Will New Rules for Real Estate Commissions Lower the Cost of Selling a Home?

Homebuyers face a changing housing market this weekend as major shifts to how real estate agents are paid take effect.

The National Association of Realtors (NAR) groundbreaking new commission-sharing agreement will end the common practice of home sellers automatically covering the fees for real estate agents on both sides of the transaction. The new rules start on Saturday.

The agreement is the result of the settlement of a series of lawsuits brought over the past few years challenging the long-held practice of splitting the sales commission between the seller and buyer agent. Plaintiffs in the legal battles, primarily home sellers who paid both agents, claimed commission sharing, also known as cooperative compensation, artificially inflated the cost of a home sale.

Although the NAR was the main defendant in several cases, other major brokerages, including Keller Williams and RE/MAX, were also named co-defendants. With the NAR settlement, however, most of these lawsuits will have been settled, clearing the way for a change in how realtor fees are negotiated.

Now, real estate agents are prohibited from advertising shared commissions on local databases, called multiple listings services (MLS), and buyers will instead have to negotiate their agent’s fees before they start viewing homes.

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How will the NAR agreement change agent commissions?

Even though these fees have always been negotiable, most homeowners entering into a listing agreement with a realtor have typically paid between 5% and 6% commission on the sales price, which was split between the agents representing the seller and buyer. The ultimate goal of the lawsuits was to reduce this percentage, thereby saving sellers money.

Since the settlement announcement in March, there has been a slight decrease in the typical percentage paid to buyers’ agents. According to a report from Redfin, the typical seller is paying the buyer’s agent a 2.55% commission through the period ending in mid-July. By comparison, the typical commission paid in January was 2.62%. The question is whether the new commission model will accelerate the decline in fees paid.

Marty Green, principal at the Texas-based law firm Polunsky, Beitel, Green, believes that once the agreement goes into effect, commission changes will remain modest — at least for now.

“It’s not likely they are going to turn a switch on August 17th, and suddenly everything’s going to be different,” Green says. The immediate effect will be more transparency between agents and their clients, emphasizing the buyer’s side of the commission discussions and whether sellers want to keep splitting commissions. Some sellers may decide to continue the practice to make their homes more attractive to buyers.

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Who benefits most from the change in how real estate agents are paid?

Although the settlement is meant to benefit all sellers and buyers, that may not be the case, according to Daniel Smith, founder of Keepingly, a home management platform. If the traditional model of commission sharing is fundamentally altered, it could simply lead to more upfront costs for buyers.

“For many consumers, particularly those with limited financial flexibility, this could make homeownership more challenging,” Smith says.

Aside from home sellers, who can decide if they want to continue footing the bill for the buyer’s agent and how much they are willing to pay, the other winners in this scenario are likely to be high-income buyers. These clients have the means to cover the costs of their own agent’s commission and may be more likely to shop around and negotiate agent fees.

On the other hand, the agreement could increase the challenges low-income and first-time buyers face in an already difficult housing market. Part of the settlement agreement includes a provision that buyers must sign a contract with their agents before touring any potential homes. That contract will likely include language that outlines how the buyer will be responsible for paying the agent’s commission if the seller decides not to.

If buyers have to pay for their agent's representation, that cash needs to be paid upfront with the down payment and closing costs or somehow rolled into the mortgage, increasing the borrowed amount and the monthly payments along with it.

The increased cost of representation could also lead some buyers to hire an inexperienced agent or forego representation altogether, which could put them at a disadvantage when negotiating a home price or concession.

It will take time to measure exactly how much change the agreements will bring about to agent commissions. For now, it’s more important than ever that sellers and buyers understand the potential impacts of the settlement. For sellers, Green says, this means deciding whether to pay the buyer's agent and for buyers, how to structure their offer in a way that makes financial sense.

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