When buying or selling a house, you will incur costs to close on the sale of the property. It is important that you understand these costs since they can add:
- 3% to 4% to the cost of buying a house;
- 1% to 3% to the cost of selling a house, excluding the commission a seller pays to realtors involved in the sale which typically ranges from 5% to 6% of the sale price.
The actual amount you will owe as a buyer or are owed as a seller will be detailed in your Closing Disclosure form.
For sellers that use the services of realtors, the current scheme of also paying the buyer’s realtor commission at closing will no longer be the norm thanks to a groundbreaking settlement with the National Association of Realtors (NAR).
What is the NAR lawsuit settlement?
The NAR agreed to a settlement in a class-action lawsuit that alleged the organization’s policies led to inflated real estate agent commissions for home sellers. Here are the key points:
- NAR payout: $418 million over four years to compensate home sellers across the U.S.
- Lawsuit claims: NAR’s policies anti-competitively restricted how commissions are set, harming consumers. As a reference, commission rates in the U.S. are significantly higher than in other countries, where they can average around 1% or 2%.
- Settlement impact: While NAR denies wrongdoing, the settlement allows for more flexibility in commission negotiations between brokers and sellers.
- Court approval: The settlement awaits final approval from the court, but is expected to go into effect mid-July 2024.
As a result of this settlement, the longstanding real estate commission model that currently exists — that is, sellers paying for both their own agent and their buyer’s — has been disbanded. Pending court approval, sellers will no longer be required to pay the agent who represents their buyer. That could open the door to much more competition among buyer-side agents, and even more potential for fee negotiation.
Stephen Brobeck, senior fellow at Consumer Federation of America, anticipates that fees will gradually fall to an average of 3% to 4% “in a competitive market.”
How will the NAR settlement rule changes impact your closing costs?
While the ultimate impact on commission rates is still to be determined, there is an expectation that buyers and sellers will bargain harder with realtors. Especially house buyers, now faced with the prospect of paying even higher closing costs.
To illustrate the potential financial impact on buyer’s and seller’s let’s consider a few scenarios.
Assume a homeowner sold their house for $417,700 (the median sales price of houses sold for the US) and agreed on commission rate of 5% with their realtor (with half of the commission paid to buyer’s agent).
Prior to the NAR settlement, the Seller would pay $20,885 at closing (5% of purchase price). Following the NAR settlement, the seller is no longer responsible for paying the buyer’s commission cutting the amount owed at closing by $10,443, assuming the seller agreed to pay a 2.5% fee with their realtor.
Under the same scenario, if the house sold for $750,000, then the seller would keep $18,750 of the sale price.
The Buyer may agree to pay a commission to their agent, which would be added to their closing cost amount. In this scenario, their closing cost would increase by $10,443 assuming they paid a commission rate of 2.5%.
When the Buyer negotiates a lower rate, say 1.5% of purchase price, they would lower their closing costs by $4,177 as shown below.
Takeaways
Once approved, the NAR settlement will “decouple” the commission model for buying and selling a house assuming you use a realtor. Sellers, no longer required to pay buyer’s commission at closing*, stand to save a significant amount of money.
If you are in the market to buy or sell, find out what the proposed commission will be before you hire a realtor. Will the realtor accept a flat-fee for their services? Remember, all fees are negotiable and there is a good chance you will get a fee reduction.
Also familiarize yourself with all closing costs so you can budget accordingly and to ensure they are in line with rates and ranges provided by the linked sources in this post. There are calculators available from multiple websites to help project your closing costs, and your realtor should provide an estimate of what you are expected to pay or receive at closing.
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*Sellers may still offer fee/price concessions to buyers or compensation to buyer’s agent in order to incentivize bids and sales, but how it is done will change.