How real estate agents get paid changes Saturday

After a blockbuster settlement five months ago, the promised changes to the real estate industry are officially underway starting Saturday.

The class-action lawsuit against the National Association of Realtors (NAR) alleged buyers and sellers had been paying their Realtors too much. In March, NAR settled the case — without admitting guilt — and agreed to pay $418 million to settle claims that long-standing business practices enabled agents and their brokers to collect egregiously high commissions. Those new rules changed the buying and selling process, including:

Josh McFall, CEO of Minnesota Realtors, said about 90% of real estate deals in the state use the Minnesota Realtor forms, including purchase agreements and representation contracts. Only buyers and sellers working with a Realtor can use those forms, but buyers and sellers don’t have to use them.

McFall said the latest versions, which reflect the new changes, have been available since Aug. 1.

Opinions vary widely about whether the settlement will lower commissions and home prices or just create more confusion for buyers and sellers. Here’s what to know about listing a house and buying one in this new era:

For decades, the seller has paid real estate sales commissions, split between the listing agent and the buyer’s agent. (Some buyers work only with the seller’s agent, creating a situation known as “dual agency.” In those situations, a listing agent is technically working on behalf of the seller.)

Technically, brokers receive the commission and take a cut, but the rest goes to the agents.

Because the settlement was in part aimed at preventing buyers’ agents from steering clients to MLS listings that offer the highest possible commissions, the agent who lists your house for sale can no longer include “offers of cooperating compensation” anywhere on the MLS listing. That discontinues a long-standing practice that enabled buyers’ agents to know in advance of the showing what share of the total sales commission they’d earn if the deal closes.

“That’s a change most sellers won’t notice,” McFall said.

This “offer of compensation” field is no longer on MLS, a move McFall said will cause listing agents to find other ways to advertise how much they’re willing to pay a buyer’s agent for specific listings. McFall said agents will likely notify others of promised compensation in other ways, including social media sites and print or digital advertisements like fliers and signs. Agent- and broker-hosted websites can still post compensation, he said.

Prior to the NAR settlement, buyers could ask an agent to show them a house without any written commitment. That’s no longer the case.

Buyers will now have to sign a representation or “facilitator” agreement before an agent can show them a house, whether it’s an in-person showing or a virtual tour. That agreement doesn’t apply to open houses.

Terms of these representation agreements, which buyers and their agents have long used, cover key aspects of the house-shopping process. That includes how long the buyer will work with the agent and how the broker/agent will earn compensation, whether it’s a share of the purchase price, a flat fee or something else.

One of the goals of the settlement, McFall said, was to make it more clear commissions are negotiable. So the representation agreement no longer discusses commission-sharing. A new and optional cooperating compensation agreement now covers that aspect of the transaction

“If you’re a buyer, you’re likely not seeing that form,” McFall said.

Realtors aren’t the only ones paying close attention to those new forms.

Prentiss Cox, a law professor at the University of Minnesota, said it remains to be seen whether it’ll now cost less to buy and sell a home. The current commission structure, he said, has been difficult to upend in part because of what he calls persistent “collusive practices” that force buyers and sellers in the U.S. to pay 5% to 6% to sell a home, not including other fees, while the rest of the world pays roughly half that.

As of mid-July, the typical U.S. seller paid a buyer’s agent alone a 2.55% commission, according to a new Redfin analysis of MLS data. That’s down from an average of 2.62% in January. The study didn’t track commissions paid to the listing agent.

The average commission paid to a buyer’s agent in the U.S. is $15,377, up slightly from $15,124 in January. The dollar amount has increased marginally, even though the percentage has declined because of the rise in home prices.

Redfin said while it’s possible news of the NAR settlement has contributed to the recent decline by making consumers more aware they can offer any commission to a buyer’s agent or none at all, commissions were already on a gradual decline prior to the settlement. Through the past decade, the average buyer’s agent commission fell from 2.89% in 2013 to 2.66% in 2023.

Consumer Advocates in American Real Estate (CAARE) — an Excelsior-based nonprofit that offers advice, alternative contracts and tips on how to buy and sell with a real estate attorney instead of an agent — is monitoring the settlement’s implementation. Doug Miller, a Twin Cities-based attorney and executive director of the group, stresses buyers and sellers are under no obligation to hire a Realtor or use those forms, he said.

He highly discouraged sellers from offering money directly to buyer brokers, a practice he says can lead to higher, preset fees without the opportunity for negotiation. He also said sellers should not work with agents who suggest buyer agents won’t show your home unless you offer compensation.

“By now, all Realtors know that it is very easy for a buyer agent to work with a buyer when the seller isn’t offering compensation,” said Miller, a long-time foe of the current commission structure. “It’s simple, it’s straightforward, and it exposes the buyer-brokerage fee to free-market forces.”

CAARE said sellers shouldn’t offer money to buyers upfront but instead request a seller credit as part of their offer, giving them more control of negotiations, which can lead to smaller credits and lower overall costs on both sides.

“When sellers offer compensation to buyer brokers, it leads to artificially inflated buyer brokerage fees,” Miller said.

The group encourages buyers working with their own agent to negotiate a flat amount that reflects the work they expect the agent to do, rather than a commission based on the purchase price.

If you don’t want to pay that fee out of pocket, Miller said, request a seller credit when making an offer that covers the fee you’ve committed to paying the agent who represented you in that transaction.

Finally, the group advised avoiding buyers’ agents who want to exclude homes that don’t offer compensation to them, especially those that include a clause in their agreements that asks to skip homes that don’t offer upfront compensation.