A NEW day in real estate is coming …

The day is finally upon us. On August 17^th, the real estate market will undergo a much-needed revamp across the United States.

Numerous articles have been written about class action lawsuits challenging our industry’s traditional commission structure, the blockbuster federal court decision, and the multi-billion-dollar judgment last October in favor of the plaintiffs. Since then, the major national brokerages and our national trade organization agreed to make significant changes in how Realtors represent and are compensated by buyers and sellers. The day of reckoning is August 17^th. Some areas of the country will be sooner, but all changes must take place by the 17^th.

The current system of sellers paying compensation to buyer agents has been criticized from both sides of the transaction:

Sellers Compelled to Pay Both Their Agent and the Buyer Agent

The first criticism is that it’s not fair for sellers to feel compelled to offer compensation to buyers’ agents whose job is to negotiate against them. This has been a longstanding practice in our industry. Sellers paid one commission (typically 5%-6%) that was usually divided between their list agent and the agent who represented the successful buyer. Sellers were told that if they didn’t offer what buyer agents in the market expected, some agents would boycott showing their homes. Indeed, this happened.

Buyers Steered to Homes Where Their Agent Was Offered More

The second criticism is that it’s not fair to buyers when their agent steers them to homes where that agent is offered the most money by the seller. Clearly, buyer agents should be showing their buyers the homes that best fit them instead of the homes where sellers offer more. Unfortunately, steering buyers is a sad but true blemish on the complexion of our industry.

Commission Structure Changes

Our industry enacted the following changes:

1. Buyer agents are no longer allowed to show homes to buyers they are “working with” without a written representation agreement. The agreement must define the agent’s duties and compensation. The compensation must be a fixed amount or able to be computed (e.g., 2% of the purchase price). The compensation cannot be based on whatever a seller or listing agent might be offering to a buyer agent.

2. Agents will be able to host open houses and allow buyers to walk through without making them sign a representation agreement. However, agents are cautioned not to begin answering buyers’ questions at the open house because this may be deemed “working with” that buyer, which requires the buyer to sign a representation agreement.

3. The amount buyers pay to a buyer agent is completely negotiable based on the level of service the agent offers. For instance, a buyer agent who drives buyers around personally showing them homes should justify higher compensation than an agent who instructs buyers to see homes on their own and then negotiates the purchase once they find a home they like.

4. On the seller side, the only compensation the seller should be expected to pay is the compensation to their listing agent. It could be a percentage of the sale price or a fixed amount. It’s completely negotiable. This should immediately cut sellers’ commissions in half.

5. Additionally, listing agents should not ask sellers to make offers of compensation to buyer agents. While the settlement only prohibits offers of compensation to buyer agents in MLS, agents who don’t like the change are talking about trying to convince their sellers to let them make offers of compensation to buyer agents in other ways – on the listing agent’s website, via flyers, emails, texts, and phone calls. While the settlement does not specifically prohibit this practice, the Department of Justice, the federal jury, and consumer consensus have made it clear that sellers and listing agents inducing (bribing) buyer agents to show their homes over other homes that may fit the buyer better is a bad and possibly illegal practice. It results in increased costs for sellers and the steering of buyers to homes where the agent makes more.

Now some advice…if you are selling your home and an agent you interview suggests that you offer buyer agent compensation, interview other agents who are up to date on these changes.

Financing the Buyer Agent Fee

If buyers find it tough to pay their buyer agent out of pocket at closing (in addition to their down payment and closing costs), there is no prohibition on a buyer including a term in their purchase offer that the seller agrees to compensate their agent a specified amount out of the seller’s closing proceeds. Buyers often make offers that include costs to be paid by a seller. Sellers simply look at their net sale price in the offer after the buyer requests “concessions.” Doing this allows buyers to “build in” their buyer agent fee to the purchase price and their loan amount.

Big Changes Beginning August 2024

Pretty big stuff, right? Lower commissions for sellers. Agents show buyers the homes that fit them best instead of homes where that agent makes more money. It’s all effective August 17th.

Our industry will be better because of these changes, even though many agents hate it and are looking for ways to work around it. In the end, they will adapt or be out of the business (deservedly so).

Change is not easy, but in the end, I feel this will be a good thing for sellers and buyers. For those lambasting the change and resisting the inevitable, I offer these wise words by John F Kennedy:

“Change is the law of life. And those who look only to the past or the present are certain to miss the future.”