Buyer Beware

We are three weeks away from new rules going into effect as a result of the NAR settlement. I have commented on these changes in previous posts and wanted to discuss in more detail the two changes that will have the biggest impact.

(1) Buyer's broker compensation will no longer be displayed in the MLS after August 17. The way it works now is that sellers offer compensation to the buyer's broker (through the listing broker) and that is displayed in the MLS listing and is folded into the asking price. Usually, but not always, the rate offered the buyer's broker is half the total commission the seller has agreed to pay to their listing broker. I have seen offerings as low as a few hundred dollars to as high as 5% to the buyer's broker. The majority of listing right now in our MLS are offering between 2% and 2.5%. Historically in our market, buyers agents represented their clients, found and closed on a property and were paid at closing whatever the seller's broker was offering in the MLS. Sometimes the agent would get 3% and sometimes much less. Agents usually just accepted whatever was offered and it worked out overall, good pay on some sales, not so good on others.

As of August 17, agents will no longer see on the listing what compensation, if any, is being offered and will have to find out from each listing agent what they can expect from the seller at closing. I think we will probably begin including buyer's broker compensation as a written part of the offer. This will make the buyer's agent's commission an inconvenient but integral part of the negotiating process which brings us to the second big change.

(2) Agents will, after August 17, be required to have a signed buyer broker agreement BEFORE viewing any property outlining compensation due the buyer's broker. The agreement will define exactly what the buyer will owe their agent/broker. The agreement allows for that amount to be paid partially or fully by the seller. This (below) is the exact wording concerning that in our new Buyer Broker Agreements as provided by our local Realtor association:

• Compensation received by Broker, if any, from an owner or owner’s broker for services rendered to Consumer will reduce any amount owed by Consumer per this paragraph.  

If a buyer's agent has an agreement with their client for more pay than the seller is offering, the buyer can either negotiate for a seller concession large enough to cover the commission or they will have to pay their broker the difference at closing. This is going to become awkward very quickly.

Imagine negotiating with a seller to within a few thousand dollars and knowing that your agent's pay is the only thing keeping you and seller from agreement. For instance; a buyer's top number they're willing to pay for a certain property is $500,000 and their agent has presented an offer for $500,000 with a request for a 3% concession from the seller to cover the agent's pay. The seller tells their agent they will accept the $500,000 but with no concessions, take it or leave it and figure out the commission however it pleases the buyer. The buyer can either walk away or take the $500,000 and pay their agent another $15,000 out of pocket or possibly negotiate a lower rate with their agent if they'll even consider it. 

Note that the commission has always been built into the price but it wasn't part of the negotiations between the buyer and seller. I have done many deals where I or I and the other agent agreed between ourselves to accept lower pay to bridge the gap and make a deal work out. Those agreements between agents to the benefit of their clients will be less likely to happen now and I suspect more of these close deals will just fail to come to agreement.

There is some interesting wording in the new agreement concerning exactly when a buyer owes their broker. Check out the highlighted phrases:

If using this agreement form, buyers will owe their broker once they contract to purchase and will still owe if they default on that contract and never close. I'd be very hesitant to sign an agreement with this wording and, if I did, I'd be sure to at least negotiate a reasonable rate. Notice in the last paragraph that the agent can select either a percentage or an amount OR a percentage or amount PLUS an additional amount. That last blank is tailormade for junk fees. Buyer's agents are going to be sliding this agreement across the desk to their clients for signatures agreeing to pay the agent a percentage PLUS their "non-negotiable" transaction or brokerage fee which is a fancy way to spell junk. If there is a number in that last blank on the buyer brokerage agreement you signed, you agreed to be robbed.

I would advise buyers to carefully read whatever agreement their agent presents them with and to question anything they don't understand. There is no set commission or rate. It's all negotiable. If you think $1000 is plenty for your agent for the transaction you hope to have, ask for it. There is little reason to agree to pay them 3% plus $395 just because they asked for it and told you it wasn't negotiable. I might consider paying the $395 junk fee if they'd drop the percentage by a point or two.

