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