As of August 17, 2024, the real estate industry has undergone significant changes due to a settlement agreement with the National Association of REALTORS® (NAR) regarding broker commissions. These changes are designed to increase transparency and fairness, transforming how real estate agents are compensated and how these payments are disclosed to buyers.
For decades, the real estate industry operated under a well-established system for agent commissions, typically featuring a total commission of 5-6% of the home’s sale price that was split between the listing and buyer’s agents. The commission was typically covered by the seller and included in the overall listing price of the home.
Although it was never an officially set fixed fee, the stated commission was generally considered to be non-negotiable and many homebuyers claimed to be unaware of these commission structures. Some buyers even believed agent services were free, not realizing that commissions were typically built into the home’s selling price or that their agent was being paid by the seller. On the flip side, sellers often felt compelled to offer competitive buyer’s agent commissions on their listings out of the fear that buyer’s agents could potentially steer their clients away from properties offering lower commissions.
This system persisted for years, becoming an accepted norm in real estate transactions. However, it has long been the subject of questions on transparency, competition, and value for both buyers and sellers.
The rules of the NAR settlement do not set or standardize agent compensation, but they do mandate a major change that is already shaking up the industry — disconnecting the seller from buyer’s agent compensation. When seller’s agents list homes, they will no longer be allowed to include the buyer’s agent compensation in the listing. Sellers can still agree to pay buyer’s agent commissions, but it cannot be included in the listing details. Buyers will also be signing contracts with their agents that will clearly state the agent’s commission as well as the services the buyer will receive in return.
What the NAR settlement means for homebuyers
These changes may not seem like big ones to someone who hasn’t bought or sold a property before, but they will have a profound impact on the traditional dynamics between buyers and their agents. First and foremost, buyers will benefit from increased transparency. At the beginning of their relationship with an agent, buyers will receive a detailed document outlining services to be provided and exactly how much their agent will be paid. This change is designed to prevent any surprises regarding fees, fostering a more open and honest relationship from the start.
Though buyers will need to adjust to the responsibility of being directly responsible for paying their buyer’s agents, the elimination of preset commission structures on MLS listings means buyers will have the power to negotiate directly with agents over those fees. This could lead to more personalized service agreements and a wider range of fees, as buyers now have the opportunity to negotiate compensation based on the services they value.
To illustrate this change, let’s consider an example. Under the old system, if a buyer was purchasing a home priced at $300,000, the seller might agree to cover a 6% commission, split equally between the buyer’s and seller’s agents, amounting to $18,000 ($9,000 for each agent). Under the new rules, the buyer will negotiate the agent’s fee directly. If they agree to a 3% commission, the buyer would be responsible for a $9,000 fee payable directly to their agent. In addition to the home price, the buyer will now be responsible for covering this commission along with other customary closing costs.
Closing costs alone, excluding agent fees, can total an average of anywhere from 2–5% of a home’s purchase price. If you look at the example of a $300,000 home, a buyer could expect to spend between $6,000–15,000 on closing costs. Adding the buyer’s agent commission increases total additional costs significantly:
Home Purchase Price: $300,000
Average Closing Costs: $6,000–15,000
Buyer’s Agent Commission: $9,000
Total Additional Costs: $15,000–24,000
This change can significantly affect a buyer’s budget, requiring more upfront cash than previously necessary. If a buyer is unable to pay the buyer’s agent commission out of pocket, they might request the seller to cover this cost as part of their offer. However, with the new rules empowering sellers to decline such requests, buyers might have to either sweeten their offer to entice the seller to make this concession, or they may choose to forego using a buyer’s agent altogether.
Buyers will now have to make informed decisions about which agent to hire based on clear cost-benefit analyses. Direct negotiation and detailed contracts could lead to agents offering various compensation models, such as flat fees, hourly rates, tiered pricing or performance-based pay, to suit different needs and preferences.
Moreover, buyers will need to adjust their financial planning to accommodate the potential for additional upfront costs when budgeting for a home. They will need to be well-informed about their local market and come to the table with proactive strategies that help them plan for these new costs upfront.
Home auction purchases are a great alternative to traditional sales and fees
But traditional sales aren’t the only avenue available for homebuyers who are looking for a more transparent way to purchase property with no surprise fees. Home auctions offer an unmatched level of transparency with an often much quicker timeline from purchase to close.
All additional costs on an auction property are disclosed upfront, enabling buyers to fully understand their financial commitment before making a bid. The fee you’ll see most frequently on an auction property is the buyer’s premium. At Xome, the buyer’s premium is either 5% of the winning bid or $2,500, whichever is greater. There are even some auction properties that may feature a reduced buyer’s premium or no buyer’s premium, offering even more savings.
Another benefit of buying properties at auction is that, unlike a traditional sale, an agent is not required. That doesn’t mean that a buyer can’t use their trusted agent when buying a home at auction, but it can simplify the process for buyers who want a more DIY approach. Sellers also benefit from being able to sell properties at auction without an agent through Xome. Not only do they also enjoy the transparency and speed of the auction process, but they also do not have to factor in selling agent commissions to their property price — which saves buyers money.
Auctions give buyers much more visibility and control overall. They decide their maximum bid based on available upfront information about the property and associated costs, free from agent influence or negotiation pressures. With auctions, buyers are able to much more clearly strategize around what they’re willing to pay for a property — with no surprises.
Why auctions can mean big savings for buyers versus traditional sales
Auctions can also be a place for buyers to find great deals, where properties may be significantly discounted compared to the market value of the home. Many auction properties are considered distressed — this could be due to a foreclosure, bank ownership, bankruptcy, or because the property is in need of repairs or renovations. These homes can be a great opportunity to score a property at a lower price, even when factoring in the buyer’s premium and standard closing costs.
Let’s compare two scenarios where a buyer is purchasing a home with a market value of $300,000 — one purchased through a traditional sale with a buyer’s agent and another via a property auction.
In a traditional purchase, a buyer might sign a contract with an agent at a 2% commission, which equates to $6,000 on a home purchased for $300,000. Including the closing costs, which in some places could be as high as another 5% ($15,000), the overall expenditure for this traditional sale would be $321,000, including the home price plus the agent’s commission and closing costs. Even with just a 2% agent commission, that’s still a significant amount of extra fees on top of the purchase price.
Home Purchase Price: $300,000
Average Closing Costs: $15,000
Buyer’s Agent Commission: $6,000
Total Fees: $21,000
Total Purchase Price: $321,000
But at an auction, a buyer could have the opportunity to bid on a comparable property that was previously foreclosed on. In this scenario, the winning bid on the property is $255,000 plus the buyer’s premium of 5%, or $12,750. Together with closing costs of $12,750 (5% of the purchase price), the buyer’s total cost at auction for a home valued at $300,000 would come to $280,500 — a savings of $40,500 over the traditional sale.
If the property featured a reduced or no buyer’s premium, the savings would be even greater. The auction buyer would still be able to work with an agent for their property purchase, and that additional 2-3% for agent commission would still result in significant savings over a traditional sale — even if the property needed some repairs or updates.
Home Purchase Price: $255,000
Total Closing Costs: $12,750
Buyer’s Premium: $12,750
Total Fees: $25,500
Total Purchase Price: $280,500
As the real estate market adapts to these new NAR rules, it’s crucial for buyers to consider all their options. Whether choosing to work with a traditional agent or exploring the auction route, being informed and prepared will help them navigate these changes successfully. The key is to clearly understand all costs upfront, allowing for the best decision in the home-buying journey.
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