10 answers to the questions confused buyers are asking now

Commission In Article 2

May is Commission and Compensation Month here at Inman. We’ll sort through the noise and misinformation and provide you with the most up-to-date facts and strategies about how to prosper in the wake of the commission settlements. And look for straight-to-your inbox updates with Inman’s new weekly digest, Commission Chronicles.

Looking to get ahead of the curve, a local agent decided to start using the state association’s buyer broker agreement before it became mandatory in August (depending upon court approval). After a successful preliminary meeting, the agent sent over the buyer broker agreement to be signed.

It did not take long for the buyer to respond; a few minutes later, he texted, “There is no way I’m going to sign this. I will not agree to pay any kind of a commission. I’m going to work with a rebate brokerage that doesn’t require me to sign or pay anything. In fact,” he emphasized, “They give ME money back.” And with that response, he was gone. 

The agent, concerned about a repeat performance from future potential clients, began to investigate and discovered that the brokerage in question did indeed provide a rebate, but had some very specific rules tied to the program. In short, they would show one property with no commitment, but before showing a second home, required that an exclusive representation agreement be signed. 

He also discovered that they, like all other brokerages, were gearing up to use the state association’s buyer broker agreement. “We will not only be using the required agreement,” he was informed, “Along with our disclosures, the package we will require to be signed is 19 pages long.”  

And then there is the question of competency. In the case of the brokerage that was providing the rebate, the average level of experience for their agents in our area happens to be very low. We know, based on our own experience, that a seasoned and well-trained agent can more than make up the difference of a rebate by negotiating a contract at a higher level and providing a superior customer experience all around. 

It is safe to say that there is a lot of confusion out there. Many buyers are oblivious to the impending changes, while others, aware that they might be required to pay a commission, are scrambling to get into a home before the rules are enacted in July.

Some sellers, smelling blood in the water, are slashing cooperative commissions now. Confusing things even more, some listing agents believe they will get more immediate market share by adopting low flat fees paid to buyer agents while others are announcing they will provide buyer representation at no charge, ensuring that they will end up in a dual agency relationship with the buyers. 

It is no wonder buyers are confused: Realtors are even more confused. To help buyers sort out the mess, here are our top 10 answers for buyers who are confused. 

1. What is the lawsuit about? 

In the early 1990s, consumer advocacy groups began lobbying for more effective buyer representation. Until then, there had been no way to guarantee that buyers would get their own, dedicated representation and that their agent would be guaranteed compensation for their efforts.

It was agreed that local MLS organizations, under agreements with the National Association of Realtors (NAR), would not only list all local listings on one site but would also include offers of cooperative compensation from sellers clearly posted on each listing so that a buyer’s agent would know what they would earn if they closed a transaction.

Under the system, the seller would pay a commission to the listing brokerage who in turn — out of the commission they received — would pay the agreed-upon compensation to the buyer’s agent. In essence, the commissions for both the listing agent and buyer’s agent were “coupled” and paid by the seller. It was a system that worked very well for many years. 

Recently, however, some sellers decided to sue NAR, claiming that the system kept commissions artificially high and prevented buyers from being able to negotiate the compensation on their own. In a landmark class action lawsuit, the jury agreed. As a result, NAR proposed a settlement that, if approved by the courts, will remove compensation displays from the MLS.

It’s safe to say that some Realtors across the country and NAR itself disagree with the ruling, with NAR denying any wrongdoing. In a statement released on March 15, 2024, they explained, “The settlement, which is subject to court approval, makes clear that NAR continues to deny any wrongdoing in connection with the Multiple Listing Service (MLS) cooperative compensation model rule (MLS Model Rule) that was introduced in the 1990s in response to calls from consumer protection advocates for buyer representation.”

Regardless of how anyone feels about the lawsuit and subsequent settlement, the new rules are projected to go into effect this coming August and will add layers of complexity into the homebuying process. 

