The rapid evolution of real estate over the last few years has led to a reevaluation of the relationship between commission rates and the quality of service—especially in the wake of the recent real estate lawsuit and the National Association of Realtors (NAR)’s landmark settlement (also being referred to as the “realtor lawsuit” by many). If you’re unfamiliar with it, the settlement challenges the traditional fixed commission rates (typically between 5-6%) and heralds a new era where commissions become more negotiable. As a buyer or seller, this means you may see a reduced cost in real estate transactions. It also means competition among agents and realtors is likely to increase substantially. The hope is that these changes will lead to higher standards of service across all real estate professionals.
IDEAL AGENT® has been a forerunner in making commission rates more equitable and providing a high level of service. Here, we’ll go over some history on rising real estate commissions and why we’ve always been driven to provide quality service for a fair rate. Let’s get into it.
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The Evolution of Real Estate Commissions
Real estate commission rates became standardized around 1950, when national associations began to form. Rates started at around 5-6% and have remained relatively unchanged for decades—a norm within the industry from the beginning. As property demand has increased, there has been speculation that industry professionals may have artificially inflated property prices to receive increased commissions. This led to a real estate class action lawsuit resulting in the NAR settlement. But as technology has advanced, things have started to shift. The digital era brought greater transparency and accessibility to listings and challenged the standard commission model. Consumers began to expect more value-driven services as economic fluctuations strained finances. This intersection of market evolution and new technology has led to a reevaluation of commission structures, setting the stage for more flexible and competitive pricing in the real estate industry.
Related: Check out our home selling guides.
Factors Contributing to Perceived Inflated Commissions
Here’s some important background. Real estate commissions have often been seen as inflated due to a combination of traditional practices and market norms that limited competition and transparency in commission rates. In reality, commission rates have remained nearly the same since they became standardized. Here’s a breakdown of the factors contributing to the perception of inflated commissions:
- Standardized Commission Rates: The real estate industry had long operated with a conventional commission rate structure, typically around 5% to 6% of the home’s sale price, split between the buyer’s and seller’s agents. This standardization meant little variation in rates, regardless of the service level provided or the property’s selling price.
- Seller Pays Both Commissions: Traditionally, the home seller was responsible for paying the commission fees for both the listing agent and the buyer’s agent. This practice did inflate costs for sellers, as they bore the expense of compensating both parties involved in the transaction.
- Lack of Transparency: The commission structure was often opaque, with buyers and sellers not fully understanding how commissions were divided or justified. This lack of transparency made it challenging for consumers to negotiate rates or comprehend the value of services received.
- Multiple Listing Service (MLS) Rules: Membership rules for MLS, a critical tool for listing and finding properties, often mandated that listing agents offer a standard commission rate to buyer’s agents. This requirement further established the standard commission rates, discouraging negotiation or competition based on price.
- Barrier to Entry and Competition: The traditional commission model also acted as a barrier to entry for new or innovative real estate service models seeking lower commissions or alternative pricing structures. This limited competition in the market, keeping commission rates consistently high.
- Alignment of Interests: Some critics argued that the standard commission model did not always align the interests of real estate agents with those of their clients, particularly in negotiating the best possible price for a property.
The NAR Lawsuit Settlement: A Paradigm Shift
Today’s real estate industry stands at the cusp of a massive transformation, marked by the recent real estate lawsuit, which resulted in a landmark settlement involving the National Association of Realtors (NAR).
A Quick Summary of the NAR Settlement:
The NAR has agreed to pay $418 million over four years to settle a class action lawsuit. The suit claimed that the NAR purposely inflated commissions and drove up the cost of selling homes. As a result of this settlement, its homebuyers will begin to pay their own commissions, and the practice of sellers paying buyers’ commissions as a standard will end. We believe this will lead to top agents maintaining more business, resulting in a more competitive customer service environment and ensuring higher quality agents stay in the mix (while decreasing the likelihood of new agents using real estate sales as a “get rich” scheme).
This settlement is poised to reshape the very foundations of how commissions are structured, moving away from the long-standing norms of fixed rates and towards a more negotiable model. By challenging the traditional commission model, this settlement encourages a move towards more transparent and competitive practices in the industry. This ultimately benefits consumers (sellers and buyers) by lowering the cost of real estate transactions—ideally preventing artificial inflation. This shift underscores a growing recognition of the need for reform in real estate commission structures—a change that IDEAL AGENT® has championed from the start. (More on that later.)
