reluctant to work for less. This may be true even if they must justify their value more often.

Buyers will determine the commission for their own agents, but the money may or may not come out of their own pockets. For example, it's possible that an offer could be made contingent on the seller paying the buyer's share of the commission or include a request for a general credit toward closing costs in the amount needed to pay the buyer's agent. Current lending guidelines and regulations would prevent most buyers from adding commission costs to their mortgages. A rule pertaining to VA loans, which specifically prohibited borrowers from paying agent commissions, has been temporarily suspended.

In some cases, sellers might agree to cover buyers' commissions, as it has long been customary and could still be in their best interests. Nationwide home prices have risen more than 50% since 2019, and high interest rates have made mortgage payments much less affordable. This means sellers with equity tend to be in a better position to pay commissions than potential buyers, many of whom may struggle to come up with enough cash for the down payment. For these reasons, a seller who's willing to pay all or some of the buyer's commission may receive more offers, and a higher final price, than one who refuses to do so.

Online sites have made it easier to shop for a home without using an agent, so more buyers might brave the market on their own if they think they can pocket the savings. Yet buying a home is the biggest financial transaction many people will make in their lifetimes, and the issues that come up during the process can be
unexpected. There are many situations in which buyers could benefit from having their own representation, especially if they are inexperienced or unfamiliar with the local market.

First-time buyers in particular — who were responsible for 31% of existing home sales in May 2024 — may have more confidence and make more informed decisions if they work with a trusted professional. But many will need help from sellers to pay their agents' fees, putting them at a bigger disadvantage than ever against buyers with more access to cash in competitive markets.

Negotiating commissions among all parties is likely to make it harder to strike deals in general, so buyers may have to search longer and write more offers before they are successful. It's also possible that sellers will see little change in commission costs in the coming months, while the market is in flux. But in time, the new rules could spark innovation that creates new business models and expands lower-cost options.

IMPORTANT DISCLOSURES

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual's circumstances.

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