How Realtor Commission Changes Impact Buyers and Sellers

With commission practices upended, the race is on to see whether home sellers, buyers or certain realtors benefit from the new cloak-and-dagger negotiation method.

Complaining about real estate agents and whether they earn their commission is common–but so is hiring one to represent you. In fact, about 90% of homebuyers and sellers choose to work with an agent during their real estate transaction.

One reason for complaints about real estate agents has always been the confusion over the way they get paid. Some consumers assume a “standard” commission of 5% to 6% is mandatory. It’s not.

In 2023, a series of lawsuits were brought by home sellers against the National Association of Realtors (NAR) and several real estate brokerages, with sellers claiming that real estate industry practices kept agent commissions artificially high. NAR offered a nationwide settlement with $418 million in damages and a promise to change. 

The settlement, which has been preliminarily approved by a judge and is likely to receive final approval in November 2024, includes two main adjustments to commission traditions that NAR plans to implement this summer.

First, commissions will no longer be advertised on Multiple Listing Services (MLS). While sellers can still offer to pay a buyer’s agent’s commission, that information must be privately offered rather than on the MLS or familiar sites such as Realtor.com and Zillow. The amount of the buyer’s agent commission will be negotiated between the buyer and their agent rather than with the seller.

Second, buyers must sign a written buyer agency contract with their agent that clearly spells out how much the buyer’s agent will be paid for their services. Buyer agency agreements are already mandatory in 18 states.

One likely impact is greater transparency about commissions. Buyer’s agents will be forced to discuss their payment options with buyers in greater detail than many have shared in the past. 

Listing agents and buyer’s agents are expected to compete more for clients with lower commissions, but there’s a big dichotomy within the real estate industry. Many agents make little to no income, while the top agents in each market dominate. Experienced agents with a deep bench of potential clients based on the agent’s reputation are less likely to lower their commission rates, while newer less experienced agents may do so to build their business. 

There are currently 1.5 million members of the National Association of Realtors, plus additional agents who don’t belong to the association. Some industry insiders expect that number to drop by as much as one-third as commission competition heats up. 

Other effects are debatable. Many real estate industry insiders predict little change. Other groups believe that commissions will decline, and home prices will follow. However, sellers are unlikely to drop prices, especially in a competitive market. 

The bigger change around home prices and even commissions is likely to occur based on whether buyers or sellers have the upper hand. In a market with plenty of homes for sale, both prices and commissions may decline. But with a continued shortage of available homes and elevated demand from buyers who want to purchase their first home, move up, or downsize, home prices are likely to stay high. 

Commissions for listing agents could decline in those markets if sellers feel they can sell their homes quickly, but buyer’s agents are likely to continue to be in demand to help people navigate a highly competitive transaction. In the end, commissions and fees may not change much at all. 

Potential Impacts for Home Buyers

Agents and consumers in states where buyer agency agreements have not been mandatory should anticipate a learning curve over the next several months, says John Wood, broker/owner of RE/MAX United in Cary, N.C.

“In all states the conversation between an agent and consumer will need to be more detailed on under what circumstances will a buyer be responsible to pay the buyer's agent versus it being offered by the seller,” Wood says. “The biggest challenge is the MLS systems will no longer display the compensation being offered, if any, by the seller. Agents will need to talk or text with each other if the seller is offering compensation or not and at what rate.”

A variety of scenarios will be possible for buyers as common practices change, including:

• Buyers may pay their agents directly out of pocket rather than at the settlement.
• Buyers may negotiate with their agents to pay a commission based on a percentage of the sales price, a flat fee for all services, individual fees for specific services or an hourly rate.
• Buyers can negotiate payment of their agent’s commission with sellers as part of their purchase agreement.
• Buyers can request seller concessions as a lump sum at settlement for closing costs and use some or all of it to pay their agent.
• Buyers may skip having an agent represent their interests.

Currently, buyers can’t finance their agent’s commission into their loan, which places a burden on them to come up with cash if they can’t get the sellers to kick in for the fee. Some real estate industry experts are concerned that this will hurt first-time buyers and buyers with low to moderate incomes who already struggle to accumulate the cash for a down payment and closing costs. Luxury buyers and move-up buyers are more likely to have the funds available to pay an agent.

Homebuyers who finance their purchase with a VA loan are not allowed under that program’s rules to pay a real estate agent commission. If sellers don’t offer to pay the buyer’s agent, VA borrowers may not have representation unless the program changes its rules.

Consumer advocates such as the Consumer Federation of America (CFA) anticipate that real estate leaders will push Fannie Mae, Freddie Mac, and federal housing agencies such as FHA to allow buyers to finance their agent’s commissions into their mortgage.

Potential Impacts for Sellers

Adjusted NAR practices continue to allow sellers to negotiate the commission or fee they pay to their listing agent. Sellers just won’t be allowed to negotiate the commission offer to the buyer’s agent.

The common practice is that the seller and listing agent agree in writing what compensation would be offered to a buyer’s agent, Wood says. In North Carolina, where he practices, most MLS systems allowed listing agents to enter zero dollars or zero percent if they didn’t want to pay a buyer’s agent commission. The new practice eliminates all commission information from MLS listings.

“Due to anticipated changes in how paperwork is written and presented to sellers, the seller will feel they have more choice than before on what to offer to a buyer's agent,” Wood says. “I feel sellers will make the choice on what to pay, if anything, based on current market conditions, the price of the home, and the projected number of interested buyers.”

In some cases, a listing agent will suggest that the sellers offer to pay the buyer’s agent commission as part of the negotiation.

“Sellers don't always realize the value of having a good buyer's agent assisting the buyer with their side of the sale,” Wood says. “A great buyer's agent can help the buyer navigate through the emotional and confusing aspects of the process. That is a win-win for sellers.”

In a strong seller’s market, homeowners may be more likely to insist that buyers pay for their own agent’s services. In a buyer’s market, when sellers have more competition for their home and fewer offers, sellers may decide to offer to cover those costs to sweeten the deal for buyers.

Who Benefits? Competing Reports

Both buyers and sellers are likely to benefit from uncoupled commissions, according to a report from the CFA: Why Commission Uncoupling Will Help First-Time Home Buyers (As Well As All Other Buyers and All Sellers).  The CFA expects commissions to decline by 20% to 30% overall, although some experts in their report believe commissions could drop by as much as 50%.

In addition to the direct savings on commissions, some industry analysts expect listing prices to decline because sellers won’t need to bake in commission payments to the price.

However, research by Bright MLS, an MLS that serves the Mid-Atlantic region, found that commissions don’t drive home prices. Instead, home prices adjust based on property and neighborhood characteristics as well as mortgage rates and other economic factors.

Whether you’re a buyer or a seller, Wood recommends that you read agreements before you sign them, understand fee structures and know who is responsible for paying for each fee.

Keep in mind that everything in your real estate transaction is negotiable, including hiring a real estate agent, how much they do for you and how they get paid.

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