Suppose you sold a $400,000 home under the long-established norms of the real estate industry. You probably paid $20,000 to $24,000 in agent commissions, which your listing agent split with the buyer’s agent.

Were their services worth the price? For years, that question was scarcely asked. Commissions were an assumed part of the transaction, unofficially non-negotiable.

Not anymore. A recent settlement the National Association of Realtors (NAR) agreed to is disrupting the traditional commission model and will likely force agents to compete on pricing and give homebuyers and sellers more negotiating power.

What does the NAR settlement mean for you if you’re buying or selling a home? We'll explain.

Read more: How to buy a house

What is the NAR settlement?

In 2019, a group of Missouri home sellers filed a class-action lawsuit against the National Association of Realtors, claiming antitrust violations and alleging that the association's practices inflated commissions. A jury last October sided with the plaintiffs, awarding a nearly $1.8 billion verdict against the powerful trade group that represents about 1.5 million real estate professionals.

To settle that lawsuit, along with several similar suits, NAR denied any wrongdoing but agreed to pay $418 million to people who have sold homes in recent years. The group also agreed to two rule changes:

• When agents list homes on the Multiple Listing Services (MLS) databases, they’ll no longer be allowed to include the buyer agent’s compensation.

• Buyers will be able to negotiate their own agents' pay and formalize it in a signed contract.

Also read: How to sell your house without a Realtor

Does the agreement kill the 6% commission?

No. Historically, the total commission on home sales was 5% to 6% of the sales price — split between the listing agent and the buyer's agent — and the agreement doesn’t directly change how much real estate agents will earn in commission. And NAR is adamant that it “does not set commissions, and commissions were negotiable long before this settlement,” according to a website post.

But to list a home on the MLS, agents historically have had to include buyer commissions. Though it’s always been possible to advertise a commission of less than 2.5% to 3% on the MLS, listing agents have often warned sellers against doing so because buyer agents may “steer” their clients away from properties that advertise lower compensation. Or they may filter listings on the MLS to display only those with at least a 2.5% commission. Fear of steering is a “strong deterrent” to sellers who might otherwise reduce commission offers, according to the U.S. Department of Justice, which has an ongoing antitrust investigation into NAR’s practices.

Meanwhile, potential buyers have had no incentive to negotiate the commission downward because sellers pay that cost. Many economists argue that buyers do pay for commissions because they’re baked into the home’s selling price. But since the money isn’t directly coming out of their pockets, buyers have long been blissfully unaware of commissions, with some believing agent services are free.

Under the new rules, commissions for buyer agents can’t be listed on the MLS. Meanwhile, buyers would need their own agreement that specifies compensation before they work with an agent. (Sellers could still cover the cost of the buyer agent’s commission, but we’ll get to that shortly.)

Overall, the new rules are expected to make commissions more transparent and competitive in the real estate industry.

“I do believe the commissions will drop,” said Sophia Gilbukh, assistant professor of real estate at Baruch College’s Zicklin School of Business in New York City. “Even if the compensation structure remains cooperative, the commissions will become more salient to buyers and sellers, and they will be more inclined to negotiate with their agent.”

Read more: 12 questions to ask when buying a home

Does the NAR settlement ban agents from advertising commissions?

No. Agents will still be allowed to discuss and advertise commissions. They simply won’t be able to do so via the MLS, which is largely unseen by buyers and sellers.

“Compensation to the buyer’s broker could be posted on the websites of brokerage firms and individual agents, individual property websites, social media, and other advertising resources engaged by the brokerage firms and their agents,” said Debra Dobbs, real estate broker with The Dobbs Group of Compass in Chicago.

Sellers could still use the MLS to advertise concessions for buyers, including help with closing costs. But the offer can’t be contingent on a buyer working with or paying an agent.

Dig deeper: What are seller concessions, and how do they work?

How could the settlement change real estate commissions?

More competition is likely to drive commissions downward with the unofficial 5% to 6% no longer baked in to the process.

But the rule changes could also prompt agents to offer non-traditional pricing for their services. More agents could offer flat fees, hourly charges, and a la carte pricing instead of taking a commission that's a percentage of the home’s selling price.

“As listing agents, we may need to get more creative in how we market our services and distinguish our value propositions to sellers,” said Jim Gray, a Keller Williams agent in Rochester, N.Y. “This could mean pulling apart traditionally bundled offerings like home prep, photography, marketing, showings, negotiations, and closings into separate packages and pricing models. We'll need keen negotiation skills to explain why our comprehensive expertise justifies hiring us rather than just paying a bare minimum to list on the MLS.”

Buyer’s agents could also charge for individual services like home tours, negotiation, and help with paperwork instead of charging a flat percentage. Any such changes could ultimately save money for buyers and sellers.

A recent working paper by economists at the Federal Reserve Bank of Richmond found that a cost-based commission model could save Americans about $30 billion on real estate commissions each year, a savings of about 30%.

