The real estate industry is changing, here’s our take on what it means for home buyers
Let’s talk about the upcoming changes in the real estate industry and the effects it could have on you as a home buyer.
If buying a house has been on your mind, it’s possible you’ve seen the NAR Lawsuit in the news. As with anything on the news, there is a lot of misinformation about this topic floating around out there. So, we wanted to share our take.
First, let’s cover what the lawsuit is.
NAR = The National Association of Realtors
DOJ = Department of Justice
If you boil the lawsuit down to the simplest form, it came about due to lack of transparency in how real estate agents are paid. And honestly, we can’t blame consumers for being confused IF they have been working with realtors who fail to explain the process and costs associated, or if they’ve just never bought a house.
First, let’s dive into the past to explain how commissions have historically worked for buyers and sellers.
While there have never been any standard commission rates or structures, there have been practices common throughout the marketplace on listed properties.
Generally, when a seller lists a home for sale with a listing broker, they agree to pay a total commission to that listing broker at closing upon the successful sale. Of that total commission, oftentimes the listing broker would offer to share a portion of that commission with a buyer’s agent representing the buyer who made the purchase. These terms are agreed to in a listing contract.
So as a home buyer, oftentimes you have not come out of pocket directly to pay your realtor, but rather your realtor is getting compensated as part of the overall deal by the listing agent.
What’s in question here were three things. One, the lack of transparency to a buyer on what specifically the buyer’s agent gets paid. Two, the fact that a buyer’s agent could steer their buyers to only look at homes offering higher commissions. And Three, that the seller didn’t have an option as to whether a cooperating commission was offered.
Next, let’s highlight what the lawsuit is requiring to change.
#1. Offers of cooperating commission are no longer allowed to be communicated through the MLS. Cooperating commissions can still be offered and paid by the listing agent, a buyer’s agent can be compensated by a seller as part of a deal, or a buyer can compensate their agent directly.
Let’s just note that the ONLY thing changing here is the fact that co-op commissions will no longer be displayed on MLS. Everything else was already an option previously. FYI- In the past, that co-op commission rate was always negotiable and could be as low as $1, now it can be $0.
#2. A buyer wishing to ‘work with’ a buyer’s agent must have a signed Buyer Representation Agreement prior to viewing ANY homes.
This is a very positive change. As a company, we have made it a practice to sit down with our buyers and have a consultation where we explain the entire home buying process, our services, and how we are compensated. Now, there is a specific form that will be used across the industry requiring buyer’s agents to up their level of professionalism and transparency with home buyers.
It’s going to force the conversation up front of what services a buyer’s agent provides and how they are compensated. It’s going to require both parties to agree to the compensation up front.
Let’s talk through how this might affect you as a homebuyer.
Positives
Buyers will likely do their homework to find a professional agent whom they trust to consult and guide them through the home buying process. The least important role of a good buyer’s agent is to open a door. A valuable buyer’s agent is almost like a consultant, advising and advocating for you along the way. Our biggest tip for buyers in this changing market is to have a sit down consultation with any agent you are considering working with. Make the agent show you their value and explain exactly what it is they will be doing for you.
Buyers will have a clear understanding of how their agent is compensated and the various ways an agent can be paid.
Negatives
You will not know immediately if a listing is offering a co-op commission now that it is no longer communicated on MLS. Now, your buyer’s agent will have to contact each listing you are interested in seeing, find out if there is an offer for co-op commission, and then discuss with you whether or not the co-op commission equals the buyer’s agent fee or if there is any shortfall or excess. Even if a co-op commission is not offered on a listing, you can still attempt to negotiate it as part of your offer.
You may be in the situation on some houses that are not offering a co-op commission that you have to pay your realtor directly as opposed to it being part of the overall price of the home.
Myths
Sellers are no longer going to be willing to pay a buyer's agent. Only time will tell, but we don’t see this going away across the board. There may be instances where a seller is not offering a co-op commission, but generally we will still encourage our sellers be willing to compensate a buyer's agent in order to be competitive in the marketplace and we see this continuing to happen. Only time will tell.
Home prices are going to go down because buyers agent commissions are going away. This one just doesn’t make any sense. Homes are priced based on comparable sales and marketplace demand. They aren’t priced based on line item expenses.
FAQ
I don’t want to sign an agreement with an agent, what are my options?
Under the new rules, in order to work with a realtor as a home buyer, you are obligated to sign an agreement that clearly outlines the working relationship and compensation structure. Realtors don’t necessarily all provide the exact same services, so you’ll want to interview to see what’s the best fit for you.
If you do not want any representation by a realtor, and you want to buy a house on your own, have at it. This has always been an option. You can contact listing agents directly and ask them to show you the home as a service to their seller. Remember, that agent represents the seller, not you unless dual agency is agreed to by all parties. Looking at a house is the easy part, but I challenge you to really think hard about whether you are equipped to handle things from contract to closing.
What if a seller is not offering a co-op commission at all, or what if it is less than what my buyer’s agent charges?
When you sign a representation agreement with your realtor, it will clearly outline the compensation and how it’s to be paid. When you sign that agreement, you are agreeing that your realtor will get paid the agreed upon amount or percentage upon the successful purchase and closing of your home.
Anytime you are interested in seeing a property, your realtor will need to contact the listing agent or seller (depending on the situation) and inquire about whether there is a co-op commission and the amount.
If that amount equals what you’ve agreed to pay your agent, you’re good.
If that amount is more than what you’ve agreed to pay your realtor, your realtor is not allowed to take the additional money. There is a chance you could try to negotiate any overage as a credit.
If the amount is less than what you’ve agreed to pay your realtor, you have a couple options.
Option 1 - you can pay your agent out of pocket, or discuss rolling the additional expense into your loan with your lender.
Option 2 - you can request the seller to pay your agent as a concession, as part of your offer to purchase. If they don’t agree, you aren’t obligated to move forward with the purchase.
At the end of the day, it is in your control what you buy, so you never have to buy something that isn’t offering the co-op commission or won’t agree to the concession in the contract. That just could put you at a disadvantage if other buyers don’t require the concession.
At the end of the day, whether you work with a realtor or not is up to you as a home buyer. It always has been, and it always will be. But who you work with matters! These changes are going to force home buyers to think hard about the professional they choose to work with.
If you’re considering buying a home, we have created a Home Buyer’s Guide that you can download here to get started.
Disclaimer: We’re just 3 local realtors in the trenches every day. We’re not attorneys, and these are our opinions and understanding of the upcoming changes about to take place in August of 2024.
