As of August 17, 2024, the National Association of Realtors (NAR) and the multiple listing service (MLS) implemented new rules for the residential real estate market that changed the way real estate agents are compensated. This change adds greater transparency, however it may be confusing at first glance. Buyers and sellers need to be in the know so they negotiate the best deal and manage their financing well ahead of closing.

Why the rules changed
Previously, when a home was sold, commission typically ranged from 5% to 6%, which was paid by the seller and divided between both the seller’s and buyer’s agents. In this situation, the seller had to pay the buyer’s agent. Under the NAR rules, the seller’s agent was required to publish an offer of compensation to the buyer’s broker/agent when listing homes on the MLS. Since listing agents could not advertise 0% commission on the MLS under the old participation rules, they were required to advertise a commission of at least $1 and could say that commissions were negotiable. However, a lawsuit alleged that the requirement to post an offer reduced competition and kept commission rates artificially high, which caused agents to encourage homebuyers to view homes that offered higher commissions. Now, the seller’s agent can no longer place an offer of compensation to the buyer’s agent on the MLS.

What does this mean for the seller?
Now, sellers may or may not have to pay a commission. Historically, agents urged sellers to pay a buyer’s agent’s commission to encourage attendance at open houses. Sellers may still wish to pay these commissions as part of their advertising and marketing strategy to deliver quality prospects, but the agent won’t be able to advertise the offer on the MLS.

How does this affect buyers?
The buyer’s first step will include negotiating how much commission they are willing to pay their agent and sign an agreement up front before they can begin viewing homes. This agreement stipulates the maximum amount the buyer’s agent can be paid as part of the home purchase. The buyer is not required to sign an exclusive agreement in order to tour a house. According to the NAR, the payment structure must be "objective (e.g., $0 or flat fee or percent or hourly rate) – and not open-ended (e.g., cannot be 'buyer broker compensation shall be whatever the amount the seller is offering to the buyer')."

If the seller is not paying the buyer’s agent’s commission, the buyer may need to come up with more cash to cover an agreed amount between buyer and buyer’s agent. Previously, commission fees were included in the sale price and amortized over the life of the loan which made it easier for buyers to pay them. Sellers could continue to and may prefer to utilize this payment structure. The buyers could also ask for concessions or “credits” in order to close the deal which could include the sellers paying the buyers back for the agent’s commission. This is where it is important for homebuyers to work with their lender in order to structure their home loan to accommodate their specific needs.

What will happen to commission rates?
With these new rules now in effect, the commission structure can’t be advertised on the MLS, which may decrease seller viewings and contribute to a buyers’ negotiating power, which could in turn cause commission rates to fall. According to the LA Times, the Consumer Federation of America recommends buyers and sellers negotiate a commission of 2% of the sales price or less for their brokers and carefully review all contracts from agents. A recent Redfin study showed that commissions have declined slightly since the new rules went into effect.
 
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