What is the NAR Settlement? And What Does it Mean For Both Buyers and Sellers?

If you’re in the process of buying a home or even just thinking about it, you’ve probably heard some buzz about the recent changes to real estate commissions. These changes stem from a settlement involving the National Association of REALTORS® (NAR), and they’re set to shake things up for both home buyers and sellers alike.

As a Loan Officer, my goal is to make sure you’re well-informed and comfortable with every aspect of your home purchase. So, in this blog, I’m going to break down what the NAR settlement means for you, how it came about, and most importantly, how it could impact the way you buy a home. Let’s get into it!

What is the NAR Settlement?

The NAR settlement is a legal agreement between the National Association of REALTORS® (NAR) and home sellers to resolve claims regarding how real estate commissions were structured. Specifically, the 2024 settlement addresses concerns about the lack of transparency around sellers being required to pay both their agent's and the buyer's agent's commissions.

Let me walk you through the basics of this big change in the real estate world. The NAR recently reached a settlement to resolve claims made by home sellers about the way commissions were handled during transactions.

Why Was This Settlement Necessary?

Here’s the issue that sparked the whole thing: for a long time, home sellers were required to pay not just their agent’s commission, but also the commission for the buyer’s agent. And this wasn’t always clear to sellers—many didn’t realize they were covering both sides of the transaction. This commission structure was bundled into the overall home price, which led to sellers feeling like they were unfairly footing the bill for both agents.

As you can imagine, this led to a series of lawsuits from home sellers claiming that the system wasn’t transparent enough and didn’t give them room to negotiate those fees.

The Key Issue: Lack of Transparency

The core problem was that sellers didn’t always know exactly what they were paying for, especially when it came to the buyer’s agent commission. In many cases, sellers were required to pay the buyer’s agent without much room to negotiate, and this was often baked into the overall transaction costs, making it harder for sellers to see where their money was going.

The settlement addresses these concerns by pushing for greater transparency and allowing sellers more freedom to negotiate commissions moving forward. What does that mean for you as a buyer? It could lead to lower home prices and a clearer understanding of the costs involved in purchasing a home. But I’ll get into that more as we go along!

The Real Estate Commission Structure—Then vs. Now

The Old Way

Let’s start with how the system used to work. Traditionally, when you sold a home, you were expected to pay commissions for both your agent (the seller’s agent) and the buyer’s agent. This typically amounted to a percentage of the sale price, often around 5-6%, which would then be split between the two agents. The important thing to note here is that this commission was bundled into the total sale price of the home, which means both the seller and buyer were impacted by the higher price, though the seller was responsible for covering both agent fees.

The Shift with MLS Rules

In the 1990s, the Multiple Listing Service (MLS) introduced what’s called the cooperative compensation model. The idea behind it was to provide better representation for buyers, ensuring they had an agent working specifically in their interest during the transaction. While that was great for buyers, it created some unintended issues for sellers. With this system, the seller was still required to cover both agents’ commissions, but now, they had less clarity and flexibility in how that payment was handled. Many sellers didn’t even realize they were paying for the buyer’s agent, and because the commission was baked into the sale price, it was difficult to negotiate or adjust these costs. This lack of transparency is what led to complaints and ultimately the lawsuit.

Post-Settlement Changes

So, what’s different now? The settlement brings several key changes aimed at fixing the transparency problem. Sellers will now have a clearer view of what they’re paying in commissions and will have more flexibility in negotiating those fees. Specifically, they’ll have the option to more easily negotiate the buyer’s agent’s commission, which was previously harder to adjust. The goal is to make sure both sides—the buyer and the seller—are fully aware of the costs involved and can negotiate more openly.

For buyers, this means that in the future, you might see more straightforward home prices and possibly lower overall costs as sellers gain more control over how commissions are paid.

How Does the Settlement Affect Home Buyers?

At first glance, you might think that this only affects sellers. And it’s true that the settlement and new rules are intended mostly for their benefit. But there are potential perks and changes on the horizon for buyers, too.

Increased Clarity

One of the most immediate benefits of the NAR realtor settlement for home buyers is the increased transparency around commission payments. In the past, the commission paid to your agent was often hidden in the overall transaction costs and bundled into the seller’s fees. Now, with the changes introduced by the settlement, you’ll have a clearer view of how commissions are structured and what your agent is being paid. This transparency ensures that everyone involved in the transaction knows exactly where the money is going, which can give you more confidence as a buyer in understanding your true costs.

Potential for Lower Home Prices

Another potential upside is that home prices might decrease as sellers gain more control over commission negotiations. With more flexibility in negotiating the buyer’s agent commission, sellers may be able to reduce some of their costs, which could reflect in the listing price. For buyers, this means you might be looking at lower home prices, which translates to a smaller mortgage and less interest paid over the life of your loan. It’s not a guarantee that prices will drop, but this new flexibility in commission negotiations could lead to a more balanced transaction, which ultimately benefits you as a buyer.

Empowered Buyers

Perhaps the most significant change is that buyers are now in a better position to understand and plan for the full costs associated with purchasing a home. With more clarity around agent commissions and potential reductions in home prices, you’ll have a clearer picture of your financial responsibilities. This empowers you to make better-informed decisions when applying for a mortgage, ensuring that your loan is aligned with the actual costs of the home, not inflated by hidden commission fees.

What does the NAR settlement mean for realtors?

For realtors, the NAR settlement introduces several important changes. While the settlement does not admit any wrongdoing, it requires significant adjustments to how commissions are disclosed and negotiated moving forward. One of the main impacts is that realtors must now ensure greater transparency with their clients, especially when it comes to how the buyer’s agent is compensated.

