The National Association of Realtors (NAR) recently came to a settlement agreement on a class action lawsuit that has changed the way that we disclose how real estate agents on a transaction get paid. It went into effect on August 17th. Let’s take some time and discuss what the settlement is and how it will affect buyers, sellers, and agents going forward.

What is the Settlement and why is it needed?

First a little disclaimer - I am not an attorney and don’t have the full case knowledge. I’m going to do a very brief synopsis. I will link literature from the NAR for buyers and sellers below with more thorough information.

The class action suit was brought because home sellers claimed that they weren’t given a choice about paying for a buyer’s agent’s commission when they sold their property. I also believe there were claims of agents not showing their homes if they offered a lower commission to buyers’ agents.

I’m not going to go into it further and I know I’m not doing it the full justice, but the changes are what are more important moving forward, so let’s talk about that.

How will it change things?

Changes in How Commissions are Advertised

The first major change is that if a seller, through the seller’s agent’s brokerage, is going to offer a buyer’s agent a commission, it can no longer be advertised on the Multiple Listing Service (MLS). This changes the model that has been in place for decades. In the past, a seller and an agent would negotiate a total commission to be paid for the sale of the home. This is often 5-6% of the sales price. The listing agent would then list the home on the MLS and offer a buyer’s agent a portion of that percentage, often half, for bringing a buyer to the sale. This is no longer allowed.

Going forward, a seller can still offer to pay a percentage to the buyer’s agent, but cannot advertise it on the MLS. It can be advertised on the listing agent’s website and in any marketing materials.

Changes in Buyer-Broker Agency Contracts

As an agent, when I represent a buyer or seller, I must have a written Agency Agreement/Contract with my client. For a listing, that contract is signed before the home is put on the market. With a buyer, the timing of signing that contract has been more nebulous. Most agents would typically sign the contract when they sat down with the buyer to write their first offer on a home. And that was perfectly fine. It’s not anymore.

Now, a buyer’s agent must sign an Agency Agreement with their buyer PRIOR to touring ANY properties. The agreement can be tailored to be for a set time period or for one specific property. This will be quite an adjustment for me too. I like to look with my new buyers for a bit to make sure we’re going to work well together. I can still do this, but I’ll have to get that contract signed first.

Signing this contract so early solves more than one issue. First, it will force the agent to have a conversation about how the agent will be paid for their work. In the old model, it was assumed the seller would pay the agent so many agents glossed over this part of the contract. That cannot be done anymore. There is no guarantee the sellers will pay the buyer’s agent and the buyer will need to know if and how they will pay for their agent’s services if the seller doesn’t. The buyer also can use this time to negotiate the commission with their agent.

Another issue solved is less applicable in our state. Before the lawsuit, Utah was one of only 11 states that even had a Buyer-Broker Agency Agreement in place. Now all 50 states will be required to have one. This will be beneficial to buyers as we advance because they will have contractual fiduciary duties from their agents that they may not have had before.

How Does this Change Things for Sellers in Everyday Practice?

It seems that the kneejerk reaction from sellers is that they expect to stop paying commissions to buyers’ agents and net a larger profit in the sale of their homes. From my experience, I don’t believe that will be the long-term effect of these changes. There are a couple of reasons I have come to this conclusion.

First, when you look at the historical data comparing agent-represented sales and for-sale-by-owner sales (FSBO), the FSBOs sell for, on average about 6% less than the agent-represented homes. That difference is also the amount of the typical commission paid on the listing. This shows that agent commissions are often built into the price of the home. If a buyer has to pay their agent themselves or is unrepresented, they will expect the seller to give them a “discount” on the price of 2-3% because the seller isn’t paying for their agent. That would mean the seller is netting the same amount either way. Thus, whether or not a seller pays a buyer’s agent doesn’t affect their net proceeds.

The second reason I believe that we will still see sellers paying buyers’ agents’ commissions is because so many buyers cannot afford to pay their agents out of pocket and the commission cannot be financed as part of their loan like closing costs can. When a buyer purchases a home using a mortgage, they have to pay their down payment (typically 5-20% of the purchase price), loan closing costs (usually 2-3% of the purchase price), and their inspection and appraisal costs (around $1000). There are many buyers who don’t have the extra 2-3 percent in cash to also pay their own agent. I think over time we will see that buyers will be willing to pay a higher price for a home so that they can have the seller pay their agent. We know that they are willing because of the above paragraph and the data showing that they have done this historically.

Sellers will ultimately get to choose if they are willing to pay the buyer’s agent’s commission. I think in the short term will we see many sellers who choose not to pay it. That means that for now, sellers who do choose to pay it will have a competitive advantage over those other sellers. In this slower market, any advantage is beneficial.

How Does this Change Things for Buyers in Everyday Practice?

For buyers, first, they will need to be prepared to sign a contract with an agent before they ever even look at a house. I think this will make buyers have to be more mindful of who they want to work with and the ramifications of their choices. If they aren’t sure when they are starting out, they can sign a contract that only ties them to the agent for a specific house. This is okay, but can be complicated if you are looking at many homes.

Second, buyers will need to discuss with their agent how the agent will be paid and how much. The amount of the commission will be set when the contract is signed. The buyer’s agent will not make more than the amount they decide on together when signing the contract. The contract states that if they both agree that the agent will be paid 2.5% and the seller is willing to pay 2%, the buyer will need to be prepared to pay their agent the .5% to make up the total of 2.5%. On the flip side, if the seller is offering to pay the buyer’s agent 2.5%, the contract will be fulfilled and the buyer won’t have to pay any part of the commission.

Finally, if the buyer cannot afford to pay their agent’s commission out of pocket but still wants to be represented by the agent, they, with their agent will need to discuss the options to make sure the agent still gets paid (Agents are working and deserve to be paid for their work just like everyone deserves to be paid for their work.) These options could include offering a higher amount and asking the seller to pay the commission, changing down payment amounts to keep enough cash free to pay the agent, etc.

Final Takeaways

In summary, these changes are significant and will create more transparency in real estate transactions and that’s a good thing. I think sellers will still, in the long term, pay the lion’s share of commissions, but that it will be discussed more between buyers and sellers and we will have new paperwork to show how agents are being paid. Just as with any change, there will be adjustments and growing pains at first, but we will adapt and come out with a better system in the future.

If you have any questions, please don’t hesitate to reach out to me. I’m also including links below to more info from the National Association of Realtors about the changes.