Buyer Beware: An update on the sweeping changes implemented by the National Association of Realtors and their potential ramifications

Major changes hit the U.S. housing market this past month that may lead to lower housing prices across the nation. These changes stem from a settlement agreement entered into by the National Association of Realtors (“NAR”), which has faced numerous legal challenges claiming its regulations have artificially maintained high commission rates.

As background, NAR is the largest real estate trade association in the U.S., and almost 9 in 10 home sales involve real estate agents affiliated with NAR. Before the changes took effect on August 17, 2024, home sellers’ and their agents were required to determine a commission rate before listing their property on NAR’s property database, Multiple Listing Service (“MLS”), which rate has historically ranged from 5% to 6%. While these commissions have traditionally been paid by home sellers and split between the respective agents, in practice, these commissions are baked into the housing prices, which have been at record highs in recent years.

Accordingly, NAR agreed to two major changes to combat these inflated housing prices. First, sellers’ agents are now prohibited from including a commission rate on MLS listings, which will make it more difficult for buyers’ agents to “steer” clients to homes with the highest commissions. Second, and the most noteworthy change, all agents associated with NAR and their prospective purchasers are required to sign a written agreement before the purchaser tours any homes or the agent provides any services. The written agreement must clearly outline the services to be provided to prospective purchasers and how much those services will cost by setting the amount or rate of the agent’s compensation. The purchaser and seller can still negotiate who will pay the purchaser’s agent’s commission, however, the purchaser’s agent’s commission cannot be more than the compensation amount set forth in the written agreement between the agent and the purchaser.

The intent is that these changes will make commission rates more competitive by allowing prospective purchasers the ability to negotiate commission rates upfront, and, hopefully, prevent such rates from artificially inflating housing prices. However, NAR’s new requirements could lead to unintended consequences; most concerningly, the purchaser may now be on the hook for its agent’s entire commission if the seller does not agree to the traditional “split” model during negotiations.