What The New Real Estate Commission Rules Mean For Buyers And Sellers

Several months ago, the National Association of Realtors settled an epic lawsuit that will forever change the way real estate agents earn commissions from home sales. Bloomberg reports real estate agents earned a record $100 billion in commission in 2021. However, that could easily drop by 20%-50% going forward, according to a lawyer who represented the plaintiffs in the lawsuit.

In the past, real estate commissions have typically been paid by sellers. Although the NAR is careful to say that it doesn't set any specific commission levels, it's common knowledge that 5% to 6% is a standard that's been almost universally accepted for decades. That 5% or 6% commission is usually split 50-50 between the listing agent who represents the seller and the buyer's agent who represents the buyer. The commission fee is deducted from the seller's proceeds during closing and is typically baked into the listing price of the home, perhaps without buyers even realizing.

However, a new set of commission rules took effect on August 17, 2024, as a result of the aforementioned lawsuit. In theory, these new guidelines are designed to reduce commissions overall and foster competition, especially among the real estate agents who represent buyers. In practice, the changing commission landscape has mostly resulted in confusion, but no worries because Money Digest will clear that up for you.

Perhaps the most significant change to the new set of real estate commission rules is that listing agents can no longer offer direct compensation to agents representing the buyer on the Multiple Listing Service (MLS) that Realtors use as a database of available properties. Previously, a total commission of 6% might explicitly offer 3% to the agent showing the house to prospective buyers upon completion of the sale. To be clear, listing agents can still offer compensation to agents who bring buyers to the table, but it must be done outside of the MLS. Acceptable communication channels include email, phone or text, or even on a real estate company's website.

Another important change is that agents working with buyers have to disclose their fee — due upon a successful sale — to the buyer(s) before showing that client a house. That means that buyers will be fully aware of how much their agent is earning for his or her services. Previously, this amount was buried within the total purchase price of the home. Depending on whether the home's seller is offering compensation to the buyer's agent, that could mean that the buyers themselves are responsible for paying their agent's fee out-of-pocket. By the way, you might also consider brushing up on the differences between a Realtor, real estate agent, and broker before hiring one.

Making homebuyers potentially responsible for paying their real estate agent might seem counterintuitive to the way things were previously done, but in a sense, buyers were always paying the agent's commission, albeit indirectly. That's because that amount was factored into the asking or selling price of the home. And honestly, this is still an option for buyers who may not have the free cash available to pay their agent's commission directly. In such a case, a contingency can be included within an offer to purchase that makes the seller then responsible for the expense of paying the buyer's agent.

Whether the new real estate commission rules that have recently taken effect will have a meaningful impact on reducing the expense to buyers and/or sellers remains to be seen. To be sure, the new policies bring the buyer's agent's commission to the forefront instead of being buried in an MLS listing. Still, real estate commissions have always been negotiable, if not in such an obvious manner. Perhaps some hungry buyer's agents will clamor to work for 1% instead of a typical 2.5% or 3%. Alternatively, others might suggest the burden of their normal fee be placed with the sellers at no cost to the buyers.

What we can say for certain is that buyers will have more control than in the past. Hence, buyers will be well-advised to brush up on their negotiating skills for dealing with their real estate agent, who's probably a negotiating whiz. While Money Digest doesn't specifically have a guide for negotiating real estate agent commissions, some tips on negotiating the price of a home as well as how to negotiate when buying a new car will nonetheless be a good place to start your haggling journey.