Navigating Home Buying Costs Post-NAR Settlement: What Every Buyer Should Know

In March 2024, the National Association of Realtors (NAR) proposed a $418 million settlement to end a nationwide, class-action lawsuit.

In the aftermath of the settlement agreement, widespread discussions and massive media coverage have surfaced with varying interpretations of its impact on the real estate industry, causing as much confusion as clarification.

Here’s what you, as a homebuyer, need to know about the possible changes that lie ahead.

The NAR Settlement: First the facts

On March 15, 2024, the National Association of Realtors finalized a settlement agreement addressing numerous class action lawsuits that accused the organization of engaging in anti-competitive practices concerning agent commissions within real estate transactions.

The litigation centered on NAR’s regulations mandating properties listed on Multiple Listing Services (MLS) to feature a predetermined buyer agent commission, which was perceived as constraining competition and inflating expenses for consumers.

This requirement to advertise the commissions paid to buyers’ agents and list them in the MLS is far-reaching on many levels. In the United States, nearly 90% of all homes sold are listed through the MLS.

There are two primary changes resulting from the NAR settlement that will happen beginning August 17:

1. Ban on compensation offers on MLS: The Multiple Listing Service (MLS) will no longer permit offers of compensation. Nevertheless, Realtors will retain the option to exhibit compensation details on their individual websites and listings.
2. Mandatory written Buyer Broker Agreements: Realtors assisting buyers must now establish written agreements outlining the compensation amount, its determination process, and its origin.

NAR will also be required to permit real estate agents to be paid for their work without subscribing to an MLS.

NAR continues to deny any wrongdoing and maintains that cooperative compensation is in the best interest of both buyers and sellers.

NAR Settlement: myths vs reality

There have been many misconceptions surrounding the NAR settlement. Even the President misspoke, suggesting that the settlement makes commissions negotiable for the first time.

Other common myths have surfaced.

MYTH: Sellers will no longer be permitted to pay buyer agent commissions

While the settlement does impose restrictions on properties with offers of buyer agent compensation on MLS platforms, sellers can still pay buyer agent compensation as a means of differentiating their homes.

The only modification introduced by the settlement in this area is the prohibition of advertising the buyer’s agent commission in MLS listings owned by Realtors. This doesn’t prevent sellers from offering to pay the commission as a perk; it simply means this offer won’t be visible in MLS listings.

It should be noted that, while sellers can choose not to pay buyer agent compensation, this doesn’t necessarily absolve them of related costs. Buyers may request concessions or include contingencies in their offers, effectively shifting the burden back to the seller.

MYTH: The settlement is a great win for buyers who can now negotiate representation fees

First, although not widely known, homebuyers have always been able to negotiate agent commissions.

For homeowners who have bought one or more homes throughout the years, you were likely pleased to have the seller cover your agent’s compensation, sparing you the expense. For buyers who had to gather enough funds for the down payment and closing costs, having the seller pay the commission and include it in the home price enabled the buyer to spread out the amount over time instead of needing to come up with thousands more dollars at closing.

Many buyers won’t be able to come up with the additional funds. This could limit the buyer pool, squeezing out first-time homebuyers in particular.

The impact on buyers’ purchasing power 

As a result of the rapidly evolving regulatory landscape, there have been mixed reactions in the industry.

Some view the settlement as a good thing in terms of innovation and consumer empowerment, saying that buyers may find improved negotiating leverage regarding commission rates and increased flexibility in exploring alternative compensation structures, such as hourly payment, flat fees, or reduced-service packages. Others express concerns about its potential impact on homebuyers and market dynamics.

Numerous experts have stated that negotiating representation fees could introduce complexities for buyers, as well as have a potential impact on their financial obligations when purchasing a home.

Eliminating cooperative compensation could mean additional costs for homebuyers, potentially taking money away from what was intended to go towards their down payment. First-time homebuyers, especially those who already deal with tight budgets and escalating housing prices, will now have to factor in their agent’s commission.

These additional costs could amount to tens of thousands of dollars on top of what buyers already need to bring to the table.

