Unless you’ve been living under a rock, you’ve undoubtedly seen headlines related to the recent settlement proposal announced by the National Association of Realtors. The vast majority of this “clickbait” contains so much misinformation we wanted to take this opportunity to highlight a few things. I won’t use up valuable word count to explain the reason behind the lawsuit but wanted to take a closer look at proposed settlement and some important takeaways that will impact our industry. A valuable resource for detailed information is Facts.Realtor where you will find a plethora of information regarding the suit as well as the proposed settlement.
The proposed settlement was an effort by NAR to protect its members from the class action lawsuit and subsequent lawsuits resulting from a lawsuit filed in a Missouri federal court. The plaintiffs argued that real estate commissions were artificially high due to practices and policies of NAR, particularly as it related to cooperative compensations between listing brokers (sellers’ representatives) and selling brokers (buyers’ representatives).
In the settlement agreement announced mid-March, NAR agreed to pay $418 million as well as incorporate changes to how buyer broker fees are being advertised along with increased transparency regarding representation and compensation. It did not stipulate buyers would be paying for their own representation.
Assuming this proposed settlement is approved by the courts, the following changes will take place in July: 1. The local Multiple Listing Service will no longer advertise the compensation being offered by the listing brokerage to the selling brokerage. This does not mean the compensation doesn’t exist. It just means the method of communicating will be placed on the brokers and not by means of the automated MLS system. 2. Realtors will be required to have signed Buyer Representation Agreements before working with buyers. This agreement will outline the services being provided by the broker, expectations regarding property type and area and will outline the fee the buyer’s broker is charging for these services. These representation agreements will further clarify if a seller and/or listing brokerage is already offering a compensation to the buyer’s broker, the fee agreed upon between the buyer and their broker will be offset by that amount.
As long-standing industry professionals, we think this change is really going to elevate the level of professionalism in the real estate market. Signing an exclusive representation agreement to represent a seller is common practice. Included in that document are the terms and conditions, including the expectations of each party as well as the fee, including but not limited to how it will be distributed between us and the buyer’s broker. Under the new terms, buyer’s brokers not only have an opportunity to articulate their value, but they also get to talk openly about what fee they charge and why. There is nothing saying the fee will be a set amount. We all know service providers set their own pricing and consumers decide whether they are going to pay it.
Sellers have always had the choice on whether or not to offer a commission and the fees associated with listing their property have always been negotiable. It is true that our local market and the majority throughout the US have always supported the seller making an offer of compensation, but they were never told what amount they “had” to offer. This fee for service is included in the listing price and when the buyer produces the funds to complete the sale, the proceeds of that sale satisfy the purchase price, closing costs as well as the service fees for the brokers on each side of the transaction.
A handful of people have reached out in the last few weeks seeking clarity on what this all means. Some have openly admitted they didn’t fully understand, questioned whether they “have” to pay for the buyer’s broker and a few have even said they just want to cover their own broker and let the buyer cover their own. We appreciate the open communication about it and welcome the discussion. When deciding whether or not you want to offer compensation to the buyers representative, consider a couple of things:
First, as of right now, buyers are not able to add their fees for representation to their loan amount so if a buyer wants representation (and most do), it will be an additional cost over and above their closing costs, down payment and fees associated with the purchase. There is an opportunity for the buyer to include their broker’s fee for services in their offer but it is not as simple as just adding it to the purchase price.
Second, the liability of an unrepresented buyer impacts many. The buyers may lack market knowledge and negotiation skills relevant to real estate, putting them at a distinct disadvantage when it comes to negotiations. They could likely overpay for a property or miss critical negotiation points such as repairs, closing costs, and contingencies. They also lack relationships with other industry professionals such as lenders, appraisers, inspectors, and title/escrow, all integral to keeping the transaction flowing smoothly and closing successfully. Without guidance of a professional, buyers may misunderstand or fail to execute contracts, leading to binding agreements not in their best interests. If buyers aren’t versed in the purchase process, they could underestimate the importance of proper due diligence related to inspections, title searches, verifying or securing necessary permits or reports which could reveal significant deficiencies with a property.
