(NewsNation) — A landmark settlement could fundamentally change the way real estate agents get paid, which could eventually lead to lower costs for consumers.
Homesellers sued the National Association of Realtors (NAR), arguing its rules on agent commissions forced them to pay excessive fees. Under the proposed settlement, the NAR will pay $418 million and eliminate several longstanding rules governing how agents make money.
Moving forward, agents working with homebuyers will be required to enter into a written agreement before touring a property. Also, listings will no longer advertise the buying agent’s commission upfront — a change meant to deter agents from steering clients away from lower-commission deals.
In the long run, those rule changes are expected to upend decadeslong industry norms and save consumers billions of dollars a year.
“Over time, we’d like to see this become a normal competitive market like virtually all other markets for services in the country, not a cartelized market, which it is right now,” said Stephen Brobeck, a senior fellow at the Consumer Federation of America.
Here’s how the proposed settlement could change the industry.
How will buyers and sellers be impacted?
Sellers and buyers could both see major savings thanks to the changes, but it’s not yet clear cut.
For decades, sellers have typically covered both agents’ commissions from the sale of the home. The buyer still pays a cut, but their portion is figured into the cost of the home.
If sellers are no longer responsible for covering the cost of the buyer’s agent, as the proposed rule change allows, they could be more willing to slash the sales price.
However, then buyers would be responsible for paying their agents directly, presenting different challenges. Under that model, buyers would have to come up with additional cash, in many cases thousands of dollars, to pay their agent.
For that reason, think tanks like the Urban Institute expect the seller-paid model to remain, just slightly altered.
“When a buyer makes an offer, they would specify both the price being offered and the fee the buyer’s agent expects to be paid. The buyer, seller, and their agents would settle on the final terms of the sale contract,” the Urban Institute noted in a recent report.
The key difference is that the buyer’s agent fee would be negotiated rather than guaranteed from the start of the process.
Over the long run, more Americans may choose to forgo agents entirely.
Nowadays, nearly half of buyers find their homes online, yet 87% of buyers still end up retaining an agent, and commission rates have barely budged, the Federal Reserve Bank of Richmond noted in a recent report.
“If you’re selling a house and you have to decide whether to pay a 6% commission to your friend or 2% online, pretty soon that savings is going to squeeze the high commission brokers out of the market,” said Andrea Heuson, academic director of real estate programs at the University of Miami.
How do real estate commissions work?
Agent fees typically come from the seller’s proceeds, usually around 5 to 6% of the home’s sale price. That commission gets split between the selling and buying agents.
On a $400,000 home, 6% works out to $24,000, or $12,000 for each agent. In the industry, this arrangement is known as “cooperative compensation.”
For the buyer, their agent’s fees are tacked on to the price of the home. The new rules could end up leaving that commission model in place while ultimately lowering the agent’s typical rate.
How will the changes affect real estate agents’ commissions?
In the future, buyers’ agents will be required to have a written contract with the buyer spelling out their compensation. That arrangement will give buyers more opportunity to negotiate and specify which services they need help with.
Under the new rules, the NAR-affiliated Multiple Listing Service (MLS) will no longer advertise what the buying agent will make from the deal. That’s a major departure from the old system, which effectively locked in fees because buying agents could steer clients away from homes with lower commissions, Brobeck said.
He estimates these changes could reduce agent commissions by 20% to 30%, saving consumers roughly $20 to $30 billion a year.
The slow housing market has already pushed tens of thousands of full-time real estate agents out of the field in recent years, and the new rules could accelerate that trend.
Still, there are unresolved questions about how commission offers will be communicated in the future. Brokers can still negotiate fees outside of the MLS platform, and sellers can also offer concessions on an MLS, which could allow them to signal to buyers agents that they will still receive a commission.
Changes to the NAR’s MLS policies are scheduled to take effect on Aug. 17.
What should consumers do?
Both experts say it will take some time, perhaps several years, for the changes to ripple through the industry.
For that reason, consumers may not notice much of a difference a month from now when the compensation and contract rules are set to change.
Nevertheless, Brobeck said there are two things people should do if they’re buying or selling a home. First, those who are working with an agent should ask to see a contract and make sure they understand it. If it’s unclear, he recommends talking it to an attorney.
Second, he says you should negotiate the commission fee and shop around for the best deal.
“Over time, if consumers are proactive, their costs will start to come down,” said Brobeck.