How buyers and sellers navigate homebuying’s seismic shakeup

When Dana McMahan sold her home this spring, she decided to try to maximize her take-home profit by skipping out on the help of a full-service Realtor.

Traditionally, home sellers in the US have been responsible for paying real estate commissions. The standard 5% or 6% commission was usually split between the seller’s broker and the buyer’s broker, referred to as cooperative compensation.

“I think it’s safe to say that for quite some time I’ve really not felt like it was fair for a home seller to be paying a 6% commission,” McMahan said.

McMahan, a content creator in Louisville, Kentucky, was slightly ahead of the curve when she opted out of the standard commission-sharing model: Beginning August 17, a new set of rules went into effect for the 1.5 million real estate professionals who are part of the National Association of Realtors designed to shift the conversation about how Realtors get paid.

Amid record-high home prices and elevated mortgage rates, NAR’s changes may only seem like tweaks to the opaque process of buying and selling a home. But many experts predict the new rules may eventually spur increased price competition in the real estate industry, opening up the possibility for Americans to save thousands of dollars on Realtor commissions in the future.

New rules, new ideas

Cutting out a traditional Realtor means taking on extra work, though.

“I hosted an open house myself; I provided my own photography and I wrote my own listing description,” McMahan said. “But if I were trying to put a value on my time, I came nowhere near spending what I would have spent on that commission.”

By selling her home without a full-service Realtor, McMahan, who enjoys fixing up and reselling old homes, pocketed some extra cash: Rather than paying 2% or 3% of her home’s final sale price to an agent, she paid a broker just $500 to list her home on her local MLS, a centralized database that Realtors use to learn which homes in their area are for sale.

Despite saving money on her side of the deal, she did not avoid paying a commission altogether. She ultimately offered the standard 3% commission to the agent representing her home’s buyer, a move McMahan said she felt was necessary to entice agents to bring buyers around.

“I knew the house would sell itself. I just needed to get eyeballs on it,” she said.

But NAR’s changes aim to prevent that calculation. After August 17, sellers and their agents are prohibited from advertising how much they would pay to a buyer’s agent in the MLS. Critics have often accused some Realtors of commission-based steering, in which they avoid showing their clients homes on the market that are offering below-market-rate commissions.

NAR has said that the practice was always prohibited but that the new rules have “eliminated any theoretical steering.”

Antitrust lawsuits

NAR’s rule changes stem from a series of lawsuits that accused the powerful trade organization of keeping commissions artificially high by forcing home sellers to pay out commissions to agents on both sides of the transaction. NAR, which is a significant lobbying group for the real estate industry, denied the accusation, saying Realtor commissions have always been negotiable. Still, the group agreed to pay $418 million to settle some of the claims ­— and agreed to implement the new rules on its members as part of the settlement.

The final approval hearing is scheduled for November 26, but a judge granted preliminary approval of NAR’s settlement in April.

Given the new rules, McMahan said she might reconsider her offer of a 3% buyers’ broker commission the next time she sells her home.

Another aspect of NAR’s rule change: Buyers will be required to sign representation agreements with a Realtor before they can begin touring homes together. These agreements are intended to inform buyers that they may be responsible for covering their Realtor’s commission payment themselves if a seller chooses not to offer it.

Some prospective buyers may balk at being on the hook for thousands of dollars in commission payments and instead turn to lower-cost alternatives, like flat-free brokerages or a la carte services.

Either way, experts caution that homebuyers carefully read any legally binding representation agreement before signing it.

A potential downside?

Some Realtors have warned that in competitive markets where homes for sale receive multiple offers, buyers may be pushed to pay their own agents out-of-pocket to make their bids more appealing to sellers, further adding to the often burdensome closing costs associated with purchasing a home.

Bill Colson, who is preparing to sell his Maryland home next year and purchase a retirement home outside Blue Ridge, Georgia, believes the changes will create more costs.

Colson, who is 57 years old and retired from the Navy, said a Realtor in Maryland still advised him to offer the standard 6% commission split between his agent and a buyer’s agent when selling his home — but in Georgia, Colson said another Realtor told him to be prepared to pay his own agent out of pocket to make a potential offer more competitive. That means Colson would be responsible for paying out commissions for both transactions, which would have been unthinkable to many homebuyers and sellers before the changes.

“If you want to stand out, you’re going to have to pay,” Colson said.

“In the end, we may end up paying something like 9%,” he said. “Instead of making things better, it just got a lot worse.”