Third, sellers are also at risk when dealing with unrepresented buyers. Who will screen them before allowing entry to the property? The listing agent can only ask so many questions before overstepping and inadvertently creating an agency relationship. Who will guide them through the inspection findings?
They’ll be left to interpret the scrutiny of the home inspection findings without a sounding board to assess what is detrimental vs what is just part of homeownership. If the home doesn’t make value after appraisal, who will challenge that value with the lender and appraiser? Brokers have first hand information about properties on the market. The intricacies involving their sales, condition, value. This information is welcome by the appraisers, particularly if their opinion of value is being questioned. A buyer, acting on their own behalf, wouldn’t have this information and would be incredibly ineffective in their attempt to challenge an appraiser. If the buyer is using government-based loan programs such as VA or FHA – they are prohibited from paying for their own buyer’s broker so now what? They’ll only be able to consider homes where the service fee is included in the sales price.
Sellers have legal obligations when it comes to disclosure and without a buyer’s broker, there may be communication failures or misunderstandings, potentially leading to legal action against the seller after the sale. The document only must be delivered to the buyers – there isn’t anyone who can interpret it for them which may lead to future hassles. If the buyer is left to consult with friends or family or good ol’ Google, we are going to run into a myriad of problems.
Some have suggested the listing agent, on behalf of the sellers, just write out the terms of the offer (as communicated by the buyer) and then everyone is assured the proper forms are used. State regulation and licensing requirements prohibit scribe services in the state of Oregon so this idea is out the window. Real estate transactions involve legal contracts, requiring anyone engaged in activities that constitute real estate brokerage be licensed.
As listing brokers, each office will need to decide if they want to take on the risks associated with unrepresented buyers. The liability is greater, the workload likely double and if something goes sideways during or even after the transaction, there is no doubt where the finger will be pointed. If you are a lawyer, have you ever had the pleasure of trying a case with a plaintiff or defendant who wanted to represent themselves? How’d that go?
As previously mentioned, a home seller certainly has the option to not offer any sort of compensation for the buyer’s representative, and coincidentally, the listing broker can also decide if they want to take on the challenges sure to come with this arrangement. By proactively stating the seller is not offering any compensation toward to the buyer’s broker, the marketing reach will be limited greatly given most buyers feel inept when it comes to representing themselves and/or are not in a financial position to cover the cost associated with the services outlined in a Buyer’s Representation Agreement.
Lastly, when trying to decide whether you want to make an offer of compensation to the buyer’s real estate broker, consider that when establishing a fair market value for a home, the comparable sales used from the past were prices that included service fees for both the listing and selling brokers. If a seller chooses not to offer compensation for the buyer’s broker, one could argue the listing price should be reduced to reflect this and therefore pass along the “discount” to the buyer so they can then allocate their own funds for those services. Having said that, there will still be several buyers who insist on having their own representation, need to incorporate it into the terms of their offer, and likely request the seller cover the fee through the proceeds of the sale. In essence, the original discounted price to offset the fee will be doubled because buyers will be asking for it anyway and if the seller wants to sell their home and has no other viable candidate to purchase it, they will potentially be in a predicament.
Having seasoned professionals involved to navigate the nuances of a major investment such as real estate is vital. The language in our purchase agreements not only addresses the contingencies of the sale but also includes important dispute resolution protocol, how the dispensation of earnest money will be handled if there is a default on the purchase and so on.
Our hope amidst all the legalese is these proposed changes encourage more conversation and even more transparency between all parties involved in a real estate transaction. Do your homework, find the broker best qualified to represent you, understand their role in the process, the fee they charge for their role and decide if you are going to work together. Please don’t expect to get the best of the best, demand competency and professionalism and then refuse to pay the fee they are charging. I pay top dollar for a financial advisor who guides me in achieving my financial goals, a trust attorney who protects my assets and a CPA who keeps me in compliance and making sound business decisions. All of these professionals protect my best interest, reduce my liability and are worth their weight in gold. There will always be someone who will do it for less but be mindful, you get what you pay for.