The bottom line is this: The previously existing system for sellers to offer cooperative compensation to a buyer’s agent through the MLS will no longer exist, and there is the possibility, going forward, that buyers themselves may be responsible for paying their agent’s representation fee should the sellers choose not to do so. 

2. Isn’t working with a buyer’s agent free? 

Although many buyer’s agents may have stated, over the years, that they were working for free (since the seller was providing their compensation), the truth has always been that their compensation was actually included in the purchase price of the home.

From the proceeds of the sale, the seller paid the entire commission to the listing agent, who then paid the agreed-upon amount to the brokerage who had represented the buyer. Going forward, if the seller chooses not to provide any compensation for the buyer’s agent, the buyer themselves will be responsible for paying their agent’s fee. 

3. So if I have to pay the compensation myself, does this mean the home prices will be lower? 

Most likely not. In a free market such as ours, home prices are not a major contributor to agent commissions but on market forces, including inventory, buyer demand, current interest rates and the overall health of the economy. Budge Huskey, president and chief executive officer of Premier Sotheby’s International Realty clarifies

General values in real estate are determined by the fundamentals of supply and demand, not Realtors. Yes, the commission represents an expense of a transaction, yet these also title fees, closing fees, mortgage-related expenses, property taxes, association fees, etc. Should real estate commissions theoretically be reduced by 1 percent as a result of compression, that $500,000 home will now only cost $495,000. Hardly the difference as to whether someone may afford the home or not. The real reason homeownership is increasingly less affordable is that homes in our market have values have risen dramatically in value in recent years.

4. Do I need a buyer’s agent? Won’t it just be easier to just go direct to the listing agent? 

In a real estate transaction, there are two parties: the listing agent representing the seller and the buyer’s agent representing the buyer. This system ensures that both the buyer and seller have their own, separate representative who works on their behalf. A situation where one party represents both the seller and the buyer is called dual agency, which is a controversial practice that isn’t legal in all parts of the country. 

In those states where it is allowed, the arrangement has to be clearly disclosed. In truth, it’s exceedingly difficult (some would say impossible) for one party to represent both sides equally.

Additionally, dual agency is one of the leading causes for litigation and, for this reason, is discouraged. It is recommended that, even in states that allow dual agency, the buyer has their own separate representation. 

5. Do I have to sign a buyer-broker agreement?

Yes. Once the new rules are enacted (most likely in mid-August), most buyers will be required to sign an agreement to work with a buyer’s agent in the same way a seller has always been required to sign an agreement with a listing agent. While this may seem new in some parts of the country, buyer-broker agreements have long been mandatory in some states and in other states, even though not required by law, have been strongly recommended for years. 

To clarify, an agreement will be required for an agent to work with you as a buyer. (Here is the clarification NAR has provided as to when agents will need an agreement in place.) Currently, in many places no such agreement is required. Once the new rules are enacted, however, an agreement will be required everywhere. The one exception will be open houses: You will not be required to sign an agreement to visit an open house hosted by a Realtor; however, if you wish to see that same open house with your agent, an agreement will be required. 

The buyer-broker agreement includes many options and will vary from situation to situation depending on the buyer’s needs, buyer agent’s practices and more. Some agreements might be for one single showing, while others may be for a period of time and include all properties shown during that period. It’s important to understand that if a buyer chooses to work with the listing agent, a buyer-broker agreement will still be required. 

6. How will my buyer’s agent be compensated? 

There are two parts to this question. First is the question, “By signing a buyer-broker agreement, does it guarantee I will have to pay my agent’s fee?”

It depends. Many believe that ultimately the seller-paid compensation model will prevail. If that happens, then in many cases, the buyer agent’s compensation will be provided by the seller. In the event that the compensation provided does not fully pay the buyer agent’s compensation as stated in the buyer-broker agreement, then the buyer will be responsible for paying the balance of the fee. 

The follow-up question is, “Then I get to ask the seller to pay my buyer agent’s commission?” 

