In July 2024, significant changes to the way real estate commissions are paid took effect, altering the multi-decade tradition of sellers bearing the responsibility of paying both their agent and the buyer’s agent. These changes are the result of a class-action lawsuit against the National Association of Realtors (NAR) and several major brokerage firms, which led to a $1.8 billion verdict against the industry. The lawsuit found that NAR and the brokerages had conspired to keep commissions artificially high, primarily through their control over the Multiple Listing Services (MLS) system.
This landmark legal decision has forced a reevaluation of how buyers and sellers of homes engage real estate agents and pay commissions. The outcome is poised to have wide-ranging effects on the real estate market, potentially reshaping how transactions are handled, how agents are compensated, and how much sellers and buyers will ultimately pay in fees. Here's a breakdown of how these changes will work and what they mean for both buyers and sellers going forward.
Traditional Commission Structures and the MLS System
For decades, the MLS played a crucial role in real estate transactions. When sellers listed their homes for sale through an agent, the property would be placed on the MLS, a network that allowed agents across a region to see and promote the listing. A significant aspect of the MLS was that when a home was listed, the seller’s agent would offer a portion of their commission to the buyer’s agent as an incentive.
This meant that, in practice, even though the buyer was the one benefiting from their agent’s services, it was the seller who paid the buyer’s agent’s commission. This arrangement, critics argued, removed any incentive for buyers to negotiate commission rates, as they weren’t directly paying for the service. As a result, commission rates remained high, and, indirectly, buyers paid for those commissions through higher home prices.
Typically, a commission of 5% to 6% of the home’s sale price was the norm, split between the listing agent and the buyer’s agent. On a $500,000 home, that could amount to $30,000 in fees, with each agent receiving $15,000. This system remained in place for decades, until the class-action lawsuit and subsequent legal battle.
The Class-Action Lawsuit and Its Impact
In the class-action lawsuit, home sellers alleged that the MLS system created an environment where real estate commissions were artificially inflated, forcing sellers to pay higher-than-necessary fees. The Missouri jury agreed, delivering a $1.8 billion verdict against NAR and the brokerages involved. As part of the settlement, NAR agreed to change its practices, fundamentally altering how commissions are handled starting in July 2024.
The key change is that sellers’ agents can no longer automatically offer a portion of their commission to buyer’s agents via the MLS. This dismantles the old system where buyers were indirectly involved in paying their agents through the home price, and it gives buyers more control over their commission negotiations.
New Rules: How Real Estate Commissions Will Change
The changes that went into effect in July 2024 will significantly impact the way buyers and sellers handle agent compensation:
- Buyers Will Be Responsible for Their Agent’s Commission
Under the new rules, buyers who choose to hire a real estate agent will need to enter into a written agreement to pay their agent directly. The long-standing practice of the seller paying the buyer’s agent will no longer apply in most transactions. This introduces a new dynamic where buyers will have more direct control over negotiating how much they pay their agents. In some cases, this could lead to buyers opting not to hire an agent at all, particularly if they feel confident using online tools like Zillow or Redfin to find homes. - Sellers May Pay Lower Commissions
Without the need to compensate both their own agent and the buyer’s agent, sellers may be less inclined to pay the traditional 5% to 6% commission on a sale. It is likely that sellers will negotiate lower commissions with their listing agents, knowing that they no longer need to split the fee with another party. This could have a significant impact on the overall cost of selling a home, potentially reducing the burden on sellers. In turn, this may reduce home prices, as the commission fees would no longer need to be built into the asking price. - Buyers' Agents Must Justify Their Fees
With buyers now directly responsible for paying their agents, those agents will need to work harder to justify their commission rates. Buyers are likely to become more discerning, comparing rates and services between different agents. This may lead to increased competition among buyer’s agents, and some may reduce their fees or offer more flexible payment arrangements to attract clients.
The Potential Impact on the Real Estate Market
The effects of these changes will take time to fully materialize, but the real estate industry is bracing for disruption. Here are some potential outcomes:
- Reduced Commissions Across the Board
As sellers negotiate lower commissions with their agents, there may be a ripple effect throughout the industry. Real estate agents may see their income decrease, especially if they cannot rely on the seller to pay both sides of the transaction. Some agents may leave the industry entirely, particularly those who struggle to adapt to the new model. - Buyers May Choose to Go Without Agents
With buyers directly responsible for paying their agents, some may opt to forgo hiring an agent altogether. While this could save buyers money upfront, it also comes with risks. Navigating the complexities of a real estate transaction without professional guidance could lead to costly mistakes. Buyers who decide not to hire an agent may instead turn to real estate attorneys to handle negotiations and paperwork, which could become a more common practice. - Increased Use of Online Tools and Direct Transactions
Platforms like Zillow and Redfin, which already allow buyers to search for homes independently, may see an uptick in use. As buyers weigh the cost of hiring an agent, some may prefer to handle the initial stages of the home search on their own. This could lead to a rise in direct transactions between buyers and sellers, with real estate agents playing a smaller role in the process.
Comissions Are More Negotiable Than Ever
For both buyers and sellers, understanding these changes will be critical to navigating the real estate market in the coming years. Sellers will need to be more strategic in how they negotiate commissions with their agents, ensuring they receive the services they need without overpaying. Buyers, on the other hand, will need to carefully consider the value their agent brings to the table and whether they are comfortable paying those fees directly.
The new rules also highlight the importance of transparency in real estate transactions. Buyers and sellers alike will need to be more informed about the commission structures and negotiate terms that are favorable to them. Agents will have to adapt to a more competitive market where their value must be clearly communicated to clients.
Ultimately, these changes reflect a broader shift toward more flexible, buyer-driven real estate transactions. While the transition may be rocky, it could lead to a more efficient and transparent process for both sides of the deal.
