The recent National Association of Realtors (NAR) settlement concerning buyer agent commissions has been described as a “sea change” in the real estate industry. It's crucial to delve into this shift to understand its origins and implications. Buckle up, as we explore these changes in detail.
Background on Buyer’s Agent Role
The role of the buyer’s agent emerged in the late 80s and early 90s to introduce consumer protections in real estate transactions. Prior to this, the “buyer beware” doctrine left buyers without adequate representation, making them vulnerable to potential exploitation. Previously, only seller agents were involved in transactions, primarily representing the seller's interests. Due to numerous lawsuits, the buyer’s agent role was established to advocate for and educate buyers during home purchase negotiations.
Commission Structure Changes
Since the early 1990s, the buyer agent commission was paid and predetermined by the seller when signing a listing agreement. Sellers, advised by their listing Realtor, set a commission amount to attract multiple offers and reward buyer agents for presenting informed buyers. This commission offer was listed in the Multiple Listing Service (MLS) and public real estate sites. Sellers had the discretion to offer varying commission amounts based on their market strategy.
However, in 2023, a significant lawsuit in Missouri challenged this practice. The lawsuit alleged that sellers were not adequately informed about their option to decline offering a commission to buyer agents. The jury concluded that sellers were effectively coerced into offering compensation to buyer agents to encourage showings and offers, creating a fear that lower commissions might hinder a sale.
Impact of the Settlement
Following the settlement, the commission structure underwent substantial changes. The commission for buyer’s agents has been separated from the listing agent’s commission and is no longer included in listing agreements throughout California. Sellers no longer set the commission amount for buyer’s agents or determine who pays for buyer representation.
Now, buyers are responsible for negotiating their agent’s commission directly. They must enter into a binding fiduciary agreement with their agent to formalize the commitment to pay for their services. In California, agents cannot even show properties without a written agreement in place first.
Negotiating Buyer Agent Commission
To avoid additional closing costs, buyers can request in their offer that sellers pay the buyer’s agent’s commission - incorporated into the offer price and potentially the loan amount. Sellers can negotiate this request just like any other offer term – accepting, countering, or rejecting it.
Implications for Buyers and Sellers
For buyers, this change allows them to choose their agent based on quality and agree on commiserate level of compensation. For sellers, it necessitates a more detailed analysis of the net proceeds from offers and the associated liability concerning the buyer’s level of representation. With that last part – level of representation – being just as important as the offer prices.
Early Feedback and Observations
In just the first few weeks, we have observed that most buyers are now requesting that sellers cover the buyer’s agent commission in their offers. Those who opt to pay their agent directly adjust their offer price to account for the commission cost. As the market adapts, we will continue to provide clear and transparent updates to our clients. We believe that informed and educated consumers on both sides of a transaction lead to better outcomes for all.
Commitment to Client Success
Our team (Alissa, Jessica, & Lissa) is dedicated to our fiduciary responsibilities, prioritizing our clients’ best interests throughout the real estate process. Whether buying or selling, these transactions are often the largest financial decisions in a person’s life. We aim to guide, educate, and support our clients to ensure they make well-informed decisions and avoid costly pitfalls.
Navigating a multi-million dollar home sale or purchase requires careful consideration beyond just commission rates. With challenges such as old housing stock, unmapped landslide zones, evolving disclosure laws, competitive lending options, and an increasingly complex insurance market, choosing the right agent is critical. The greater risk lies in selecting an agent who can effectively protect, advise, and advocate for your long-term success.
Conclusion
Every real estate transaction is unique. Take your time, ask the right questions, and ensure you trust your agent to be your advocate throughout the process.
