Real estate commissions have withstood the challenges posed by the Internet and years of competition from discount brokers. However, it appears that a reduction in these commissions may finally be on the horizon.
A federal lawsuit has prompted significant changes in how consumers negotiate and compensate real estate agents. In October 2024, a federal jury in Missouri concluded that the National Association of Realtors (NAR) and various prominent brokerages had engaged in collusion to inflate Realtors’ commissions artificially. The brokerages opted for out-of-court settlements, and in March 2024, NAR also reached a settlement, agreeing to pay $418 million in damages and to amend certain long-standing regulations. (Final court approval is anticipated in November.) This development has important implications for both homebuyers and sellers.
The alteration of real estate commissions: Is a 'price war' emerging?
As of August 17, home sellers are no longer automatically obligated to pay both their own agent and the buyer’s agent. Instead, homebuyers seeking representation may need to compensate their agents independently. Under the new framework established by the National Association of Realtors (NAR) in response to the lawsuit, listing agents will no longer disclose the payment amount for the buyer’s agent when a property is listed. This fee will now be negotiated directly between the buyer and their agent.
Looking ahead, there may be significant price competition among buyer’s agents. Vishal Garg, the Chief Executive Officer of the mortgage firm Better, anticipates that “a price war on the buy-side will emerge by the following year.”
While real estate commissions have always been negotiable in theory, in practice, agents tend to be more adept at negotiation than their clients, resulting in commissions typically hovering around 5 percent. The recent regulations enable buyer agents to proactively advocate for their fees. Stephen Brobeck, a senior fellow at the Consumer Federation of America, anticipates that commissions could eventually drop below 4 percent, potentially reaching as low as 3 percent. He indicated that, as time progresses, a greater number of agents will be inclined to provide diverse compensation models, while consumers will become more active in comparing options and negotiating commissions in a market characterized by increased transparency.
A new competitive environment among buyer agents is emerging, as stated by Garg. He asserts, “In the best-case scenario, consumers will begin to shop for buyer agents in a manner similar to how they currently shop for mortgage lenders.”
A financing wrinkle
Numerous details remain to be finalized. Should the buy-side agent no longer receive compensation from the listing commission, it would imply that the buyer must directly compensate their agent, which would typically amount to approximately $10,000, assuming a 2.5 percent commission on a $400,000 sale price. Currently, buyers are not permitted to incorporate this expense into their mortgage for deferred payment. Nevertheless, there is a possibility that the Federal Housing Finance Agency may revise its regulations to permit Fannie Mae and Freddie Mac mortgages to encompass such commissions. Industry specialists anticipate that federal regulators will address this matter in the near future.
How much do commissions cost?
Historically, when a homeowner sold a property for $400,000, which is approximately the average price for existing homes in the United States, the seller would incur a commission fee of around 5 percent, equating to $20,000. This fee was subsequently divided between the seller’s agent and the buyer’s agent, a detail that was largely inconsequential to the seller, who was still responsible for the entire amount.
In the past, the standard commission rate was 6 percent, with 3 percent allocated to each agent. However, following years of competitive pressures and regulatory oversight, the average commission has now decreased to just under 5 percent, as reported by Anywhere Real Estate, the parent company of major real estate brands such as Coldwell Banker and Century 21. In its disclosures to securities regulators, Anywhere indicates that its average commission “side” — representing half of the total commission — currently stands at approximately 2.4 percent.
Although commission rates experienced a temporary increase during the Great Recession and again in 2024, they have generally been on a downward trend for several decades. For real estate agents, this reduction in commission rates has been balanced by the rise in home prices: while their percentage-based earnings have diminished, the overall value of transactions has increased.
About the NAR lawsuit
In a trial that took place in 2024, home sellers in Missouri accused the National Association of Realtors (NAR) and four prominent brokerages—Keller Williams, Anywhere, RE/MAX, and HomeServices of America—of engaging in antitrust violations. Prior to the trial, Anywhere and RE/MAX reached settlements, agreeing to pay $83.5 million and $55 million in damages, respectively, while the other defendants chose to proceed to trial.
The jury ultimately ruled against the real estate industry, leading a judge to mandate that NAR and the two remaining brokerage firms pay a total of $1.8 billion in damages to the home sellers. Keller Williams subsequently reached a settlement amounting to $70 million, while HomeServices of America, a subsidiary of Berkshire Hathaway owned by Warren Buffett, consented to a settlement of $250 million. Additionally, NAR consented to modify its practices and make a financial settlement.
Other dramas
NAR has encountered additional challenges beyond the antitrust lawsuit and associated legal matters. In 2024, a sexual harassment scandal prompted the resignation of the organization’s then-president, followed by the departure of the subsequent president and long-serving CEO.