Let’s put this into perspective. If you’re buying a home with a purchase of $450,000, typically, a 3% buyer agent commission is covered within the proceeds of the sale. That’s $13,500 that you didn’t worry about because the seller was paying for it.

Now imagine this. You plan to make a down payment of 5% ($22,500). You’ll then need to add estimated closing costs of 2% ($9,000), and then another $13,500 to cover your agent’s compensation. You could be looking at a whopping $45,000 out of your pocket.

Some say transaction costs for residential housing will become lower as a result of the settlement. Others, however, say this will do nothing more than make it easier for people to buy at scale. The problem with that? Investors and institutions buy at scale, not families.

How to pay for buyer agent compensation when a seller won’t pay

Starting on Aug. 17, 2024, sellers will no longer be required to pay buyer agent commissions. As a homebuyer, you may be worried about how you can afford to pay their commissions.

Here are a few ways to navigate the soon-to-change homebuying landscape.

Finance agent commissions. Fannie Mae and Freddie Mac have recently released clarifications on financing concessions permitted by sellers.

According to Fannie Mae, if a seller or seller’s real estate agent continues to pay the buyer’s real estate agent commission in accordance with local common and customary practices, these amounts are not required to be counted towards the Interested Party Contribution (IPC) limits for the transaction.

In plain English, under existing Fannie and Freddie policies, buyer agent fees, which have customarily been paid by the property seller or seller’s real estate agent, are not subject to financing concession limits. If these fees continue to be paid by the seller, they will not be subject to financing concession limits.

In other words, sellers have been permitted to make contributions ranging from 2% to 9% of the property value that can be applied to a mortgage borrower’s closing costs. These amounts will remain the same and, more importantly, the seller can cover buyer agent compensation in addition to the current concession limits.

So, where permitted and negotiated, a seller could contribute 9% towards a buyer’s closing costs, plus an additional 3% to cover buyer agent compensation.

While the FHA has issued a similar statement, the VA has yet to comment on the issue.

Currently, VA loans do not accommodate any agent fees, primarily because their guidelines suggest it’s customary for the seller to cover these costs. Yet, with Fannie Mae and Freddie Mac’s recent policy adjustments, we might soon see a shift in the VA’s stance.

Seek out home sellers that offer buyer agent compensation. Remember, sellers will retain the option of paying both sides of the agents’ commissions. They can continue doing so. They just aren’t required to do so.

Many sellers may decide to continue the tradition of paying both agents’ compensation, as it will attract more buyers, which means their home is likely to sell faster.

Hire a discount agent. Some real estate agents may charge a lower commission than a traditional agent. Some “discount agents” may charge just 1 to 1.5 percent of the home’s sale price. It’s important to note, however, you may sacrifice some of the personal attention you would get with a traditional Realtor.

There are also brokerages and agents who work on a flat-fee basis, earning a preset amount on the sale rather than a percentage of the sales price.

Obtain gift funds. Gift funds are popular for first-time homebuyers as a way to cover their down payment and/or closing costs. But, you don’t have to be a first-timer to use gift funds. It’s possible that we’ll see an increase in gift funds being used as a way to offset agent compensation.

Negotiate agent commissions. Real estate commissions have always been negotiable, but asking for a reduced commission may become more common practice.

Negotiating your agent’s commission may work in your favor. However, it’s important to remember that an agent has the option of walking away too.

You’ll want to make this type of request considerately with the understanding that, at the end of the day, most real estate agents depend on commissions to survive, and some place their value on the amount they earn. Be careful not to come across as devaluing what they bring to the table.

Will we see a whole new real estate world?

The NAR settlement has the potential to reshape the dynamics of home transactions in an industry already dealing with the effects of low inventory and elevated interest rates, inciting confusion, and considerable uncertainty.

There is another reality, however. If you’re buying a home soon, you could see the real estate scene undergo significant changes. But the industry may change slowly, if at all, with agents negotiating the same split as before, just through means other than the MLS.

Speak with a lender about any guideline changes that may offer additional ways that allow you to cover your agent’s commission as part of your loan. And don’t assume you should go it alone, without the help of a buyer agent. A great buyer agent – one that’s on top of the changes, as well as a great negotiator – can be an invaluable resource.