Historic Shift in Real Estate Commission Model as NAR’s Influence Declines

Buying a home, often the largest financial commitment of one’s life, has long been an arduous process characterized by complexity and opacity. The real estate industry, facilitated by an extensive and convoluted network, has traditionally made home buying an emotionally charged and paperwork-heavy experience. This complexity, perpetuated by the National Association of Realtors (NAR), has been a deliberate part of the system, designed to keep the process confusing and buyers feeling less informed.

For decades, the NAR, a powerful trade group with significant influence over the U.S. real estate market, has maintained a commission structure that sees sellers paying the fees for both their agent and the buyer’s agent. However, this system is now undergoing significant change. In a major shift, sellers will now be responsible only for paying their own agent’s fee, while buyers and their agents will negotiate compensation directly. This move marks a partial deregulation of a market previously governed more by industry norms than by government regulations, according to Stephen Brobeck, senior fellow at the Consumer Federation of America.

Despite the long-standing nature of this commission model, which has seen resistance to change, the shift represents a major overhaul in an industry resistant to disruption. Unlike sectors such as travel or stock trading, which have seen significant transformation due to technological advancements, real estate has largely retained its traditional practices. This resistance is largely attributed to the NAR, which represents over 1.5 million members and is known for its powerful lobbying efforts and stringent control over real estate practices, including the use of the term “Realtor.”

Historically, the idea of negotiating commission fees was virtually unheard of in real estate transactions. Sellers, accustomed to paying around 6% of the sale price in commissions, rarely challenged this norm, often due to a lack of awareness or because they feared repercussions. One notable concern was that buyer agents might steer clients away from properties offering lower commissions, potentially causing those properties to sell more slowly or not at all. A study has confirmed that such steering practices do indeed occur, further complicating the negotiation process.

The NAR has been a central player in upholding this commission structure. Despite claims from the NAR that commissions have always been negotiable, a 2021 study highlighted an industry-wide tendency to obscure information about commission rates, contributing to a lack of transparency.

Recent changes to the commission model come in the wake of prolonged legal and political battles involving the NAR. The organization has faced multiple lawsuits from the Department of Justice over its practices, and antitrust investigations into its MLS system are ongoing. These changes also reflect internal turmoil within the NAR. The resignation of its former president, Kenny Parcell, amid allegations of misconduct, and the subsequent leadership upheavals, including the early retirement of the CEO and the resignation of his successor, underscore a period of significant instability for the group.

Despite these seismic changes, experts suggest that the NAR’s influence remains substantial due to its extensive lobbying efforts and control over market practices. The organization has been effective in maintaining a “black box” around real estate transactions, using complex terminology and restrictive practices to keep commission structures opaque.

Stephen Brobeck emphasizes that while the industry faces challenges, the responsibility does not lie with individual Realtors, who, in his view, are operating within a flawed system. The recent changes signal a notable shift towards increased transparency and fairness in real estate transactions, though it will take time for the full impact of these reforms to be felt.

In summary, the real estate industry is on the brink of a significant transformation as the NAR’s long-held commission practices give way to a more transparent and negotiable system. This change, driven by legal pressures and internal controversies within the NAR, represents a crucial step toward making home buying a less opaque and more equitable process.