Real Estate Commissions and The New Rules

The recent NAR settlement is shaking up the real estate market, changing how buyers, sellers, and real estate agents handle commissions. With new rules requiring direct negotiations and greater transparency, both buyers and sellers must adapt their strategies to navigate this shifting landscape. Understanding these changes can help you make smarter financial decisions and get the best deal in today’s evolving housing market.

First a Bit of History

The practice of real estate commissions dates back to the early 20th century when property transactions became more structured, and professional brokerages emerged. Before that, buying and selling homes was largely informal, with deals often handled by attorneys, landowners, or individual sellers. As urbanization increased and the real estate industry grew, brokers began charging commissions—typically a percentage of the final sale price—as their primary method of earning income.

By the mid-1900s, the 6% commission model became the industry standard, with fees split between the listing agent (representing the seller) and the buyer’s agent. This system was reinforced by the development of Multiple Listing Services (MLS), which allowed brokers to share listings and agree on commission splits in advance. While sellers traditionally covered the full commission, the cost was often factored into the home price, indirectly affecting buyers.

Over the years, commissions have faced increasing scrutiny, with legal challenges arguing that standardized rates limited competition and consumer choice. The rise of the internet in the late 1990s and early 2000s introduced online listing platforms, discount brokerages, and alternative pricing models, giving consumers more options. While many agents continued to operate under the traditional commission structure, growing transparency and competition have led to more negotiable and flexible commission arrangements, paving the way for the recent NAR ruling that is reshaping the industry today.

NAR 2024 Ruling

In March 2024, the National Association of Realtors (NAR) reached a landmark settlement that significantly alters how real estate commissions are handled. The ruling eliminates the long-standing expectation that home sellers cover the buyer’s agent commission and requires buyers to negotiate and sign formal agreements with their agents before touring homes. Additionally, MLS platforms will no longer display commission offers, aiming to create more transparency and competition in the industry. These changes took effect in August 2024 and are expected to shift how agents structure their fees, how buyers budget for representation, and how sellers market their homes.

Benefits for Buyers

• Greater Transparency – Buyers now have a clearer understanding of how much they are paying for agent services, since compensation is negotiated directly.
• More Negotiating Power – Buyers can shop around for agents and negotiate fees, potentially leading to lower costs.
• More Competition Among Agents – With commissions no longer standardized or hidden in MLS listings, agents may offer more competitive pricing and tailored services.

Challenges for Buyers

• Increased Costs – Buyers may now have to pay their agent’s commission out-of-pocket, rather than having it covered by the seller as in traditional models.
• Loan Complications – Some buyers, especially first-time or low-income buyers, may struggle to afford an additional upfront expense for agent representation.
• More Complexity – Buyers must now actively negotiate and understand agent contracts, which can be an added burden.

Benefits for Sellers

• Potential Cost Savings – Sellers are no longer expected to cover the buyer’s agent commission, which could reduce their overall transaction costs.
• More Control Over Pricing – Sellers can decide how to structure agent payments without adhering to traditional commission norms.
• Increased Market Efficiency – The change could encourage more fair and flexible pricing in the real estate market.

Challenges for Sellers

• Fewer Buyers with Agents – If buyers cannot afford agent fees, more may attempt to navigate the process alone, potentially slowing sales.
• Pressure to Offer Buyer Incentives – To attract buyers, sellers may still need to offer compensation for buyer agents indirectly, reducing potential savings.

Real Estate Market Affect

1. Impact on Home Prices

• Potential Decrease in Prices – Since sellers are no longer expected to cover the buyer’s agent commission, some may lower their listing prices accordingly.
• Buyers May Have Less Purchasing Power – If buyers need to pay their agents directly, they might have less money available for home purchases, which could put downward pressure on prices.

2. Impact on Buyer Behavior

• Fewer Buyers Using Agents – Some buyers may opt to go without an agent to avoid additional costs, leading to more “For Sale by Owner” (FSBO) transactions.
• More Direct Negotiations – Without built-in commission fees, buyers and sellers may negotiate more openly on pricing and terms.

3. Impact on Seller Strategy

• New Incentives for Buyers – To attract buyers, sellers may offer concessions like covering closing costs or offering credits rather than paying agent commissions.
• More Sellers Might List Without Agents – If sellers feel commissions are too high or unnecessary, they may turn to discount brokerages or FSBO options.

4. Impact on Real Estate Agents

• Increased Competition – Agents will likely need to justify their fees and prove their value to clients more than before.
• More Flexible Commission Structures – Instead of a fixed percentage, agents may adopt hourly fees, flat fees, or service-based pricing models.
• Some Agents May Leave the Industry – If commission earnings decrease, some agents may exit the market, leading to fewer but potentially more skilled professionals.

5. Impact on the Overall Market

• More Negotiation in Transactions – Without standard commissions, every deal will likely involve more price and fee discussions.
• Temporary Uncertainty – In the short term, confusion over the new rules may slow transactions as buyers and sellers adjust.
• Long-Term Market Shift – Over time, this could lead to lower transaction costs, greater transparency, and new business models in real estate.

Navigating the Market Under the New Rules

For Buyers

• Budget for Agent Fees – Buyers may need to pay their agent directly, so factor this into your budget.
• Compare Agents – Shop around for flexible pricing models and negotiate fees upfront.
• Negotiate Smartly – Ask sellers for closing cost credits or other incentives to offset expenses.

For Sellers

• Adjust Pricing & Incentives – Lower listing prices or offer buyer incentives instead of covering commissions.
• Boost Marketing – High-quality photos, virtual tours, and strong online visibility are more important than ever.
• Consider Alternative Selling Options – Explore FSBO, discount brokerages, or flat-fee services to save on commission costs.

For Agents

• Offer Flexible Pricing – Consider flat fees, hourly rates, or service-based pricing to attract clients.
• Clearly Communicate Value – Transparency and strong negotiation skills will be key in justifying your fees.

Bottom Line

The ruling aims to increase fairness and competition in the real estate industry. Buyers may face higher upfront costs, but they also have more power to negotiate fees. Sellers could save money on commissions, but they may need to adjust strategies to attract buyers. These changes bring more transparency and negotiation flexibility to real estate transactions. While they may require adjustments, they can also create new opportunities for more competitive pricing and innovative real estate services. 

If you have questions about buying or selling a home or need help navigating the real estate market, feel free to reach out to me at 312-296-4175 or email me at connect@borislending.com. I lend in all 50 states and I am never too busy for your referrals!!