In 1913, the precursor to the National Association of Realtors (NAR) – the National Association of Real Estate Exchanges – set forth this policy:
“Always be ready and willing to divide the regular commission equally with any member of the Association who can produce a buyer for any client.”
For 111 years that pay structure held with commissions split between the listing agents and buyers’ agents. Though not set by law, commissions averaged 6% for years before averaging closer to 4-5% now.
Economists and prognosticators predict this century-old system is about to change in a big way due to a recent class action lawsuit settled by NAR.
Recently, while denying any wrongdoing, NAR settled a class action lawsuit (Sitzer-Burnett vs. NAR) by agreeing to require formal Buyer Representation Agreements between buyers and agents/brokers, to keep offers of compensation off the Multiple Listing Service (MLS) and to pay plaintiffs $418M (the jury originally awarded the plaintiffs $1.78B in damages, which could have been tripled to $5B).
Buyer Representation Agreement
Buyer – Broker agreements have been around for decades. This document formalized the relationship between a home buyer and his/her agent/broker. When buyers sign this document, depending on the terms, they are guaranteeing that the agent will be paid a commission from their home purchase.
The agreement can cover a specific home or time.
Suppose a buyer signs the Buyer-Broker agreement and ends up using another agent to buy a home. In that case, the agent on that Representation Agreement can pursue the commission, causing the new agent who did the work, to lose their commission, which is why agents always ask potential buyers, “Have you signed a Buyer-Broker Agreement with another agent?” If they have, the new agent declines to work with that buyer. Though financial terms were included in the Buyer-Broker Agreement, for the most part, they were often left blank as A) home sellers paid the buyers’ broker and B) financial compensation was not the point of this agreement, commitment to representation was the intent of this document.
Up until now, most agents have not used these contracts to commit clients to using their services because it felt like a prenuptial arrangement:
I love you and you love me but I don’t trust we will stay together, so please sign this form that you don’t want to sign compelling you to stay with me whether you want to or not.
With the NAR settlement, that choice has flown out the window. The Buyer Representation Agreement will soon be required. Agents will not represent buyers without a signed Buyer-Broker Representation Agreement. More than commitment, agent compensation is now a main component of the agreement.
How will the buyer’s agent be paid, how much, for what services, and what amount, if any, is the buyer willing to pay the Realtor?
Imagine you are in the market to buy a home in San Diego where the median price is $1M. If you purchase with a 20% down conventional loan, you need to come up with $200,000 plus loan origination, title, inspection, and escrow fees.
Depending on the type of loan, for a $1M home purchase expect to pay $8,000 – $15,000 in buyer costs in addition to the $200,000 down. Now imagine adding $25,000 to cover your Realtor’s 2.5% commission. The number of buyers willing (or able) to do that wouldn’t fill an elevator. If buyers don’t or won’t pay buyers’ agents and listing agents are not allowed to advertise Cooperating Commissions on the MLS, what will happen?
My prediction:
There will be buyers who will contact listing agents directly seeking to write an offer on their own or with the listing agent (dual agency).
More likely, buyers’ agents will determine their bottom line for compensation. “I am willing to do _______ for $________.” They may offer percentage or flat fee choices for VIP, a la carte, or just opening-doors representation. The buyer will agree and they will work together.
Buyers’ agents will (rightly) assume that sellers will still offer Cooperating Commissions as they have for over a century. If all goes well, the sellers’ commission will cover the amount stated in the Buyer-Broker Agreement.
If the commission is more than the negotiated amount on the Buyer-Broker Agreement, the agent will be a happy camper, if the commission is less than the amount negotiated on the Buyer-Broker Agreement, then the buyer will be expected to pay the difference.
Again, anyone predicting buyers will happily shell out money to their agents instead of toward the home purchase doesn’t understand buyers or economics.
I don’t believe Cooperating Commissions will be a secret.
I expect commissions or concessions or whatever they’re called will be posted on sister sites to the MLS, agents’ websites, social media, For Sale sign posts, flyers, QR codes, and email blasts.
Selling and buying real estate is complex, fraught with pitfalls, highly emotional, and involves large sums of money. Buyers’ agents will remain essential to the real estate transaction.
I predict sellers will pay the bulk of buyers’ agents’ commissions and I do not see big changes coming to the real estate industry for the foreseeable future.
The changes are planned to go into effect by mid-July but are subject to court approval.
– Part 1 of this article ran in the May issue of La Mesa Courier and online at: https://sdnews.com/successful-buyers-agents-end-up-wearing-many-hats/.
– Reach eXp Realtor and La Mesa Vice Mayor Laura Lothian at: [email protected].
Photo credit: Pixabay.com
