Productivity

Three ways the realtor commission settlement affects people looking to buy and sell their homes



The U.S. housing market is undergoing a major disruption, as a century-old practice that determines how homeowners and home buyers pay their real-estate agents is about to change. 

A nationwide settlement between the National Association of Realtors, several real-estate brokerages, and home sellers, to the tune of $418 million, was announced on Friday.

The home sellers, who had filed dozens of lawsuits against the organization and affiliated companies in recent months, had claimed that the real-estate industry conspired to keep realtor commissions high.

The new deal is expected to upend how home sellers in America have traditionally paid for their homes to be sold. It could also potentially change how much home buyers may have to cough up for their new purchases. 

“We hit the reset button on the housing market today,” Michael Ketchmark, an attorney who led one of the landmark lawsuits that led to the settlement, told MarketWatch. 

“This settlement is going to result in tremendous savings for Americans when they sell their homes,” he added. “The days of NAR and the large corporate real-estate companies working together to establish a procedure for setting up inflated commissions are over.”

Here’s what could change — for better or for worse — for millions of Americans. 

How real-estate commissions have worked to date

The NAR doesn’t set commissions and has maintained that broker fees were negotiable even before the settlement was reached. 

However the traditional practice in American real estate is for the seller to pay the listing agent and the buyer’s agent.

That means that a seller, in some circumstances, could have paid 4%, 5% or even 6% in commissions between their own listing agent and the buyer’s agent. The split depends on how the agents want to divide it, which can be a 50-50 split, or something else.

The fee charged varies between real estate agents and brokerages. Some agents may ask for a higher commission in order to provide their services to a homeowner looking to sell. Some homes might need more work than others in order to be sold, which could end up with the homeowner paying a higher commission.

But the seller foots the buyer’s agent fees, and buyers generally pay nothing to their agent. 

To be sure, commissions come from the final sale price — so in that way, a buyer technically contributes to the fees.

What will change?

If the settlement is approved, beginning in July, buyers will have to sign agreements to detail how much they are willing to pay their agents for their services.

Sellers will pay their own agents. That broker — the listing agent – will, under the new rules, be prohibited from making offers of broker compensation on the Multiple Listing Service. 

Sellers can still cover the cost of the buyer’s agent but are not compelled to. In such cases, buyers will have to cough up the amount. 

But the full extent of the changes — and the consequences — are unclear.

“The residential real-estate marketplace will take some time, perhaps several years, to fully process the implications of this settlement,” Stephen Brobeck, senior fellow at the Consumer Federation of America, told MarketWatch.

But one potential scenario would be that agents will offer different types of compensation, and home buyers and sellers will shop around and negotiate commissions in a way that is more transparent, Brobeck said.

In 2023, the total pool of commissions was between $75 billion and $80 billion, according to estimates from investment bank Keefe, Bruyette & Woods.  

Who’s affected?

Home sellers

The most immediate impacts of the settlement and the new rules will be felt by home sellers.

Sellers will no longer be compelled to offer to pay for the buyer, which could bring down commissions. 

“We expect commissions could fall by 25% to 50% late this year from the 5% to 6% that is typical today,” Jaret Seiberg at TD Cowen Washington Research Group wrote in a note.

On a $400,000 home, they would no longer need to pay the same 4% commission of $16,000 to both the buyer’s agent and listing agent.

Instead, they may negotiate a lower commission since they are only paying for the listing agent. For instance, they can negotiate a 2.5% fee, which would be $10,000. That’s savings of $6,000. 

To be sure, sellers can still offer to pay for the buyer’s commission on the side, as noted by Redfin CEO Glenn Kelman in a blog post-Friday. This can be in the form of seller concessions to help bring down the fees. 

And in a similar vein, some sellers may receive concessions from the broker or the buyer, to lower commission fees. 

But this rule is expected to impact the industry more broadly, rather than being applicable to some sellers on a case-by-case basis. 

So the proposed changes will benefit existing homeowners since they will be able to keep more of the proceeds of their home when they sell.

Home buyers

Home buyers will also feel the impact of the settlement, as they may need to pay up for their own agent when buying a house.

Some buyers’ agents might provide a superior level of service, or have decades of experience, which could be well worth paying more for. That will now be a negotiation that will happen between the agent and their buyer.

In effect, a buyer purchasing a $400,000 home could go from paying $0 to their agent to, hypothetically, paying $8,000 if the fee agreed upon is 2%.

“Our concern is with first-time and less-wealthy buyers,” Seiberg wrote. 

Under the current system, since the seller foots the bill for both their own agent and the buyer’s, that “provides an incentive for the buyer’s agent to take prospective buyers around neighborhoods and to walk them through the home-buying process, as they only get paid if a deal closes,” he added.

Plus, there is no easy way for buyers to pay their own agent fees outside of this system “because mortgage rules cap the amount of fees that can get added to a loan,” Seiberg continued. “Lawmakers did this to ensure fees do not deplete borrower equity. That means it may not be possible to roll these fees into the loan.”

The commission then becomes an added upfront cost to home buyers, who already struggle to buy a home due to high home prices and still-elevated mortgage rates.

“The real solution is for the industry to work to remove regulatory barriers that make it difficult for buyers to include this compensation in their mortgages,” the CFA’s Brobeck said.

“We are fairly confident that the industry will pursue this issue in part to preserve buyer brokerage. Without the option, more buyers will contact listing agents, losing fiduciary representation though also potentially lowering their costs,” he added.

Real-estate agents

Real estate agents who represent buyers may have to work a lot harder for their commissions.

Michael Downer, a Naples, Fla.-based real-estate agent with Coldwell Banker Realty, told MarketWatch that it’s a net win for capable brokers.

“The best part of the settlement is that moving forward, buyer’s agents will have to explain what they do to add value to a transaction. The professional agents will do better than ever, and the less professional agents will have a hard time getting clients,” he said.

Buyers don’t necessarily need to pay their agents, Downer added, and may “choose to pay for the services of an agent who can help them find a great place and at the best price and terms.”

Will this affect home prices?

In the near term, home prices could go down — but it would be short-lived.

For a homeowner who sells a $1 million home, they may be able to negotiate a lower fee only paid to their own listing agent, which could slash commissions in half. Hypothetically, a $1 million house with a 5% commission would currently come with fees of up to $50,000. 

Under the new rules, a seller can negotiate to pay only their listing agent, which could slash that figure in half. 

Theoretically, that could impact home prices, since commissions are generally factored into the price of the home. So the home might sell for $25,000 less, holding all other variables steady.

But with an inventory shortage, that could be short-lived, as buyers look to offer bids over the asking price in the hunt for a home.

Changes could take effect in July

If you’re selling a house in the summer and beyond … Be prepared to negotiate your commission with your agents. Theoretically, you can pay $0 in commissions, but you should come to terms with your agent regarding what they will do for you, and whether or not it makes sense for you to skip or pay the buyer’s agent.

If you’re buying a house in the summer and beyond … Be prepared to negotiate how much you want to pay your broker. Do your research to see whether the buyer’s agent is worth paying a fee for. And factor that into your housing budget when looking for a home.