This turmoil has fostered a sense of discontent and instability within the organization. Redfin severed its relationship with the trade group, compelling numerous brokers and agents to terminate their memberships, a trend that has been mirrored by other brokerages. Furthermore, two prominent real estate agents have established a rival trade organization, named the American Real Estate Association (AREA).
Jason Haber, one of the cofounders of AREA and a broker/agent at Compass in New York City, who has been a vocal critic of NAR, characterized AREA as an alternative rather than a substitute. He stated, “We’re not trying to replace NAR. We’re not trying to replicate NAR. They have a 108-year head start.”
Competition and the MLS
The residential real estate sector has historically exhibited a dual nature. On one side, it has maintained significant control over property marketing through a comprehensive network of multiple listing services (MLSs) across the nation. This situation has sparked concerns regarding potential collusion and price-fixing, attracting the attention of the U.S. Department of Justice.
Conversely, entering the real estate sales profession is relatively straightforward, as demonstrated by the National Association of Realtors (NAR) boasting over 1.5 million members. To obtain a real estate license, an individual typically needs to complete a few courses and pass a state examination, with no requirement for a college degree and minimal entry costs. However, the anticipated settlement may lead to a reduction in the number of active agents.
Lawrence Yun, the chief economist for NAR, highlighted these low entry barriers last year as an indication of robust competition within the industry, stating, “Real estate is a perfectly competitive industry,” during the organization’s annual conference in November.
Consumer advocate Brobeck, however, contests this viewpoint. He indicated that at present, we are not functioning within a free market. There is significant competition for clients; however, there is a lack of competition regarding rates. In a typical marketplace, competition arises not only from marketing efforts but also from the pricing strategies employed.”
Additionally, the prevailing belief within the industry has been that commissions are negotiable, implying that sellers and buyers have the authority to determine the fees paid to agents. In reality, however, most consumers engage in buying or selling a home only once every five to ten years, and many lack the necessary knowledge to effectively negotiate lower rates.
Brobeck stated, “Consumers find themselves in a challenging position. They engage in the buying and selling of homes rarely, and their main concerns revolve around the sale price and timing.”
In historical contexts, discounters have often failed to achieve success.
For many years, critics have forecasted the end of real estate commissions, suggesting that these fees would follow the path of stockbrokerage commissions and travel agency charges. Contrary to these predictions, real estate commissions have demonstrated remarkable resilience.
Several efforts have been undertaken to tackle this problem. Various disruptors have identified commissions as a challenge to overcome, yet most have not succeeded in transforming the industry.
In the early 2000s, a notable discounter named YourHomeDirect, which later became Foxtons, introduced a 2 percent commission model in New York and New Jersey. Despite significant advertising efforts and an initial increase in market share, the company ultimately failed.
A decade later, Purplebricks, headquartered in London, ventured into the U.S. market, attracting sellers with a fixed fee of $3,200. Nevertheless, it miscalculated the demand and withdrew from the U.S. market in 2019.
One notable discounter, Redfin from Seattle, has managed to maintain a presence in the market. Initially launched as a more affordable option compared to traditional brokers, it offered listing fees of just 1 percent, although it has since adjusted its focus to 1.5 percent listing fees.
Strategies for Sellers to Reduce Real Estate Commission Costs.
If you prefer to avoid paying agent commissions, consider the following alternative options:
- Self-sell: You can sell your property independently through a “for sale by owner” arrangement. According to data from the National Association of Realtors, 7 percent of home sales between July 2022 and June 2023 were conducted by owners without the assistance of an agent. However, managing the sale on your own can be quite labor-intensive, and while you may save on one agent’s commission, you could still be responsible for compensating the buyer’s agent.
- Negotiate fees: If you prefer not to sell independently, inquire about commission rates from various agents at the outset and evaluate the terms they offer. Should you find the fees excessive, consider negotiating for a reduction. If both agents involved in the transaction belong to the same brokerage, you may have greater negotiating power.
- Engage a discount agent: A low-commission real estate agent typically charges significantly less than a conventional agent, often ranging from 1 to 1.5 percent of the sale price of your home. However, this option may not provide the same level of personalized service as a traditional Realtor. Additionally, some brokerages and agents operate on a flat-fee model, receiving a fixed amount for the sale rather than a percentage.
- Sell to a cash home-buying company: These companies, frequently promoting themselves with slogans like “we buy houses,” offer cash payments, expedite the closing process, and generally do not impose fees. Nevertheless, selling through this method may result in a lower sale price compared to a traditional sale.
