A homebuyer's guide to the real-estate revolution

Austin Whitt has seen a lot in his six years as a real-estate agent. He weathered the pandemic in Tennessee, slinging homes in the Nashville area and training new Realtors as they piled into the industry. But twice in the past month, Whitt has encountered a rare sight: a buyer without an agent. In his years of listing homes for sale, Whitt had come across this kind of rugged individualist only once before. Sure, the recent run-ins may have been a coincidence, a blip. But given the seismic changes underway in real estate, Whitt can't be certain.

Thanks to a series of multibillion-dollar class-action lawsuits, the real-estate industry is in the throes of its biggest upheaval in half a century. The National Association of Realtors, the powerful industry group that sets the ground rules for buying and selling homes in America, recently negotiated a $418 million settlement with aggrieved home sellers who sued the organization over the commissions they'd paid to real-estate agents. The deal could open the door for more consumers to bargain down those fees or nudge some people looking for a new home to forgo an agent. Given their revolutionary nature, the proposed rule changes — which still need approval from a federal judge — have also prompted a flood of questions about the future of homebuying.

"It's a very fluid situation," Whitt told me.

Buying a home has never come with a handy road map. But one thing is clear: It's about to get a lot murkier. With that in mind, I've been asking experts how buyers can prepare for whatever world comes next. Their answers illuminated the potential pitfalls, of which there are many. They also highlighted new ways to come out ahead — and maybe save thousands of dollars along the way.

So, you're ready to turn your late-night Zillow scrolling into a proper home search. Before you begin the journey in earnest, you should ask yourself: Do I want to hire an agent? There's a good chance the answer is yes — buying a home is a complicated, emotional transaction that usually benefits from an experienced set of eyes. Last year, 89% of buyers enlisted the help of a licensed agent, according to the NAR. Even Steve Brobeck, a senior fellow at the Consumer Federation of America and an outspoken critic of the real-estate industry, told me he wouldn't buy a home without one.

But the conventional wisdom — that it doesn't cost a buyer anything to hire an agent and that you need one to secure your dream home — is crumbling. Sites such as Zillow and Redfin have democratized the home search, while the recent lawsuits have exposed the billions of dollars that US consumers pay their agents every year. Some critics argue that buyers could be better served (and save a lot of cash) by instead hiring a lawyer for a few hours to look over contracts and make sure everything is in order.

Most buyers probably don't have that kind of confidence, especially first-timers. If you fall into that camp, the next step is to figure out exactly which kinds of services you'll need. Maybe you feel certain that you can find and tour homes on your own but want someone to manage the transaction and make sure you don't skip over any crucial to-dos. Or maybe you want a more involved agent who can send you listings, guide you through homes, help you line up inspections and a mortgage, and haggle with the seller over every last detail — someone whose "whole job is to be nosy," as Sabrina Brown, a broker in North Carolina, told me. Those are two very different job descriptions, but they've traditionally commanded pretty much the same fee.

Discerning buyers could upend that status quo. Once you figure out what you want out of an agent, you'll have to figure out how much you're willing to pay for them. Prepare to have a frank conversation with prospective agents. For decades, homebuyers have coasted on the blissful assumption that using an agent is free. This illusion was maintained by the roundabout way in which money trades hands: The typical buyer never pays their agent directly; instead, the seller pays their own agent, who then uses part of that commission check to pay out the buyer's agent. Ultimately, the commission comes out of the money the buyer sent to the seller, but the transaction is hidden.

Sellers agreed to this method because they didn't want to risk having their homes passed over by buyers' agents who might "steer" their clients away from properties that didn't offer compensation to the other side or offered sums lower than standard commission rates, usually 5% to 6% of the total home price. And because buyers weren't paying their agents directly, they usually didn't see much reason to bargain down the fee. In fact, they might not even know their agent's rate until they're at the closing table, if they ever found out at all. This model has proved lucrative for agents. Buyers and sellers typically pay more than $100 billion a year to the real-estate industry, a massive wealth transfer that Brobeck estimated could be cut down by about $30 billion annually if commissions were in line with America's peers like the United Kingdom or Australia.