It's going to be wild and probably not a lot of fun for buyers and their agents. Agents in our market have always gotten occasional calls from people on vacation wanting to see properties while they're here. That's part of real estate in a vacation destination. Now those folks are going to have to have a discussion about the agent's pay and sign an agreement to those terms before they can get in to see that little beach condo that caught their eye. Awkward. Best of luck to everyone on all three sides. We are entering uncharted waters.

"Against profitability, morality is overmatched." _Jay Busbee 

Pay Now or Pay Later

This picture is from a better time on Union Island in the Grenadines. Hurricane Beryl destroyed almost every structure on the island as it did on several small neighboring islands. Imagine your entire community being wiped out with not a single neighbor escaping major damage. A charity that I trust to prudently use my donation is Direct Relief, donation link HERE.

There are currently 285 condo and townhome units and 50 single family homes for sale in Cocoa Beach and Cape Canaveral as reported by our MLS. Inventory has pulled back from it's recent highs and has been more or less static since the beginning of summer. Fourteen condo units and two homes have found a buyer in the first 13 days of July which is a noticeable slowdown from our pace of sales earlier this spring. Median time on the market for the remaining 50 single family homes is 64 days and for the condos, 79 days.

There seems to be a sense of increased caution about condos among buyers. The uncertainty about condo fees for the condos that have not yet completed their structural reserve studies and determined the funding necessary to comply is adding friction to the offering process. After seeing some of the fee increases among the buildings who have done their inspections and begun funding the new reserves I understand the reticence. 

Buyers are quickly finding themselves in a conflicting position with incentive to wait for reserve studies before offering and another incentive to hurry to get under contract before they find themselves responsible for paying their agent because of the new buyer's broker compensation requirements slated to go into effect on August 17. On one hand I might contract a condo before August 17 only to find myself staring at a healthy increase in fees by the end of the year. On the other hand I might wait for the new fees to become known and, if after August 17, find myself owing my agent out of my own pocket. I think it's safe to expect many sellers to continue offering buyer's broker co-broke but I also think it's reasonable to expect quite a few to refuse to offer anything. After all, real estate commissions are loathed by pretty much everyone except agents and their families. Having to possibly pay or even discuss agent commission is not going to be embraced by buyers but that discussion is going to be required come August 17. Remember my previous appeals to reject junk fees? Now all buyers are going to get to reject them before they ever see the first property. Keep in mind that what you agree to pay your agent is entirely negotiable and there is zero reason to pay your agent a junk fee on top of a percentage of the purchase price. I shouldn't have to say this but don't let a real estate agent rip you off with a made-up junk fee.

There are several new houses in a riverfront development in south Cocoa Beach that have been under construction for over three years. Construction has started and stopped several times during those three years and appears to have stopped again. None are completed although three of them look to be close. They've been at that "close to complete" stage for over a year. Several of these sluggish builds already closed in the MLS two and three years ago, several of them before the first block had been laid. I'm sure there's a reasonable explanation. Reckon how long these buyers are going to wait for their keys? Meanwhile buyers at The Surf oceanfront downtown should begin closing on their new units by the end of the month.

Lots of things happening downtown with the old Yen Yens building torn down and construction beginning on the new brew pub/food court at the same site. The new Cocoa Beach City Hall one block away is coming along nicely. The old International Palms has been reduced to piles of rubble and construction on the new Westin resort complex there is supposed to begin in August, hurricane season allowing. There are several other projects being discussed and construction is under way on a few. 

Cocoa Beach is changing but the population holds steady at the 12,000 number as it has for fifty years. It's hard to increase population when there is no vacant land. Something has to come down for something to go up. We didn't always realize how fortunate we were that we ran out of land long ago. I can relate to John Cougar's "I'll probably die in a small town." Take care out there in the heat. Seek shade and stay hydrated.

"I shall not commit the fashionable stupidity of regarding everything I cannot understand as a fraud." _Carl Jung