Read more: What do real estate agents do, and do you need one?

Will buyers have to pay their agent’s commission?

Buyers will need to negotiate commissions with their agent when they sign a contract. That doesn’t necessarily mean that buyers will have to pay the agent's fee, though. When the buyer makes an offer to a seller, the question of who pays the buyer’s agent could become yet another point of negotiation.

A homebuyer in a hot market may find it tough to persuade a seller to pay their agent’s cost. But sellers may agree to foot the bill if they’d otherwise be forced to accept a lower price.

“It is difficult to know how this will shake out, but it is conceivable that the buyer agent commission will become a concession offered by the seller to attract more buyers,” Gilbukh said.

One wrinkle, though, is that commissions generally can’t be financed into a mortgage under Frannie Mae, Freddie Mac, and Federal Housing Administration (FHA) guidelines. Under the current rules, a buyer seeking to finance closing costs would likely need to get a personal loan, which carries a higher interest rate than a mortgage. That would increase their debt-to-income ratio, which could in turn make it harder to get approved for a mortgage.

Stephen Brobeck, senior fellow at the Consumer Federation of America, an advocacy group that has called for commission decoupling, believes government lending rules should change to allow buyers to include commissions in their mortgages.

“Before commissions can be included in mortgages, buyer agent compensation is likely to be in flux,” Brobeck said. “We believe that most sellers will continue to be willing to provide funding to buyers to pay their agents. In some cases, this will take the form of sellers agreeing to raise their list price, thus allowing the commission to be included in the mortgages.”

Learn more: Real estate agent fees — What percentage do Realtors get?

What would that mean for first-time home buyers?

Paying an agent’s commission could be especially tough for first-time home buyers, who often struggle to save cash for a down payment as it is.

“If banks and lending institutions do not find a way to include their agent’s compensation in the purchase price, first-time homebuyers will face a significant financial burden that could prevent them from buying a home or [result in them] forgoing representation,” Dobbs said.

First-time homebuyers often lack access to cash and liquid assets, plus they usually don’t have an established relationship with a real estate agent.

“I think this makes them more likely to explore agent services alternatives to the traditional model that is likely to emerge,” Gilbukh said. “For example, an a la carte service where buyers can pay per viewing of each property they desire to visit. Or a fixed fee service to help buyers draft and offer and/or finalize the deal.”

But some observers worry that price-conscious first-time buyers could be tempted to skimp on important services.

“There's a legitimate risk of buyers under-investing in professional representation across all phases to save a few bucks,” Gray said. “This leaves them more vulnerable to potentially costly missteps during complex processes like negotiating inspection items, securing optimal financing terms, or handling contracts.”

Will the NAR settlement agreement bring down home prices?

Perhaps the most burning question surrounding the NAR tentative settlement is: Will lower commissions lead to lower home prices?

Housing experts generally believe that any resulting drop in home prices would be modest.

“Decreased transaction costs will help bring prices down slightly,” Gilbukh said. “I also think that it allows people to move more often because it will effectively lower the relocation cost.”

It’s possible that more competition would have a greater impact on the price of more expensive homes, according to an Urban Institute report. That’s because many costs of marketing a home are relatively fixed. In other words, you’d incur similar costs whether you’re selling a $200,000 home or a $2 million home. So, an agent might be inclined to lower their commission on a higher-priced home.

The lack of housing supply is the main driver of stubbornly high housing prices. The shortage of affordable homes has been an issue for well over a decade but was exacerbated by the pandemic. More recently, high interest rates are driving many homeowners who locked in rock-bottom rates in 2020 and 2021 to stay put rather than sell and take out a new mortgage at a significantly higher rate.

Researchers at the Urban Institute wrote that the “deep housing shortage” will offset any savings from lower fees. “As such, fee reductions will not substantially affect home affordability, so policymakers should continue focusing on increasing housing supply to make homeownership more attainable in the long run,” the authors wrote.

Another issue, according to Brobeck, is that home prices generally have the buyer’s agent commission built into the list price. But what happens once that 2.5% to 3% no longer automatically falls to the seller?

“If it is not removed, and buyers end up paying this commission, then they will effectively have been charged twice, with the seller receiving the main benefit,” Brobeck said.

Additionally, if the buyer and their agent can’t convince the seller to reduce the price accordingly, buyers could wind up paying even more.

“This is one reason that in the future, it will be even more important for buyers to employ very competent buyer agents,” Brobeck said. “Many lack this competence.”

Read more: Is this a good time to buy a house?

I recently sold my home. Am I getting a piece of that $418 million?

Possibly. As with any class-action lawsuit, a large chunk will go to attorneys, but millions of people who sold homes are expected to qualify for a piece of the settlement, including those who sold their homes as far back as 2014.

To find out whether you’re eligible, go to realestatecommissionlitigation.com.