The recent lawsuits, which accused the NAR and some of the country's largest brokerages of conspiring to keep agents' commissions unfairly high, could signal the start of a new era. As part of its deal to settle the cases, the NAR agreed to prohibit sellers' agents from making offers of commission to buyers' agents on the multiple-listings services, the local databases where agents can browse homes and see how much they stand to collect on a deal. The organization also agreed to require its members to negotiate commissions with their buyer clients in writing before so much as showing them a home.

But even with these changes, the settlement, which is set to go into effect in July if approved, doesn't contain a single rule that would kill off the 6% commission on its own. A deal like this simply can't solve all the industry's problems in one fell swoop, Prentiss Cox, a law professor at the University of Minnesota, said recently in a public forum he convened to discuss the coming changes. In many instances, agents might proceed with business as usual, and consumers could still end up paying today's standard commission rates. In other words, it'll be up to savvy buyers to find ways to make this deal work in their favor.

The NAR has always argued that commissions are negotiable. That may be true in theory, but buyers rarely take advantage of that right. It's worth a shot, though — even if the seller is the one who pays out both agents after the deal closes, the money you bring to the table is ultimately footing the bill. If you negotiate a lower fee, you could get some money back from your agent in the form of a rebate after the sale closes. Alternatively, you might be able to bargain down the home price by tens of thousands of dollars if the seller knows they'll have to set aside less money for agent commissions.

Maybe you're the kind of buyer who wants someone to hold your hand through every step of the process, in which case the traditional 2.5% to 3% for your agent might be a good deal. But if you've found a home and just need help making sure the deal doesn't go off the rails, you stand a greater chance of scoring a lower fee from your agent. There are also various discount brokerages that charge lower commission rates, even flat fees, in exchange for a more bare-bones approach.

Bear in mind that an agent isn't obligated to lower their commission in the same way that a lawyer doesn't have to cut down their hourly fee — even if you ask nicely. But they may be inclined to do so if they really want your business. And if not, well, there are many other agents out there who would probably love the chance to help you with your home purchase. Interview agents as if you were a boss hiring them for a job, which is exactly what you're doing. Don't shy away from the tough questions. Jack Ryan, a cofounder and the CEO of the discount brokerage Rex Real Estate, suggested one query: Ask your agent why they're worth 3% of the home's sale price — after all, that's equal to $15,000 on a $500,000 home. Some will have a great answer, others, not so much.

"The Realtors keep saying, 'Oh, we deserve our 3% fee,'" Ryan, whose company shuttered in the midst of a legal battle with the NAR and Zillow, told me. "Well, maybe you do. Convince the buyer that you do. And if you can add 3% of value, great. But why are you claiming you know what you're worth relative to what the market says you're worth?"

This brave new world of homebuying won't guarantee easy wins for consumers. The path to homeownership is still lined with plenty of hazards.

For instance, while listing agents — those who represent the seller — are set to be prohibited from offering commissions to buyers' agents via the MLS databases, they can still disclose commissions pretty much anywhere else: on their websites, on a phone call, or even in person at an open house. A seller just wants to get the best price for their home as quickly as possible, Rob Hahn, a longtime industry consultant, said during the University of Minnesota forum. To make sure their house is seen, the standard commission might be a necessary pill to swallow. On the other hand, sellers in hot markets might feel like they could save a lot of money by offering less to a buyer's agent — maybe 1% instead of the typical 2% or 3% — or even nothing at all. If people are falling over themselves to get into your home, why dangle money in front of buyers' agents just to get them through the door?

