Commission Model Predictions Post-NAR Settlement

The future of residential broker commissions has come under a microscope since the National Association of Realtors struck a landmark settlement deal expected to change how agents earn income.

The trade group last month agreed to pay $418 million to settle an antitrust lawsuit accusing it of conspiring with the nation’s largest brokerages to inflate brokers’ fees. The agreement, which is still awaiting the judge’s approval, would require the 1.4 million-member organization to change some of its policies that have long dictated commission structures.

Under the terms, NAR agreed to eliminate the policy at the heart of the lawsuit, known as the participation rule. The provision required listing brokers using NAR-controlled multiple listing services to offer compensation to buyer’s agents. If approved, the deal would also require buyer’s agents to obtain signed agreements.

With new rules on the table, many expect the typical 6 percent commission to go by the wayside, opening the door for a host of shake ups to the model that’s dominated the industry for decades.

Commission rates could decline

Commission rates are largely expected to drop. More than half of agents who responded to a Redfin-sponsored survey in December said they believed a settlement like the one NAR proposed would drive fees down on the buy side.

But exactly how much is up for debate.

Commissions were already declining before NAR proposed its policy changes, though rising home prices have largely offset the tip. Though 6 percent is widely understood to be the standard, the average commission rate falls slightly under 5 percent, according to data from Anywhere Real Estate.

With structural changes on the horizon, some, like financial services research firm TD Cowan, are estimating that commissions could fall by as much as 25 percent to 50 percent, according to CNN. With a typical rate ranging between 2 percent and 3.5 percent, others predict buyer’s agents will walk away with just 1 percent.

The anticipated dip in commissions would bring the rate in the U.S. closer to that of other countries, where seller’s agents usually charge less than 2 percent, according to Brookings.

But commission rates are also tied to certain market conditions. When homes are selling quickly and for big price tags, commission rates could reduce, as sellers gain the upper hand in negotiations. If demand slows down,

Buyers could be responsible for paying their own agents

The commission pool is expected to decrease, in part because buyers may have to pay their own agents instead of the sellers covering their fee as part of the commission offered to the listing agent.

“When the consumer who hires an agent pays that agent, that consumer is much more careful about fees,” Redfin CEO Glenn Kelman wrote in a statement after NAR announced its agreement.

Barring listing agents from including the buyer’s agent compensation offer on the MLS means buyers and sellers will have to negotiate the commission, how and whether or not it’s divided separately.

Under the proposed settlement, NAR would also require buyer’s agents to secure signed agreements before they can even bring buyers on a tour of a home. In the agreement, buyer’s agents will be required to spell out what services they provide and what their expected compensation is for those services, which could include a provision stating that buyers will be responsible for covering their fee if the sellers don’t agree to.

Market conditions will also likely influence who pays what. When homes are trading quickly and for hefty sums, sellers could have more negotiating power, pushing buyers to foot the bill for their own agents. When the market slows down or supply exceeds buyer demand, buyers may be able to cut deals with sellers to cover their agent costs.

Buyers’ agents could reinvent the wheel

More negotiation likely means more variability in the structure and cost of fees, particularly on the buy-side. Many industry stakeholders also expect the rule changes to increase competition among buyer’s agents, which could introduce new forms of compensation to the market.

One option is for sellers to offer what Austin, Texas-based agent Emily Ross called “buyer credits” in an opinion article she wrote for USA Today. Sellers and their agents would include these credits on the listing, but leave it up to the buyer to divy them up after closing based on their discretion.

These buyer credits differ from buyer commission rebates, which are when a buyer’s broker or brokerage offers to return a portion of their commission to the buyer. The practice is illegal in eight states, including Tennessee and Missouri.

Others expect buyer’s agents to pivot from a transaction-based rate to charging a flat fee for certain services like showing a house or assisting with contracts or switching to an hourly rate.

Buyer’s agents could also charge commission rates according to a level of service. Premium service would reap a higher commission or buyers could opt for scaled-down assistance for a lower rate.