Let’s take a look at what could change due to the real estate commission lawsuit:
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In anticipation of the changes to come, we expect a ripple effect across the real estate sector, prompting many companies to reevaluate and adapt their business models to align with the new standards set forth by the NAR settlement. This adaptation will likely emphasize technology and customer-centric services as firms seek to differentiate themselves in the more competitive market. Real estate companies must navigate these changes carefully, balancing the need for competitive pricing with maintaining high service standards. One example of these such changes? Firms have begun developing online platforms to streamline the selling/buying process—from scheduling viewings to signing and even online negotiation tools. Blockchain and data analytics have also come into play, providing more transparency in property sale histories and more accurate recommendations for sellers and buyers alike.
IDEAL AGENT® stands uniquely positioned in this evolving landscape with a model already embodying the principles of flexibility, transparency, and value. Having anticipated the need for a more equitable approach to real estate commissions, we’ve established a framework that meets and exceeds these emerging industry standards. Our commitment to connecting clients with top-tier agents at more reasonable commission rates places us a step ahead, allowing us to help you navigate these changes confidently. As the industry continues to shift, IDEAL AGENT® will continue to act with your best interests in mind.
The IDEAL AGENT® Model
As the real estate industry witnessed the evolution of commission structures, IDEAL AGENT® came into the picture. We were founded in 2016 on the principle that high-quality real estate services and customer satisfaction shouldn’t come at a high cost to the customer. By embracing technology and optimizing efficiencies, we offer a model where lower commissions don’t compromise the standard of service—instead, they enhance it. Our philosophy challenges the traditional real estate model, and we’ve hoped to help propel the industry forward—something we’re excited to see happen in the wake of the NAR settlement.
What to expect when selling your home with IDEAL AGENT®
Looking Ahead: The Future of Real Estate
The real estate industry is at a pivotal moment, marked by not just changes to commission structures but advanced technology and improved customer service practices. While we’re more than pleased to see these changes—changes we’ve been pushing for since our beginnings—we’re excited to see what further changes are prompted by the NAR settlement, and how service will continue to improve for all those working with IDEAL AGENT® real estate professionals.
FAQs About Real Estate Commissions
What are real estate commissions?
Real estate commissions are fees paid to real estate agents for the services they provide during the buying or selling of a property. These commissions are typically a percentage of the property’s sale price and are one of the primary ways real estate agents earn their income.
How do real estate commissions work?
Real estate commissions are typically a percentage of the sale price of a property paid to compensate the real estate agents involved in the transaction. Historically, these fees have been 5-6% and were paid by the seller in a 50/50 split to the buyer’s agent and the listing agent. These fees cover the agents’ services, including listing and marketing the property, facilitating viewings, negotiating prices, and guiding clients through the closing process.
Moving forward after the National Association of Realtors lawsuit settlement, the structure of these fees will become more negotiable and likely lower.
Do I need a real estate agent?
A real estate agent isn’t required for you to buy or sell a home, but working with a real estate agent can be incredibly beneficial. Agents bring expertise in marketing trends, pricing, negotiation, and legal requirements, helping to navigate the complex real estate landscape and securing the best possible deal.
Why were commissions inflated?
Commissions have actually remained around the same percentage since their standardization around 1950. What many believed, though, is that real estate professionals were artificially inflating property values to increase the amount that 5-6% would bring in.
At IDEAL AGENT®, we’ve always been committed to providing commissions as low as 2% to provide the best possible customer service and ensure you get the value you deserve.
Why was there a real estate commission lawsuit?
The real estate commission lawsuit arose due to allegations against the National Association of Realtors (NAR) and major real estate brokerage firms, accusing them of artificially inflating commissions. The lawsuit argued that the practices being used violated antitrust laws, restricted competition, and resulted in higher costs for consumers selling their homes. It highlighted concerns about the traditional model where sellers pay the commissions of both the buyer’s and seller’s agents, questioning the fairness and transparency of such arrangements. This legal action sought to challenge the status quo, aiming to make commission rates more negotiable and to increase competition and innovation within the real estate industry.
IDEAL AGENT® has always been committed to these values and will continue to provide high-quality service at rates as low as 2%.
