The Future of Agent Commissions

The National Association of Realtors (NAR) is a global organization for real estate industry professionals representing more than 1 million realtors worldwide. On Friday, NAR reached a landmark settlement with major implications to the real estate industry at-large, some of which could result in a sweeping changes to who pays what in a real estate transaction. Before we jump in, here's a quick summary of how agents have historically been compensated in a sale:

A seller signs a listing agreement with an agent to sell their property. That agreement details how much they will pay both agents in the transaction. When the seller's agent lists the property on the Multiple Listing Services (MLS), these compensation details are included and buyers' agents know how much they will be paid if their client purchases the property. Sellers typically pay 5% to 6% commission on the final sale price, which the two agents split.

Now let's get into some of the changes set to hit the industry come July that could open the door to a new future for who pays what in a real estate transaction.

Compensation information will be prohibited from being included in a property MLS listing

Previously when listing a property on an MLS, NAR required agents to include the details for what the buyers and sellers agent will be compensated when the property sells. This may have impacted what properties some buyers' agents showed their clients, favoring transactions that would result in higher commissions. While technically compensation rates are always negotiable, some sellers said they felt pressure they'd lose potential buyers if they didn’t offer competitive rates.

Now, buyers agents will have no visibility into what the commission arrangements are for listings. This will help level the playing field for those sellers who negotiate lower commission rates with their agents, as the buyers' agents won't have upfront knowledge of the compensation they'd receive if their buyer decides to purchase the property.

A signed agreement will be required for a buyer to work with an agent

Because buyers agents have traditionally been compensated by the seller upon closing a successful sale, many agents didn't require a signed agreement with buyers before working with them. Come July, buyers will be required to sign an agreement in order to work with an agent. This will enable upfront transparency of how the agent will be compensated.

Since new changes will also empower sellers to negotiate how and what they will compensate both their agent and the buyers agent, this may result in agents writing their buyer agreements in such a way that could leave homebuyers paying out-of-pocket for their services if they're not covered by the seller in a transaction.

What this means for Buyers, Sellers, and Real Estate Agents

Buyers will have to sign an agreement with an agent in order to receive their services. This could result in agents writing their buyer agreements such that buyers may be paying out-of-pocket for their services if they're not covered by the seller in the transaction.

Sellers will have more leverage negotiating an agent compensation structure in their listing agreement, since buyers' agents won't have prior knowledge of it before deciding to show the property to their clients.

Real Estate Agents will have to innovate ways to customize pricing for their services to continue to enable clients to meet their real estate goals. Some brokerages keep over half of the commissions their agents earn, so it will be interesting to watch if that changes and whose bottom line this will impact the most.

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