Commission Lawsuits & Proposed Settlement by NAR
Many of you have been following or are likely seeing the results of the Sitzer-Burnett commission lawsuit and its copycats. It's mainly about whether or not buyer broker fees should be offered by the seller's broker automatically in the Multiple Listing Service (MLS) or decoupled and negotiated directly between buyers and their real estate professional of choice. How this ends will change the real estate industry moving forward but not nearly as much as you may have imagined from recent headlines. Based on the settlement offered by the NAR this month, here is how it will likely affect us in Los Angeles & Orange County.
**Please keep in mind that these changes have not gone into effect yet**
The primary outcomes of this lawsuit are going to be that buyer's agents will disclose their fee up front, buyers will need to agree to that fee, and they will both have to sign a buyer representation agreement just as sellers have always had to sign a listing agreement.
How will this change the industry?
Simple, the buyer representation agreement was a best practice until now so that real estate professionals that choose to work with buyers would be paid for the considerable time, effort, and expertise given to the buyer upon the buyer closing on a property. Now it will be a minimum requirement to have an exclusive representation agreement before working with a buyer.
There are only a few possible ways that this could resolve itself in our markets going forward. In other states, where demand and home prices are not as high this might not have a significant impact, however, in our highly competitive environment this change will be most important for first-time home buyers. For everyone else this change will be much less significant as in most cases it will result in very similar costs to the overall process. I'd like to walk you through these changes now so that you have time to adjust and ask any questions BEFORE your next real estate need. Knowing your options in advance will allow you to make informed decisions and act more confidently in the future.
Change #1 - No Required Commissions In The MLS
In the event that commissions are separated from the MLS, buyers will have to factor their representation fees into their overall home buying plan and budget for it before starting their search. You may have noticed that buyer representation agreements in California have changed this year to now include a section saying that the buyer is responsible for their broker's fee. Historically, in our areas, the seller paid both brokers' fees on the sale side and then didn't have to pay it upon purchasing their next property or "upleg".
This was recommended because, in our market, it is much more challenging for first-time home buyers to factor in an additional fee than someone who has already built a significant amount of wealth through investing in a home/property over the last decade. A 2-3% additional closing cost could feel very different depending on which side you stand. At the end of the day though, the home will be appraised at the value of the buyer's offer, not the buyer's offer minus their broker's fee.
Does this mean that going forward buyers will always pay their 100% of their chosen professional's fee directly or that sellers will stop offering all or part of the buyer broker's fee as an additional incentive for buyers to consider their home? No... but it does mean that buyers will have to be prepared for it to happen more often than before. It will become another step of the negotiation just like all other costs involved with buying/selling properties have been up until now. Buyers may be responsible for all or part of their chosen real estate professional's fee. This will be good for the industry as many buyers do not realize how valuable having their real estate professional is over the short and long-term and many agents will need to up the value and expertise they offer or get out of the business.
Here are the most probable outcomes you should be prepared for...
1. Seller's will continue to offer all or a portion of the buyer broker's fee as an additional incentive to come bid on their property. Except this will be off of the MLS. Other websites like Zillow, Compass, Redfin etc... will not have this limitation. This will encourage more attention on their home and a higher frequency of multiple counter situations where they can shift some or all of the buyer broker's fee back onto the the buyer while increasing the final sales price as much as possible. If there isn't as much interest as expected they will still benefit by having more eyes on the property, selling more quickly, and paying no more costs than a home sale would have involved over the last 30 years.
2. Buyers will offer an additional amount over the asking price to cover the additional closing costs just as they have always done. Any time a buyer needs assistance with closing costs, buying down their interest rate, or their broker's fee, they will include it in the offer. This allows buyers to leverage their loan to cover the cash needs of buying a home for a minimally higher monthly payment. How much their monthly payment will increase will ultimately depend on current interest rates.
3. Sellers will offer no, or less than sufficient compensation to cover the buyer broker's fee. Buyers who cannot afford to pay their representative's fee will avoid seeing these properties resulting in less overall offers on those properties. Ultimately, in our markets, it could cost sellers more than what they are attempting to save by not offering it because pricing aggressively, receiving multiple offers, and offering the buyer broker's fee has historically led to selling quickly while bidding up the final sales price due to the volume of offers received. If the property does not sell for any reason, buyers will negotiate a price reduction, for the seller to pay their closing costs (which will include their broker's fee), and anything else they can get just as buyers have always done on properties with longer days on market (DOM).
80%-90% of the offers in these situations do not come up. Your agent earns their fee by negotiating the strongest offers into even more favorable terms before accepting one and shifting immediately to handle escrow while finding you a replacement property at the same time.
If the property does not sell, buyers will negotiate a price reduction or for the seller to pay their closing costs (which will include their broker's fee if the seller is not paying) just as they have always done on properties with longer days on market (DOM).
