What The NAR Settlement Means For Home Buyers And Sellers

Agent Commissions Before the Pre-NAR’s Settlement

Suppose you sold a $400,000 home under the long-established norms of the real estate business. You probably paid $20,000 to $24,000 in agent commissions, which your listing agent split with the buyer’s agent.

Were their services worth the price? For years, the question was scarcely asked. Commissions were an assumed part of the transaction, unofficially non-negotiable that the seller pays it.

However, the default real estate commission of who pays the agent commissions could be on its way out. More specifically, it could be that the buyer may now have to not only come up with the money to pay for a home, pay closing costs, but now pay their Buyer Agent.

A recent settlement the National Association of Realtors (NAR) agreed to is expected to disrupt the traditional commissions model and force agents to compete on pricing that affects both the buyer and seller.

What is the NAR settlement?

In 2019, a group of Missouri home sellers filed a class-action lawsuit against the National Association of Realtors (NAR), claiming antitrust violations and alleging that its practices inflated commissions. A jury sided with the plaintiffs, awarding a nearly $1.8 billion verdict against the powerful trade group that represents about 1.5 million real estate professionals in October of 2023.

To settle that lawsuit, along with several similar suits, NAR agreed to pay $418 million to people who have sold homes in recent years.

The group also agreed to two rule changes:

1. When agents list homes on the Multiple Listing Services (MLS) databases, they’ll no longer be allowed to include the buyer agent’s compensation.

2. Buyers will need to have written agreements with their agents.

NAR denied any wrongdoing in settling the lawsuits. A federal court signed off on the agreement and the new rules are beginning to take effect across the country and fully implemented around the middle of August.

Does the agreement kill the 6% commission?

No. The agreement doesn’t directly change how much real estate agents earn in commission. And NAR is adamant that it “does not set commissions, and commissions were negotiable long before this settlement.” As a matter of fact, commissions have for the most part varied between 4% and 6% for residential homes depending on what was negotiated between the real estate broker and seller.

The Seller Historically

To list a home on the MLS, listing agents (the seller’s agent) historically have had to include buyer commissions. Though it’s always been possible to advertise a commission of less than 2.5% to 3% on the MLS, listing agents have often warned sellers against doing so because buyer agents may “steer” their clients away from properties that advertise lower compensation. Or they may filter listings on the MLS to display only those with at least a 2.5% commission. Fear of steering is a “strong deterrent” to sellers who might otherwise reduce commission offers, according to the U.S. Department of Justice, which has an ongoing antitrust investigation into NAR’s practices.

The Buyer Historically

Meanwhile, potential buyers have had no incentive to negotiate the commission downward because sellers had for the most part paid that cost. Many economists argue that buyers do pay for commissions because they’re baked into the home’s selling price. But since the money isn’t directly coming out of their pockets, buyers have long been blissfully unaware of commissions, with some believing agent services are free.

The New Rules

Under the new rules, commissions for buyer agents can’t be listed on the MLS. Meanwhile, buyers would need their own agreement that specifies compensation before they work with an agent. (Sellers could still cover the cost of the buyer agent’s commission, but I’ll get to that shortly.) The new rules are expected to make commissions more transparent and competitive in the real estate industry.

I do believe the commissions will drop,” 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 cooperative, the commissions will become more salient to buyers and sellers, and they will be more inclined to negotiate with their agent.”

But this is mere speculation. The settlement may drive agents out of the business, leaving Buyer Agents to become more selective and want a commitment from their clients before spending unpaid time and cost unless the buyer purchases.

Further, instead of lower commissions, it may mean an across the board lowering of home prices as buyers make lower-priced offers to sellers to compensate paying their Buyer’s Agent.

It’s all new territory and it’s one the entire industry will be treading lightly on.

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 so via the MLS.

Compensation to the buyer’s broker could be posted on the websites of brokerage firms and individual agents, individual property websites, social media, and other advertising resources engaged by the brokerage firms and their agents,” said Debra Dobbs, real estate broker with The Dobbs Group of Compass in Chicago.

Sellers could still use the MLS to advertise concessions for buyers, including help with closing costs. But the offer can’t be contingent on a buyer working with or paying an agent.

Will buyers have to pay their agent’s commission?

Buyers will need to negotiate commissions with their agent when they sign a contract. That doesn’t necessarily mean that buyers will have to pay the cost, though. When the buyer makes an offer to the seller, the question of who pays the buyer’s agent could become yet another point of negotiation.

A homebuyer in a hot market may find it tough to convince a seller to pay their agent’s cost. But sellers may agree to foot the bill if they’d otherwise be forced to accept a lower price.

It is difficult to know how this will shake out, but it is conceivable that the buyer agent commission will become a concession offered by the seller to attract more buyers,” Gilbukh said.

Commissions and Mortgages

Commissions generally can’t be financed into a mortgage under Frannie Mae, Freddie Mac, and Federal Housing Administration (FHA) guidelines. Under the current rules, a buyer seeking to finance closing costs would likely need to get a personal loan, which carries a higher interest rate than a mortgage. That would increase their debt-to-income ratio, which could in turn 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 change to allow buyers to include commissions in their mortgages.

Before commissions can be included in mortgages, buyer agent compensation is likely to be in flux,” Brobeck said. “We believe that most sellers will continue to be willing to provide funding to buyers to pay their agents. In some cases, this will take the form of sellers agreeing to raise their list price, thus allowing the commission to be included in the mortgages.

For first-time homebuyers paying an agent’s commission could be especially tough, as they are the ones who most often struggle to save cash for a down payment 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 homebuyers will face a significant financial burden that could prevent them from buying a home or [result in them] forgoing representation,” Dobbs said.

First-time homebuyers often lack access to cash and liquid assets, plus they usually don’t have an established relationship with a real estate agent.

Some observers worry that price-conscious first-time buyers could be tempted to skimp on the important real estate services.

There’s a legitimate risk of buyers under-investing in professional representation across all phases to save money,” Gray said. “This leaves them more vulnerable to potentially costly missteps during complex processes like negotiating inspection items, securing optimal financing terms, or handling contracts.”

Will the NAR settlement agreement bring down home prices?

So perhaps the most burning question surrounding the NAR tentative settlement is: Will lower commissions lead to lower home prices?

Housing experts generally believe that any resulting drop in home prices would be modest but in reality, it’s unknown and the possibility exists that buyers will begin to submit reduced offer amounts.

Another issue, according to Brobeck, is that home prices generally have the buyer’s agent commission built into the list price. But what happens once that 2.5% to 3% no longer automatically falls to the seller?

If it is 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 can’t convince the seller to reduce the price accordingly, buyers could wind up paying even more.

This is one reason that in the future, it will be even more important for buyers to employ very competent buyer agents,” Brobeck said. “Many lack this competence.