Absolutely. And in most cases, you will know before you view a home whether or not they are willing to provide compensation. However, they also have to right to say no if they choose to do so. If they agree to provide compensation, your agent would, in turn, write this into an offer for the property. 

7. Is it possible to negotiate a commission?

Yes. Commissions have always been negotiable. Negotiation happens in two separate situations. First, when engaging the services of a buyer agent, you will have the opportunity to negotiate the representation fee your agent will accept. You will have the right to ask for a specific fee structure and the agent will have the right to state what their fee will be.

If an agreement is reached, then that fee will be written into the buyer-broker agreement. If agreement is not possible, you then have the freedom to go find another agent. 

The second negotiation will happen during the offer process. Prior to showing any given home, your agent will have determined whether or not the seller is willing to provide cooperative compensation and will share that information with you. You will then be given the choice as to whether or not you still wish to be shown that property.

Even then, and although the seller has stated no compensation will be provided, you could still view the home and even then write an offer asking for your agent’s compensation to be included. Once the seller has an offer in hand, given the other terms of the offer, they may be willing to negotiate the fee.

As an example, an option could be to write an offer enough over list price that the fee would be included (one caveat: make sure the home will appraise at the higher amount).

8. Can I still get a credit back from the seller?

Yes, depending on the local market. In some regions across the country, it is possible to write an offer and ask for the seller to provide a credit toward closing costs. In other areas where the market is extremely hot, the odds are far less likely that a seller will be willing to provide a credit.

There was initially some concern that any buyer agent compensation would be counted as part of the credit (varying loan programs have a maximum percentage allowed for any credit) which would lower the amount available to a buyer, however, any seller compensation to the buyer’s agent is separate from any credit provided by the seller to the buyer. 

9. Can I finance my buyer agent’s commission? 

Yes, depending on the local market. In some regions across the country, it is possible to write an offer and ask for the seller to provide a credit toward closing costs. In other areas where the market is extremely hot, the odds are far less likely that a seller will be willing to provide a credit.

Fannie Mae and Freddie Mac limit “interested party contributions” (IPCs) — concessions offered by sellers, builders, real estate agents or other “interested parties” who may benefit when a home sells for the highest price possible — to between 2 percent and 9 percent of a property’s value.

There was initially some concern that if sellers were to compensate buyer agents, that would be considered a concession subject to limits on interested party contributions. But federal housing regulators have clarified that sellers can continue to pay buyer agent commissions without being subject to financing concession limits on conventional and FHA loans.

10. What if I don’t have enough money to cover the commission and my closing costs? 

To be honest, this is the dark side to this settlement. 

David M. Dworkin, writing for the National Housing Conference on Sunday, March 17, 2024, declares,

How much the settlement will change the current system, which for home sellers and buyers is arguably one of the most expensive in the world, is anyone’s guess. According to Gary Acosta, co-founder and CEO of the National Association of Hispanic Real Estate Professionals, “forcing buyers to pay out-of-pocket for an agent to represent them through the process would only exacerbate affordability challenges and put homeownership out of reach for millions of would-be buyers… a ban on broker cooperation would benefit no one but the wealthiest among us.” How much the settlement will confuse and discourage first-time homebuyers, especially people of color who are disproportionally first-time homebuyers, is much easier to understand and predict.

It is important to also note here that buyers using programs such as VA loans cannot pay buyer agent compensation. Therefore, under the currently proposed changes, if they want to submit an offer on a home where the seller refuses to pay a buyer agent compensation, they will be unable to do so unless their agent chooses to work for free. Since I know from experience that agents have bills to pay and, in many cases, families to feed, the chances of this happening are fairly slim. 

While it is our hope that this post answers most of the buyer questions that will arise from the NAR settlement, the ongoing fluidity of the situation guarantees that more questions are on the horizon. We recommend that to effectively respond to your buyer’s ongoing queries, you get the requisite training now and start using the buyer-broker agreement as soon as possible so you will be skilled up and ready to go once the agreement goes into effect. 

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