If you’ve been following the latest on real estate, you may have seen the reports
regarding the National Association of Realtors recent decision to settle a lawsuit out of
court pertaining to commissions and buyer representation. So, what is the low down on
these highly publicized “real estate lawsuits” regarding commission, and what does it
really mean for future sales and purchasing?
The lawsuit revolved around federal anti-trust laws that govern the restraining of trade.
In this case, the National Association of Realtors, as well as several real estate
corporations and agencies, were accused of stifling trade through requiring buyers’ agents’ commission rates be publicized in the multiple listing services. The fact that
many brokerages across the country charge similar commission amounts for selling and
buyer representation on a transaction led to accusations of “price fixing”, perhaps
“boycotting”, perhaps “steering,” or some type of “anti-trust” that could be restraining
free trade.
However, there have always been options for lower fees, giving alternatives to full real
estate representation. These include flat fees for services, auctions, and so called
“discount brokers” who put a listing into the MLS but do not take on any further roles or
responsibilities in the property sale process. All these alternatives provided options and
charged miscellaneous amounts. Most of these alternative models are also members of
the National Association of Realtors. It’s just that these alternatives have not been
extremely popular and therefore have not made up a large percentage of the real estate
sales approaches. My personal belief is that the lack of popularity stems from their poor
results and the fact that they do not protect sellers and buyers in the stressful
complicated process of buying and selling a home or investment property.
It is true that largely across the US, commission rates are similar for full representation.
Like the cost to have a landscaper take care of my lawn is similar whether I am in
Michigan suburb or Georgia suburb, or my general practitioner has a similar charge for
a doctor’s office visit whether I am in Nashville or Cincinnati. The cost, in my opinion,
for a real estate commission is often close to the same because that is what it takes to
represent sellers and buyers. But it is always negotiable and there is a range of what is
offered.
The National Association of Realtors has always instructed and required that
commission be negotiable 100% of the time and that no broker should collaborate
outside of his brokerage with others to “set prices”. Therefore, in this lawsuit, they did
not agree that they were guilty of restraining trade, but they did agree in the settlement
to no longer publish commission rates in multiple listing services. NAR also agreed to
begin requiring that buyers sign representation agreements before they go and view
property. These buyers representation agreements have been used for years, but they
were often signed when an offer was written. The reason for this change is that in the
lawsuit the complainants were concerned that buyers were not given a chance to
negotiate the fee that was being offered to their agent. They contended that the home
purchase was “covering” this buyer’s agent commission. This signing before viewing
property would give the buyer opportunity to negotiate his own commission fee. The
buyer’s representation agreement outlines a buyer agents’ duties and what their
brokerage charges for this service.
The settlement still allows the seller to pay the buyer’s agent compensation. The
change is that it will not be published in the MLS, so agents will have to communicate
what is offered directly. The second change in the lawsuit settlement is that buyers will
be required to sign an agreement with their agent prior to touring a property with that
agent. At first glance this seems extremely reasonable. Why not let the buyers negotiate
their own rate with their agent? Why not let them pay for it themselves instead of the
seller? Again, that sounds fantastic until we start putting it into practice. The purchase of
the house needs to be set up for all parties to win.
There’s an old saying that I believe applies here. The more things change, the more
they stay the same. The needs have not changed. So with that in mind, let’s look at
how these new rules impact each side of the transaction. (Note: the final approval of
this agreement is set to happen later this year, so these changes are tentative until that
happens.)
IF YOU ARE THE SELLER:
1) Currently lenders do not allow buyers to finance a commission payment so they
will need additional cash right when interest rates are high, so they are already
stretched with what it costs today to purchase as compared to last year. Lenders
also have tightened up their requirements for down payments, property mortgage
insurance (PMI), and closing costs are higher. So, the amount of cash needed to
purchase is higher than ever. Giving buyers the responsibility of paying for their
own representation is effectively removing many buyers’ ability to qualify or it is
limiting the amount they can purchase. Therefore, I recommend that it will be in
your best interest for you the seller to continue this powerful concession for their
buyer and offer buyer’s agent compensation with a caveat that the buyer may
waive this concession and receive a discount.
