Understanding the Shift in Real Estate Commissions: A Guide for Sellers and Buyers
The National Association of Realtors (NAR) recently announced a nationwide settlement resolving allegations that the industry colluded to maintain high agent commissions. This agreement has created the most significant law changes in the U.S. home buying and selling process in decades.
Sellers and buyers must understand how these new laws impact their roles in a real estate transaction. This blog will break down what these changes mean for sellers and buyers, along with the considerations they should keep in mind going forward.
How It Used to Work
In the past, when a seller listed their home, they would typically agree to pay a commission, often around 6% of the sale price. This commission was then split between the seller’s agent and the buyer’s agent. For example, if a home sold for $500,000, the total commission would be $30,000, with the seller’s agent paying the buyer’s agent their portion of the commission ($15,000 in the example below).
Basics for Sellers
Sellers were accustomed to this process: hire an agent, agree on a commission rate, and then wait for the agent to bring in buyers through the network of cooperating agents. The commission, although substantial, was an understood cost of doing business and securing a sale.
The New Landscape
These new regulations shift how buyer’s agents are compensated. Instead of automatically splitting the commission with the seller’s agent, the payment to the buyer’s agent is now negotiated directly with the buyer. This change introduces more flexibility but also more responsibility for buyers, who now need to consider how much they are willing to pay their agent for services.
The shift is clearly illustrated in the comparison below. Previously, the seller paid both agents’ commissions. Now, the buyer and their agent negotiate a fee for the agent’s services, which can come from the seller, the buyer, or a combination of both, depending on the negotiation.
Understanding the Seller’s Perspective
Now, with the new rules, sellers have new decisions to navigate. Real estate agents may suggest that if sellers do not offer the buyer's agent a full commission, their property may not attract as many buyers. This is a critical point for sellers, as it directly impacts the visibility and speed of their sale. The new laws allow sellers to experiment with commission structures, potentially saving money, but this also means they need to find a balance between saving on commissions and ensuring their home gets the attention it needs in the market.
This represents the biggest challenge for sellers today: navigating these uncharted waters where offering a lower commission could result in fewer buyers but could also lead to significant savings.
What It Means for Buyers
The new regulations shift how buyer’s agents are compensated. Instead of automatically splitting the commission with the seller’s agent, the payment to the buyer’s agent is now negotiated directly with the buyer. This change introduces more flexibility but also more responsibility for buyers, who now need to consider how much they are willing to pay their agent for services.
Buyers now have more control over how they compensate their agents, which can work to their advantage. By carefully determining the level of service they need—whether it's full support in finding a property or simply assistance with closing the deal—buyers can manage their costs more effectively. Additionally, opting for a flat fee or billable hour for an agent’s services may also incentivize sellers to offer more favorable home pricing terms, as they are not burdened with the traditional 3% commission to the buyer’s agent.
Conclusion
The recent changes in real estate commission rules represent a significant shift in how sellers and buyers approach transactions. For sellers, the challenge lies in balancing potential commission savings with ensuring their property remains attractive to buyers. For buyers, the opportunity is in tailoring their agent’s compensation to fit their needs, potentially lowering overall purchasing costs. Understanding these new dynamics is essential for anyone looking to buy or sell a home in today’s market.
Have questions or want to speak with our team directly? Contact us.
Robert Amato, CFP®, CIMA®
Principal
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