This is why buyers can no longer afford to remain in the dark about how their agents get paid and how much. If sellers aren't paying out commissions to buyers' agents, buyers themselves could end up on the hook. To avoid this kind of surprise and lay out the terms of their representation, buyers' agents will have to get their clients to sign what's known as a buyer-agency contract. Some states already require these contracts, but a lot of agents in other places never use them: Only 41% of buyers last year said they signed a buyer-agency agreement, according to the NAR. This might be a more prudent move than buyers even realize — most of the agreements floating around today were created by state Realtor associations and are therefore designed to protect the interests of the agent, Wendy Gilch, a consumer advocate, told me.

"Even if someone presents you with some printed form, that doesn't mean it's set in stone," Gilch, who focuses on transparency in real estate through her company, Selling Later, told me. "You can decline it and be like, 'No, I'm not going to sign that. Change this; change this."

Buyer-agency contracts don't have to be tilted in favor of Realtors. In fact, if used fairly, they can provide transparency and clarity for both buyers and their agents. Under the terms of the recent NAR settlement, these contracts would have to include a few things. First, a buyer and their agent would need to agree to the maximum amount of compensation that the buyer's agent can receive — this could be something like a certain percentage of the sale price, an hourly rate, or a flat fee if the agent is willing to accept that. If the buyer and their agent agree to, say, 2% of the sale price, the agent can't accept any more than that. The buyer's agent would also have to update the client, in writing, on how much commission they stand to receive from the house their client is pursuing. On the whole, these look like positive steps for consumers.

As always, though, the devil is in the details. For example, what happens if the seller isn't willing to pay the buyer's agent's commission? In many cases, the template forms provided by the state Realtor associations say the buyer is responsible for covering the difference between what the buyer's agent expects to receive and what the seller is offering to pay. This could leave buyers on the hook to pay thousands of dollars out of their own pockets. A report from the Consumer Federation of America pointed out other risks: Buyers might not have a good way to get out of the contract if they're unsatisfied with their agent, or they might unwittingly agree to pay "junk fees," such as an administrative fee, which can cost anywhere between several hundred dollars and nearly $1,000.

One more scenario to consider: What happens if a seller is offering 3% of the price to a buyer's agent, but you and your agent agreed to a max of 2%? In most states, the buyer's agent can technically just rebate that extra money to their client. These kinds of rebates may be rare these days, but they could become more common after this settlement. On the other hand, in a mind-boggling twist, nine states prohibit rebates entirely. That needs to change.

The most important thing for buyers entering this new market, experts told me, is to read the buyer-agency contract carefully or consider hiring a lawyer if you have concerns. Realtors may rely on templates handed down from their state associations, but the terms aren't ironclad.

If all this sounds intimidating, rest assured: Even the people who live and breathe this stuff are struggling to make sense of it. David Dworkin, the president and CEO of the National Housing Conference, called the settlement "the most opaque and complicated agreement I have ever encountered." Dworkin told me he feared the deal would favor higher-income buyers and sellers who might be able to claim larger discounts from agents who stand to make a bunch of money off them regardless. But the bigger issue is that nobody has any idea how buyers and sellers would react to these proposed changes.

Depending on how you look at it, that's either aggravating or exciting. Regardless, the lawsuits have undoubtedly exposed market corruption, said Cox, the University of Minnesota law professor. All this focus on commissions could hasten a new era of experimentation in real estate, in which buyers' agents offer varying levels of service or commission rates in a bid to win clients. The revolution is only beginning; recently, the Justice Department got clearance to reopen its investigation into the NAR's practices, meaning more changes could be on the horizon. In this sense, the mere fact that more people are talking about commissions is a win.

The advice I got from experts can be boiled down to a simple mantra: Get in on that conversation. Talk to your agent early on in the process about the services you want, and make sure you're on the same page about their commissions.

"It's not the solution. It's the first step in attacking this problem," Cox said of the recent settlement. "And it's been spectacularly successful in being the first step."

James Rodriguez is a senior reporter on Business Insider's Discourse team.