4. Sellers will not pay the buyer broker's fee in highly competitive situations, like multiple offers, however they will have to pay their broker's fee on the buy side when buying the next home to balance it out. Although the commission negotiation might be separated, most people buy within the same or similar markets resulting in not being able to "work the system" to avoid the fee on both sides.
Change #2- Buyers Will Need A Buyer Representation Agreement
You may have noticed that buyer representation agreements have changed this year. They now include a section saying that the buyer is responsible for their broker's fee. On the newly updated Purchase Agreement, in section G(3) paragraph 18, it gives you the option to check a box to include the 'seller's obligation to pay the buyer broker's fee under a separate agreement' in the offer. By checking, a new form called 'Form SPBB' is then included with the purchase agreement. This form allows you to request that the seller's broker & seller pay the buyer broker's fee.
Just as all sellers have to sign a listing agreement, buyers will have to sign a representation agreement to work with a reputable broker. Without that representation agreement agents will not be able to use form "SPBB" to request that the sellers pay their fee. Brokers representing buyers are also going to need this agreement prior to doing any work to ensure that the buyer is aware of the possible costs and what their fee is. Even when a buyer chooses to work directly with the listing agent, they will still need to sign a representation agreement with that agent for their buyer broker services because they are now responsible for the fee required for that broker to do all of the work required on the buyer's side of the transaction.
The most probable outcomes of this will be...
1. Brokerages will require their agents to have signed buyer agreements before working with a buyer past the initial consultation and before viewing homes. This will make sure the buyer is educated on how the process works, what their broker's fee is, what they should expect for that one-time fee, and create full transparency in the relationship before getting started. Buyers will be able to hire the right professional that they feel is worth the fee or that is in their budget just as in every other industry. The old adage "you get what you pay for" is ultimately true and for very real reasons in the service industry. Professionals who serve : e.g. lawyers, real estate brokers, designers, chefs, financial advisors all have the ability to ask for a fee commensurate with the value they bring to the table.
2. There will be newly updated disclosures regarding agency, fees, and your rights as the buyer or seller just as they are updated every year.
Summary:
Agent fees have always been negotiable and will continue to be so. The buyer may have been added to the negotiation but this does not change that fact. The overall buying and selling processes will not change much as per how they will affect you directly, the clients. You might have thought so after seeing some of the recent headlines. It might even have seemed that the sky was falling with articles using clickbait titles like "gone are the says of 3% commissions" or "realtor group agrees to slash commissions". Possibly even that the sky would be falling or that things are looking dire in the real estate industry. Let me save you the time... they are not.
This will be a good thing because buyers are getting to be a larger part of the process and understand what truly goes into it. They will be gaining new information and accountability that it was too easy to ignore in the past. When you buy a home, you will need to hire your real estate professional just as you would a lawyer, contractor, architect, designer, etc... or any other person who provides a service that is necessary for the goal you are working to achieve. Those professionals all charge a fee commensurate with their services, experience, and the value of their time. Pick the one that makes you feel confident in what you are trying to achieve, not the one that gives you a 2 for 1 coupon. There is a reason why they have to do that to get the work and it will show in your net outcomes.
The buyer broker's fee will be another closing cost that will need to be accounted for on the buyer's side and discussed with their agent. Seller will be more or less open to offering closing costs or broker fee assistance depending on the market. Will it lower some buyer's price ranges before getting started? Yes. By how much? Somewhere between 0.5%-3%. It depends on your broker's fee, how much incentive the sellers are offering in your desired neighborhoods, and a variety of other factors.
Buyers, just as they always have, will need to budget based on area, type of home, amenities, closing costs, interest rate, monthly payment, inspection fees etc... before starting their search and now they will add a possible 0.5%-3% fee when running the numbers. Sellers may be able to avoid paying that 0.5%-3% fee on the sale side only to have to make up for it by paying it when they buy a new property. As people typically buy in the same market they have sold in, there will be very few situations where one can avoid paying the broker's fee on either side.
Despite some short-term discomfort while adjusting to the new rules when they go into effect, the best course of action will continue to be the same as it always has been. I encourage you, as I do everyone, to work with someone whose expertise you find valuable regardless of their fee. Whether you work with me or anyone else, that fact doesn't change. A one-time 2.0%-3.0% fee for a long-term real estate advisor you trust, that works alongside you for years prior to buying/investing in your home, and continues to be a resource for you years after is a bargain. The amount of time, money, and stress they will save you along with the wealth they will help you build through that home makes those fees seem like nothing. Ask anyone who's worked with a broker they trust for years.
And as always, avoid discount brokers and fire agents that don't deliver the expertise/value they promise. Both are showing you the excuses they will use after delivering sub-par results. You are able to cancel the agreement without penalty (unless otherwise agreed to) and move on to an agent that better matches what you need with a simple notice in writing. It's important to choose to have accountability with the professionals you hire and to hold them accountable in turn.
Feel free to reach out the next time you have any real estate need/question. I don't bite, and appreciate any opportunity to be of service now for the chance to earn your trust/business in the future.
-Dave Dippong
