NAR Settlement and Real Estate Industry Changes: What Homebuyers Need to Know About Commissions

Real Estate Commissions: What You Need to Know

I'm sure you're aware of the recent changes in how real estate transactions are handled in the United States. If you're planning to buy a home after August 17, 2024, it's crucial to understand these updates. There's a lot of misinformation circulating, so let's cut through the noise and dive into the facts. Understanding these changes could save you from paying unnecessary fees to a real estate agent.

The Old Way: Understanding Traditional Real Estate Commissions

In the past, when a home seller listed a property with a real estate agent, they could choose to offer a commission to a potential buyer's agent. This commission was displayed on the MLS (Multiple Listing Service) and visible on popular real estate websites like Zillow and Realtor.com. The commission amount varied, typically ranging from 2% to 3% of the purchase and sale price, depending on how much the seller wanted to incentivize home buyers' agents.

Seller's Choice: The seller had the discretion to determine the real estate commission offered to the buyer's real estate agent, which was paid through the listing agent's brokerage.
Commission Splits: For example, a 5% commission might be split evenly between the listing agent and the buyer's agent, with each receiving 2.5%. However, this split could vary based on the listing agreement.
No Buyer’s Agent: If there was no buyer’s agent involved, the listing agent would receive the full commission unless otherwise specified in the contract or listing agreement or through NEGOTIATIONS (real estate commissions have always been and will always be negotiable!).

The New Reality: Post-Lawsuit Settlement Changes

Following a recent lawsuit settlement, the National Association of Realtors (NAR) will enforce new rules starting August 17th. The most notable change is that offers of compensation to buyer’s real estate agents will no longer be published on the MLS (Multiple Listing System). While home sellers can still offer real estate commission to a buyer's agent, it will now be negotiated with each offer, rather than being advertised upfront.

Transparent Compensation: Previously, the real estate commission paid to a buyer's agent was agreed upon at the listing stage and visible to everyone on the MLS; it was also visible to home buyers on all real estate syndication websites, including Zillow, Realtor.com, Redfin, etc, so contrary to popular belief this new rule makes commissions LESS TRANSPARENT to home buyers! Now, the commission, if any, will be negotiated and may vary depending on the offer.
Buyer’s Agreement: Before a buyer can tour a property with an agent, they must sign an agreement outlining the agent's commission. This commission is negotiable and may be the home buyer’s responsibility if not paid by the seller. The buyer's agent may be compensated by both parties as long as it's disclosed and in writing. For example, if the seller is offering 1% commission to a buyer's broker and the buyer's broker has set their price at 2.5% as a minimum that they will accept for their professional services, the buyer would make up the difference of 1.5%, making it less out-of-pocket than paying the entire 2.5% since the seller is offering 1%. There are several ways that buyers agents can be compensated for their services.
Formalized Relationships: Like sellers, home buyers will now need to formalize their relationship with their agent through a contract, which will specify the agent’s commission.

Types of Buyer's Agent Contracts

There are two main types of contracts that buyers may encounter:

Showing Agreement: We like to refer to this as the "dating" relationship with a home buyer.
1. Multiple Property Addresses: This form, last updated in 2006, allows home buyers to sign with an agent for either one or multiple properties that they plan on touring with their Realtor. This form outlines the properties that the real estate agent will show the buyer and mentions the relationship between the buyer and agent. Home buyers SHOULD AVOID signing this form with multiple agents for the same house, which could lead to paying both agents a commission, similar to a seller signing a listing agreement with two different real estate brokers.
2. No More Random Showings: This agreement prevents buyers from requesting a showing from one agent and then using another agent to complete the purchase. Doing so could result in legal obligations to pay both agents.
Exclusive Buyer’s Agency Agreement: This is what we refer to as the "engagement or marriage" relationship with a home buyer.
1. Longer-Term Commitment: This contract outlines the type(s) of property and geographic location(s) the buyer's real estate agent will assist with and specifies the commission or compensation expected to be paid to that agent, whether from the seller and/or buyer. If a buyer purchases a property during the agreement period, the agent’s commission is due, even if the buyer switches agents.
2. Protection Period: If the agreement is terminated early, the agent is still entitled to a commission if the buyer purchases a property they were shown during the contract period. This clause protects real estate agents from being cut out of a deal after doing the hard work that goes into finding a home buyer a property.

Why Choosing Your Real Estate Agent Matters Now More Than Ever

The changes in real estate commission rules mean that the real estate agent you choose to represent you is more important than ever. Experienced agents like us can save you thousands by identifying hidden defects during inspections or negotiating repair credits. They can also help you navigate the complexities of the new commission structure, ensuring you avoid any legal pitfalls. There are several other reasons to work with an experienced buyer's agent that we highlighted in an article from several years ago which can be read here: https://www.pearlantonacci.com/blog/do-you-really-need-a-buyers-agent-when-moving-to-south-florida/.

Key Takeaways for Homebuyers:

Who You Work With Matters: Choose an agent with experience and a proven track record, not the agent with the most followers on social media or the agent with the coolest TikTok videos! The best real estate agent can significantly impact your home-buying experience. Ask the right questions when interviewing your real estate agent, as referenced in this blog post.
Understand the Contracts: Before signing any agreement, make sure you fully understand the terms, especially regarding commission payments.
Home Buyers Don't Necessarily Have to Pay Commissions to Work With An Agent: While some scenarios will leave the home buyer responsible for paying their real estate agent a commission, most of the time, we're finding that sellers are still willing to offer compensation to the buyer's real estate agent. So, while there may be misinformation in the media and even by some agents, don't assume that you will have to pay your real estate agent a commission!
Avoid Legal Issues: Be aware of the legal obligations outlined in your agreements to avoid potential lawsuits.

Conclusion: Navigate the New Real Estate Landscape with Confidence

These changes require home buyers to be more informed and proactive. Take the time to choose the right Realtor, understand the contracts, and ensure that you’re getting value beyond just opening a door. If you have any questions about these new rules and how they affect you, don't hesitate to reach out. We'd love the opportunity to guide you through these changes and help you make the best decision for your real estate needs.

NAR Settlement Frequently Asked Questions

What is the NAR settlement about?

The National Association of Realtors (NAR) settlement addresses lawsuits claiming that the traditional cooperative commission structure unfairly inflates real estate commissions and leads to anti-competitive practices like steering. As a result, changes have been introduced to how commissions are negotiated and handled in real estate transactions.

What is the cooperative compensation structure?

The cooperative compensation structure is where the seller pays the full commission for the transaction, which is then split between the listing agent and the buyer’s agent. This system is now under scrutiny, leading to shifts in how commissions are handled.

How will commissions work under the new model?

Under the new structure, the seller negotiates their commission directly with the listing agent, and the buyer’s agent negotiates their fee separately with the buyer. There is no automatic sharing of the commission; instead, both sides determine how to handle each party’s success fee during the transaction.

What are the potential impacts of removing cooperative compensation?

Without cooperative compensation, buyers may face challenges in securing proper representation. This could lead to more unrepresented buyers attempting to navigate transactions on their own, increasing the risk of costly mistakes and legal issues. Sellers might also face repercussions if buyers take legal action due to errors made during the process.

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Posted by Brian Pearl on August 28th, 2024