2) VA loans and many specialized loans don't even allow buyers to pay their own
agent. I imagine they will change this. But what really changes? The price of the
home contains the commission whether it is the buyer or the seller paying. So
again, to help a veteran and present your home to as many buyers as possible, I
highly recommend this concession right off – offer compensation for buyers
agents. The key to getting the best price for your property is to expose it to
as many buyers as possible.
3) Lastly, the other good news for you as a seller is this: If you will continue to offer
a concession to pay the buyer’s agent, you will attract more buyers, thus giving
your property more exposure and proclaiming to all the buyers that you are the
kind of seller that they will find enjoyable to purchase from. Even if they have
made other arrangements to pay their agent. You are a hero, offering a discount.
You will be surprised how many people want to buy “from a friendly kind person”
and want to live in that home or buy that cabin from! Generosity and kindness
count! Buyers’ agents will love you also. This lawsuit has generated a negative
environment of distrust and lack of appreciation. The buyer’s agent will have an
attitude of gratitude towards you even if their buyer doesn’t take you up on the
concession. This spirit of cooperation can make all the difference in a successful
closing without drama and other losses.
IF YOU ARE THE BUYER:
1) Find out on each property you are considering for purchase what the seller is
willing to cover toward your closing costs, repairs, etc. Remember that all things,
including the concessions you may need in order to purchase this home, are
negotiable. Even if the seller is not offering to cover your agent, or concede
closing costs that you need, or repairs you desire. Be positive, that doesn’t mean
they may not reconsider and agree to your offer. You simply need to be willing to
ask and accept a no and move on. This wasn’t the right property for you.
Remember the seller is most interested in the bottom line, so you need to take
that into account when making an offer. It’s okay to offer a higher purchase price
in order to compete with other offers that will not be asking for your concessions.
Do not get hung up on small amounts when negotiating. Keep the big picture in
mind! You will never remember if you paid $550,000 or $570,000 three years
from now.
2) Be willing to negotiate a fee for representation with an agent. The hard truth for
buyers is that in the case where the seller is not offering concessions for
commission, you might feel compelled to “go it alone” without help. There will be
many steps in the process and things you need to know that an agent
representing you can help with, such as finding out if there is a septic permit, or
having a home inspection done, or reviewing the deed and other public
information about property boundaries, public services, HOA contacts, etc. If you
are looking to buy an investment, you will want someone to help you make sure
the property can be rented in accordance with zoning regulations and subdivision
restrictions. These are only a few of the problems I have caught for my buyers
over the years. Back in the early 80’s, we came up with “buyer representation” in
Tennessee and it was a good thing for everyone. Be willing to move on to other
property if you can’t make the numbers work including your buyer’s
representation fee.
3) Part of the settlement included a stipulation that the National Association of
Realtors agree to place in writing a new version of the buyer’s representation
agreement that Realtors will be required to have signed by a buyer before going
to view a property with them. Therefore, as a buyer, you should expect every
buyer’s agent to present you this documentation prior to scheduling the showing
of a property with you. The purpose of this document is to outline the costs
associated with purchasing a property before you view it. It’s like the requirement
that a lender give you a good faith estimate before you commit to a loan. This
representation agreement will also outline all that your agent is commits to do on
your behalf and it is your releasing them to work on your behalf and represent
you. It will also serve as the document that determines the negotiated fee
between you and the agent, defines the costs associated and the various options
of how it will be paid. It is all negotiable and can be renegotiated as well during
the process.
To recap as a seller, I recommend that you be ready to offer concessions from the sale
of your property to help buyers with representation this will give you the most exposure
for your property.
As a buyer you will need to be ready to be more flexible; setting aside cash for buyers’
representation or giving your agent the ability to negotiate on your behalf asking for
compensation if you need this concession and it is not being offered. If a property
negotiation isn’t coming together for you be ready to move on. Be willing to ask for what
you need and stay creative!
