What changes are there?

You’ve probably heard about the lawsuit wherein the NAR (National Association of Realtors) settled a lawsuit to avoid further costs in exchange for some changes in the structure of how Realtors do business. So what is changing you ask? Although there has been significant hype in the media, actually, not too much is changing. Next week we'll have new practices and new forms that have to be in place August 17th.

Plaintiffs in the case (sellers) alleged that their Realtors did not advise them that commissions are negotiable (as they have always been, and will continue to be), and that even though it was clearly outlined in the listing agreement, they were not advised that they would be paying the buyer agent’s commissions; so, NAR is trying to make the commissions piece of both selling and buying property more transparent by making the language clearer, so the public understands commissions paid to Realtors is always negotiable - both the amount, and who is paying whom. The offer of a seller to pay a buyer agent’s commission is no longer included in the listing agreement, and will be a separate negotiation addended to any purchase agreement between buyer and seller.

It is also now mandatory for buyers and their agents to have a written agreement, which had been previously voluntary. This agreement includes a clearly stated, negotiated commission amount payable to the buyer's agent, and includes a clause that states if anyone other than the buyer pays the buyer agent’s commission, the buyer is not obligated to do so. This is a good thing. Sellers have always had to have a written agreement with their listing agent, which protects both of them; and now buyers and their agents will have a similar, very clearly defined agreement that protects both of them.

NAR also banned any mention of commissions a seller might be offering to pay to a buyer's agent from appearing on MLS (Multiple Listing Service), the centralized data hub which all Realtors use to post and find available listings, and from which all sites like Zillow, Opendoor and Redfin pull their data. This last step will make it more difficult for buyers to find properties for which the seller is willing to pay the buyer agent's commission, which seems a bit counterintuitive if the goal is to make commissions more transparent in my personal opinion. A buyer’s agent will have to be more proactive in reaching out to listing agents directly to confirm if sellers are offering to pay commission, as this information will no longer be readily available. However, buyers are still able to ask for the seller to pay their agent’s commission as part of their purchase offer, and so far, sellers are still doing so. There are definite advantages for the seller to continue this practice. It brings them more qualified buyers, makes the transaction smoother because they have a dedicated agent looking out for the buyer's fiduciary interests, reduces the risk of a buyer being unrepresented (which can lead to a buyer suing the seller), and opens the buyer pool to more buyers competing for the property, which leads to a higher purchase price and monetary gains for the seller.

The important thing to remember here is that a seller's agent has a fiduciary duty only to the seller, so their whole job is to get the highest price for the property. They have no such fiduciary duty to a buyer, so if a buyer enters a transaction without their own agent (who is bound as their fiduciary, and is looking out solely for their interests) the likelihood of both paying too much, and not being fully aware of their rights and options is pretty high.

Why would there be more buyers if sellers continue to pay commissions you ask? About 75% of buyers in our market (more in other areas) purchase a home with a loan. Currently, lenders will not include the additional cost of commission in a loan, so those costs have to be paid out of pocket. Lenders base the loan amount on the market value of a property, as determined by an appraisal. An appraisal is simply a survey of what similar properties in the same neighborhood recently sold for. Lenders are concerned about the risk involved in their investment. They want to be sure their investment is protected, and if they extend too much and then they have to foreclose, they want to be sure they can recoup their losses. That’s just lending 101. They’re in this to make money. Of course that may change, but if it does, due to the increased lender risk, it will mean the cost of getting that loan will increase. So logically, if a buyer has to include commissions, and therefore pay more for a home, particularly if that additional amount affects their debt to income ratio, cash reserves or decreases the amount they are able to use as a down payment, they may not be able to qualify for the loan, or at the very least, the amount of the loan they can qualify for is reduced, which means they can’t offer as much for the house, thereby reducing the seller’s profit. 

The really silly thing about all of this is that in reality, the buyers have always paid their own agent commission if you think about it. They’re the ones coming up with all of the money that changes hands. So, even though sellers have been using part of their profit to pay agents, they made that profit because a buyer was willing to pay them for the property. This settlement has just moved the pieces around on the board. The game is still the same. Agent commissions are, and always have been negotiable. 

However, all of this means that selecting a knowledgeable, experienced, well-respected and connected buyer’s agent is even more important now, and may make all the difference in the world as to whether a buyer is successful in purchasing the home they want.