Learn the true impact of the historic NAR settlement on American home sellers, from short-term disruptions to long-term industry evolution.

By Estate Monthly

March 23, 2024

The landscape of American real estate is on the brink of a monumental shift, reminiscent of the seismic changes not seen in the last century.

At the heart of this transformation is the National Association of Realtors (NAR), a titan of industry which represents about 1 million Realtors across the US. The NAR recently agreed to a groundbreaking settlement resulting in a $418 million penalty and agreement to new rules for Realtors.

Summary of the New NAR Rules

The recent settlement involving the National Association of Realtors (NAR) introduces several new rules designed to transform the real estate industry. Here’s a summary of the key changes:

  1. Commission Structure Alteration: The settlement eliminates the traditional 6% commission structure, which was typically split between the buyer’s and seller’s agents. This change aims to reduce the costs associated with buying and selling homes.

  2. Explicit Broker Agreements: Homebuyers will now need to enter into explicit agreements with their brokers before starting to work with them. This could lead to a scenario where many buyers choose to navigate the home buying process without the assistance of a broker.

  3. Prohibition on Listing Agent Compensation in MLS: One of the new rules prevents the inclusion of agents’ compensation details in listings on multiple listing services (MLS). This is intended to discourage brokers from steering clients towards more expensive properties for higher commissions.

  4. No Mandatory Subscription to MLS: The rules also eliminate the requirement for brokers to subscribe to multiple listing services, many of which are owned by NAR subsidiaries. This change aims to open up the market for more competitive practices.

  5. Buyers’ Broker Written Agreements: The new framework requires buyers’ brokers to secure written agreements detailing the services they will provide and the commission they expect. This change is designed to make the process more transparent and allow for commission negotiations.

Potential Disadvantages for Home Sellers

The residential real estate market will now be navigating through uncertain waters, which might not be all smooth sailing for home sellers. One potential disadvantage is the increased complexity and confusion as the industry adapts to the new rules. This uncertainty could extend to negotiations, where the absence of standard commission rates makes each transaction a unique discussion, possibly leading to less predictability in the costs associated with selling a home.

Sellers might also face challenges in marketing their properties without the lure of a fixed commission rate to attract buyer’s agents, which could necessitate more investment in marketing to make their listings stand out.

Additionally, the transition period could see a mismatch in expectations between sellers and agents, as both navigate the new compensation structures, possibly leading to delays or complications in sealing deals.

In the long-run, an unintended consequence of the sweeping NAR reforms might be a thinning of the ranks of knowledgeable, experienced real estate agents. As commission structures become potentially less lucrative, the real estate profession could become less attractive to new and seasoned professionals who have traditionally relied on standardized commission rates. This shift could inadvertently lead sellers to rely more heavily on automated online services and less on experienced agents.

About this possibility, the real estate behemoth Zillow warned that, “if agent commissions are meaningfully impacted, it could reduce the marketing budgets of real estate partners or reduce the number of real estate partners participating in the industry…”

The nuanced understanding of market dynamics, negotiation skills, and personalized service that experienced agents offer could become scarcer, potentially impacting the quality of advice and support available to sellers. For some sellers, this could mean paying higher commissions than the current standard to secure the more experienced Realtors, now that the rates are easily negotiable.

Potential Advantages for Home Sellers

The changes may also bring a range of advantages for home sellers. The most obvious is with negotiable and transparent commissions, average commission could drop (by some estimates, up to 25% to 50% lower, according to TD Cowen Insights).

On an industry scale, the commission flexibility and transparency could foster a more competitive market for real estate services. Sellers now have the leverage to select agents based on the value they provide rather than just the commission rate. This could eventually encourage innovation in marketing strategies, making the selling process more effective and potentially more lucrative for sellers.

Additionally, the changes could democratize the real estate market, giving rise to a variety of selling models. From flat-fee services to discount brokers, sellers might find themselves with a wider array of choices to suit their specific needs and financial goals.

Finally, this evolution could incentivize agents to offer more flexible services to home sellers on a sliding scale of commissions and fees. This may allow sellers to choose a level of “DIY” involvement in exchange for lower agent commission.

What the NAR Changes Really Mean for Home Sellers

Unfortunately for sellers, their new commission flexibility means they also need to be more informed about their choices:

More Research and Planning

Now, home sellers should be ready to negotiate the commission with their Realtor. This means more preparation, research, and early-stage planning. Sellers will need to balance the desire for savings with the need for a skilled agent who can effectively market their home and navigate the sales process.

Shop Around for Services

The dismantling of traditional commission structures opens the door for various home-selling services and models. Sellers now have more incentive to shop around, comparing traditional full-service agents against newer models such as flat-fee services or discount brokers. This diversity in options allows sellers to find a service that best fits their budget and needs, whether they prioritize saving on commission costs or desire a comprehensive service package.

Evaluate Different Selling Models

With the industry’s transformation, sellers might encounter an array of selling models they weren’t previously aware of. New online listing services such as Oregon’s listYourHaus, concierge agent services, and ibuyers all deserve some consideration. Sellers should research and evaluate these models, considering factors such as cost, level of service, and the potential reach to prospective buyers.

Appreciate the Value of Expertise

While negotiating lower commissions can lead to cost savings, sellers should also weigh the value of an agent’s expertise and network. An experienced agent with a strong understanding of the local market can offer invaluable advice on pricing your home correctly, marketing it effectively, and navigating negotiations with buyers. Balancing the cost savings against the potential benefits of professional expertise is a key consideration for sellers.

Be Ready for a Learning Curve

As the real estate market adjusts to these new norms, both sellers and agents are on a learning curve. Sellers may find that practices and expectations vary significantly from one agent to another. Being flexible and open to learning about the new landscape will be important. Sellers should also seek agents who are transparent about their adaptation to the new rules and who demonstrate a willingness to work within the seller’s preferences and budget.

Impacts Beyond NAR Realtors and the US

While the settlement directly involves NAR and its members, its broader implications signal a shift towards more transparent and flexible commission structures across the U.S. real estate market, affecting all real estate professionals, whether they are part of NAR or not.

The settlement signifies a significant shift towards transparency and flexibility in how commissions are structured, promoting a more competitive environment. While specifically targeting NAR and its affiliated entities, the ripple effects of these changes are likely to influence the entire U.S. real estate industry. This includes non-NAR brokerages and agents which may be pressured to adopt these or similar rules​​​​.

Potential Impact in Canada

The NAR is an American trade association, and its operations, including the direct implications of its settlements, are specific to the United States. In Canada, the real estate industry is regulated by different organizations, such as the Canadian Real Estate Association (CREA). Therefore, Canadian real estate professionals are not directly impacted by the NAR’s settlements or required to abide by its terms​​.

However, the U.S. developments could serve as a case study or catalyst for similar discussions around commission structures, transparency, and competition. This could lead to a reassessment of their own practices, potentially inspiring regulatory reforms or shifts in the professional culture towards more consumer-centric approaches. Moreover, multinational real estate firms operating in both the U.S. and Canada may adopt unified policies that align more closely with the emerging standards south of the border, thereby indirectly influencing the Canadian market.