Realtor 6% commission model loses curb appeal

Technically negotiable rate had been sold ‘as is’ for decades

The real-estate industry’s 6% agent commissions have been 86’d.

At least that’s likely to be the result following the March settlement between the National Association of Realtors (NAR) and groups of lawyered-up home sellers from Missouri, who filed anti-trust lawsuits last year alleging NAR and a pair of brokerages conspired to keep agent commissions artificially high.

Last November, a federal jury found the defendants liable for $1.8 billion in damages; faced with dim prospects on appeal, NAR settled March 15. As part of its agreement to end the antitrust suits, NAR promised to pay out $418 million in damages and revise its rules regarding agent commissions. With more than 1.5 million members, the National Association of Realtors is among the largest trade associations in the U.S.

Under the current NAR model, home sellers have typically paid a 5% to 6% commission—split between the buyer’s and the seller’s agents—on the sale price of the home. On a $1 million home, a seller would likely pay about $60,000 in commissions.

Critics of that model say it means both agents are essentially working for the seller, creating a potential conflict of interest for the buyer’s agent. What’s more, the seller’s agent is required by NAR to disclose the exact commission rate to the buyer’s agent on NAR’s homes-listing websites—aka multiple-listing services, or MLS—but the rate isn’t known by buyers. In other words, unbeknownst to the buyer, their agent may be incentivized to steer them toward purchasing homes with the highest commission rates—and bigger agent payday.

Further muddying the waters is the reality that commission fees are often reflected in the sales price for the home. Thus buyers, in effect, are typically paying some, maybe even all, of the commissions via an inflated price above the true value of the home—no doubt one of many factors in the skyrocketing housing prices of recent years.

When the commission-rule changes take effect in July—assuming the settlement is approved by the court—sellers will no longer be expected to pay a commission to the buyer’s agent, allowing them to keep several percentages more of their sales price, potentially saving tens of thousands of dollars.

Of course, a buyer’s agent will then need to be paid by the buyer—but it’s unclear if a single model will be adopted as a norm or various methods will come into play, such as a flat fee from the buyer, an hourly rate or a pre-determined percentage of the sales price. Industry watchdogs predict more buyers will be incentivized to forgo agents altogether or hire “no frills” brokers who offer basic services at a lower price, a model that has grown in use in the UK and other parts of Europe.

At the very least, competition for clients will push some agents to charge reduced commission percentages. A report in the Wall Street Journal predicted commissions could be slashed by as much as a third.

Headlines published since the settlement announcement have predicted everything from cheaper housing prices and more homes listed to an exodus of agents from the industry due to the loss of income.

Allison Norman, a Sonoma County-based agent with Keller Williams Realty, hopes industry members and the media will “take a step back” and wait for any major change to “work itself out” over the next few months. “There is so much misinformation out there right now—among agents, consumers and news outlets,” says Norman.

One point NAR itself alleges has been misrepresented is the suggestion that NAR sets commissions. “They are negotiable,” the association stressed in a March 19 press release. The requirement is “only that listing brokers communicate an offer of compensation,” NAR officials wrote in the release. “That offer can be any amount, including zero.”

According to NAR’s Handbook on Multiple Listing Policy, seller agents must “specify on each listing filed with the service the compensation being offered by the listing broker to the other MLS participants.”

That said, the industry standard has been 6% for decades and few listing agents stray from it out of concern over “steering,” or the possibility that buying agents will steer their clients away from considering homes that result in less agent compensation for the same work.

The origins of the 6% standard are murky, but stem from earlier in the 20th century when the National Association of Real Estate Exchanges—later to become NAR—stipulated in its code of ethics that seller agents should split commissions equally with buyer agents, according to a story from December 2023. NAR later dropped the requirement, but the practice stuck. Up until 1950, commission rates were set by local boards of realtors, which did little to discourage commission rates from climbing. When they were around 6%, courts ruled it illegal for realty boards to establish set rates—but by then the 6% number had settled in as an industry standard and, with little incentive for agents to negotiate lower, the rate, while no longer required, remained.

Adding further to home buyers’ and sellers’ reliance on NAR and its industry practices over the years has been the power of the MLS. Multiple Listing Services have been around for more than a century, allowing NAR agents to share among other members what properties are for sale at any given time, along with other information such as property details, price, commission rates, open home or viewing times and more. Prior to the internet, the general public had little access to timely and up-to-date property-sale information and relied on NAR agents for MLS access. While in recent years public sites like Zillow and have chipped away at the power of the MLS, they still don’t provide all the information necessary to compete for the best deals in an increasingly competitive real estate market.

While some industry watchdogs view the settlement as a harbinger of major change to the industry, NAR has largely downplayed impending fallout. In a Jan. 30 letter to the editor in Bloomberg, NAR President Kevin Sears refuted the allegation that the commission model creates a conflict of interest. “The opposite is true,” Sears argued. “Offer compensation to buyer brokers in this fashion fosters consumer choice, stimulates market competition and boosts access to homeownership by lowering the cost burden for buyers.”

In its March 19 statement, NAR highlighted just one policy change from the settlement: “NAR has agreed to put in place a new MLS rule prohibiting offers of broker compensation on the MLS.”

While NAR’s official policy may only be changing marginally, it’s what some would describe as the industry’s unofficial policy that stands the biggest upheaval—and few outside of NAR members are defending the current seller-pays-all 6% commission model. In fact, some agents are conceding it is high time the 6% commission got the boot.

A semi-retired real-estate agent in Novato, who asked not to be named, agrees that Zillow and other websites provide buyers with much of the information they need to find a suitable home—and agents are really only necessary for overseeing certain legal aspects of the process, such as the closing contracts. He said if he weren’t winding down his practice, he’d begin offering specialized services for home buyers—let them find the home and make an offer and he’d handle the paperwork for a set fee of $4,000. He believes he’d do very well.

Alexander Narodny, a Corte Madera-based Realtor, is taking a positive approach to the settlement. I consider it a good thing for the industry,” says Narodny. “This will force buyers’ agents to have a more transparent commission conversation with their clients that should have been taking place all along.”

He also believes it’s a chance for the best agents to set themselves apart in the marketplace through their knowledge of the local community—everything from knowing the good schools to the best hiking trails. “Bay Area buyers need a lot of help to locate their ideal property and, most importantly, feel secure and fulfilled at the end of the process.”

One Sonoma County agent told NorthBay biz his office forbade agents to speak to the media about the settlement.

Norman, meanwhile, is taking a wait-and-see approach. “Change is hard,” she concedes. “But honestly… sometimes change is good.”

Still, she stresses, “the sky is not falling.”

“Buyer representation is not going away,” she says. “Real estate has been through many upsets, changes and challenges over the years. Realtors, brokerages and consumer will adapt as we always have.”

Related Posts

Leave a Reply