This settlement also means that realtors will need to adapt to a market where commission negotiations are more flexible. This could lead to more competitive commission rates and require agents to more clearly justify their value to both buyers and sellers.

The settlement could also create some initial uncertainty in the market as buyers, sellers, and agents adjust to the new rules. But it also presents an opportunity for realtors to enhance their client relationships by providing more transparent and customized services.​

When does the NAR settlement take effect?

The NAR settlement received preliminary approval from a judge in April 2024, which means the settlement is moving forward but isn’t fully finalized yet. This preliminary approval sets the stage for notifying affected parties and preparing for final approval, which is typically the next step in the process. Final approval of the settlement is currently set for November 26, 2024.

Once the judge grants final approval, the settlement's terms, including changes to commission structures and transparency, will begin to take effect.

The exact timeline for when the settlement will be fully implemented depends on court proceedings, but buyers and sellers could start seeing these changes roll out shortly after final approval is granted.

Who gets the money from the NAR settlement?

The money from the NAR settlement, a total of approximately $418 million, will primarily go to the home sellers who filed the lawsuits. These plaintiffs argued that the real estate commission structure unfairly inflated their transaction costs by requiring them to pay both their agent’s and the buyer’s agent’s commissions without full transparency. The funds will be distributed as compensation to these sellers, although the specific amounts and how they are distributed will depend on the final terms of the settlement​.

What Buyers Should Know About Negotiations

Where buyers are likely to feel the impact of the new NAR settlement the most is during the negotiation process. Here are some things I recommend keeping in mind.

Negotiating Commissions

Even though the seller traditionally pays both their agent and the buyer's agent commissions, this doesn’t mean it’s set in stone. With the changes from the NAR settlement, these commissions are becoming more negotiable, particularly the buyer’s agent fee. This is good news for buyers because sellers may now be able to negotiate down that portion of the commission. However, it also means that how the commission is structured could vary more from deal to deal. As a buyer, it’s important to be aware that the amount being offered to your agent might fluctuate, depending on the seller’s flexibility in these negotiations.

How This Impacts Your Offer

With commissions now more flexible, sellers may adjust their pricing strategies to account for these changes. For example, you might see sellers offering a lower commission to the buyer's agent and compensating with a lower listing price, or vice versa. This could affect how competitive your offer looks compared to others. That’s where having a knowledgeable Loan officer comes in handy. I can help you understand these shifts and work with you to structure a mortgage that matches your offer, ensuring you’re staying competitive while still making a smart financial decision.

Negotiations can sometimes get tricky, but with a clear understanding of the new landscape, you’ll be better equipped to navigate the home-buying process!

What Home Buyers Can Do Next

So, what are some practical next steps or actions buyers should take as a result of the new commission rules? Here are a few of my top tips:

1. Work with an Informed Loan Officer

   The changes in the real estate market can feel overwhelming, but you don’t have to navigate them alone. It’s more important than ever to work closely with a loan officer who understands how these commission adjustments might affect your budget and overall financial obligations. I’m here to help you break down all the numbers, so you have a clear picture of what you're responsible for and how it impacts your mortgage.
   
   

2. Choose a Trustworthy Real Estate Agent
   

   The NAR settlement brings more transparency to the home-buying process, especially around commission structures. But you’ll still need a real estate agent to guide you through this complicated transaction. The settlement makes sure that buyers and sellers have a better understanding of how commissions are handled, but the role of a realtor is still crucial for negotiating the best deal, managing paperwork, and navigating the legal processes. A trusted realtor provides expert insight and ensures your interests are represented throughout the process.

   Reach out and I can connect you with top agents who are as dedicated to your success as I am!

3. Plan for True Costs

   While you’re not directly paying the buyer's agent’s commission, it’s still factored into the overall price of the home, which means it indirectly affects your loan amount. It’s essential to budget for the “true” cost of buying a home—commissions, closing costs, and everything in between. By planning carefully, you can make sure your mortgage matches your financial needs and goals without any surprises down the road.
   

4. Stay Flexible in Negotiations
   

   As the real estate world adjusts to these new rules, flexibility is key. Sellers are likely to try out different strategies, and negotiations might feel a little different than they used to. Stay open to these changes and remember that your lending officer can help you navigate them. Being flexible could give you an edge in securing the right home at the right price.

   Whether you’re ready to buy now or just starting to explore the market, I’m here to help you through every step. Let’s make sure your next home purchase is as smooth and informed as possible!

Making Your Home Purchase Easier and More Affordable

The NAR settlement is ushering in a more transparent and potentially less costly way to buy a home. With clearer commission structures and the opportunity for sellers to negotiate fees, home buyers are in a better position to understand their financial obligations. This can translate into lower home prices and a smoother buying process.

My goal is to help you take full advantage of these changes. Whether it’s navigating the new commission landscape or structuring a mortgage that fits your needs, I’m here to guide you through every step.

If you’re ready to explore your options or just have questions about how this impacts your home-buying journey, reach out to me today for expert advice. Let’s make your next home purchase as straightforward and cost-effective as possible!

Sources:
https://www.nar.realtor/the-facts
https://www.nar.realtor/the-facts/what-the-nar-settlement-means-for-home-buyers-and-sellers
https://realestate.usnews.com/real-estate/articles/what-the-2-billion-realtor-lawsuit-means-for-homebuyers-and-sellers
https://www.housingwire.com/articles/court-grants-preliminary-approval-to-homeservices-commission-lawsuit-settlement/
https://www.cnn.com/2024/04/24/homes/nar-settlement-broker-commissions-approval/index.html