Clickbait headlines are circulating the web, and the news, regarding the recent National Association of Realtors (NAR) settlement agreement. The short story is there were a series of lawsuits against big name real estate brokerages accusing them of conspiring to keep commissions high. NAR reached a settlement agreement, which has uninformed industry spectators in an uproar with headlines like This will blow the market. Let’s dive into the new mandates and how they will, or will not, affect how buyers, sellers, and realtors do business!
The settlement agreement includes 2 noteworthy changes:
- Offers of compensation will no longer be included in the Multiple Listing Service, or MLS.
- In the past, the commission the seller committed to pay the buyer’s real estate brokerage was disclosed in the MLS.
- With the new mandates, this commission will not be disclosed. Instead, it will be discussed outside of the MLS between real estate agents.
- Buyers working with realtors must sign an agreement before touring homes.
- While NAR always encouraged realtors to use written agreements prior to showing properties, these written agreements are now required.
- Buyer-broker agreements are designed to outline the services and value your real estate agent will provide and at what cost.
Many articles accused NAR of mandating 6% commissions – 3% to the listing brokerage (the real estate brokerage that represents the seller) and 3% to the cooperating broker (the real estate brokerage that represents the buyer). This is simply not true. I’ve been a licensed realtor since 2017, and I’ve seen and sold properties with varying commissions. 5-6% is the standard; It was never a rule, law, or mandate and it has always been negotiable.
Real estate agents are not paid directly. Commission is paid to the real estate broker. The amount of commission that is paid to the real estate agent is dependent upon his/her agreement with the broker.
Fun Fact
The Effect of Undisclosed Commission and Buyer-Broker Agreements
Remember I said NAR always encouraged buyer-broker agreements? In the past, I opted not to use these agreements. Here’s why: Early in my real estate career, I presented the agreement to a potential buyer and it totally turned him off. We use standard agreements approved by Florida attorneys and there’s a blank line that indicates the commission that must be paid to the buyer’s broker upon closing. Notice I said that line is blank – because commission has always been negotiable! Since sellers traditionally paid commission, and I accepted whatever commission they were offering, the buyer-broker agreement did not seem necessary. I felt the language scared the buyer into thinking they would be responsible for the commission listed on that agreement when they were not.
There are plenty of agents who use those agreements and whose buyer clients incur some out of pocket costs. For example, buyer-broker agreement states buyer’s brokerage is entitled to 3% commission upon closing. Seller’s offered commission, as listed in the MLS, is 2%. Buyer’s broker charges buyer the 1% difference, rightfully so if this is in line with their written agreement. Since I chose to forego buyer-broker agreements, I was simply paid the commission the seller offered for the home my buyer chose. And, yes, I’m aware that the agents who’ve always used these agreements may question the sanity of the agents that do not.
While sellers will continue to offer compensation, this compensation will no longer be listed on the MLS. In the past, commission had to be listed in order for the home to appear on the MLS. The agent representing the seller will still have a listing agreement that outlines the commission they will receive upon a successful sale, as well as the commission the seller will pay the buyer’s broker. It will be up to the buyer’s agent to discover offline what that commission is.
Now here’s where things get a little complicated with the new mandates for both real estate agents and buyers: Required buyer-broker agreements means your realtor cannot show you a home without a written agreement outlining services and fees. Business as usual for all realtors that are already using these agreements. The scenario I previously described will now be commonplace. If a buyer chooses a property where the seller is only offering 1% and the written agreement says their realtor is to be paid 2% (or whatever figure was negotiated between the buyer and their agent), then said buyer is now responsible for the remaining 1% out of pocket.
The difference now is (1) realtors won’t know the commission offered upon viewing the listing on the MLS and (2) sellers may be more prone to offer less to cooperating brokerages, since commission is no longer displayed upfront. Let’s pause. I know that was a lot of information!
Ready? Okay! I totally said that in my 8th grade cheerleader voice. The question is who do these mandates have the potential to hurt? If you guessed the buyer, you are right. The risk that the new mandates pose is more buyers will end up being responsible for agent commissions – that is if they want the knowledge, guidance, risk-mitigation, and support that an experienced agent brings to the table. When it comes to the biggest financial decision one can make, security and peace of mind are priceless.
If you’re a seller, it’s important to remember that offering compensation is in your best interest. Why? Because, choosing not to offer compensation, makes your home more expensive than competing homes in terms of out-of-pocket costs for the buyer. If you’re a listing agent, it’s important to ensure your seller(s) are aware of this. Keep in mind that buyers are responsible for upfront costs that sellers are not, like earnest money deposit, inspection and appraisal, and – in the case of the 80% of residential properties that are financed – down payment.
If you’re a buyer’s agent, work with your buyer(s) to submit an offer that is contingent upon the seller offering compensation in order to limit or eliminate out-of-pocket compensation costs for your client. In other words, put compensation in the contract. Together we can ensure that real estate transactions continue to serve both buyers and sellers in a mutually beneficial way.
All things considered, this will not blow the market! Investors buying up all the affordable homes, on the other hand, might. I digress! For me, nothing beats the joy of helping a family find a home they love and build generational wealth. The mandates won’t stop me from contributing to their realization of the American dream. I hope you’ve found this information useful in cutting through the noise. What do you think about the new mandates? What impact do you predict they’ll have on the real estate market?
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