The real estate business model, how buyer and seller representation is constructed, commissions paid, and transactions negotiated is presently in a period of transition.
I’m not going to get into the weeds on the seller and buyer lawsuits, the DOJs reneging on a prior negotiated agreement, etc. I’ve been following the legal wrangling for over 3 years, and over the past week I’ve been in communication with CAR, NAR, and MLS legal staff on the recent NAR Settlement. One thing that’s been conveyed by NAR is that even if the proposed settlement terms are not approved by the court, they are going to implement changes. That said, even though the NAR gives an implementation timeframe of Mid-July, there are a lot of moving parts before everything can go into effect. This is all tentative, but rules, guidance, transaction and representation form changes, MLS database modifications, potential lender guideline changes… and a lot of agent training will have to be conducted.
The present system of buyer’s brokers’ compensation has been in place for 40 years. The jury in the Missouri seller lawsuit decided that the buyer didn’t have the opportunity to negotiate their side of the transaction, and the sellers didn’t necessarily want to pay for the other party’s (buyer) representative.
This whole commission structure will be more capitalistic than in the past. A much clearer opportunity to negotiate the buyer’s representative’s services and to accept the obligation to pay for those services. Commissions will be more transparent. There will be some negatives, especially for the First Time Buyer who generally will have limited financial resources and barely has enough money in savings to purchase, before adding the cost of their representatives’ commissions.
Buyers need and generally want great representation. They don’t know what they don’t know, even if they purchased properties in the past. Regulations (especially in California and Los Angeles) are constantly changing. Transactions and negotiations can be very complex. Buyers may want to avoid paying for an agent commission to save money and attempt it by themselves by going to YouTube or Google to learn what to do (good luck)… or go directly to the listing agent. Duel agency (where the same broker represents both seller and buyer) is still legal in California, but realistically, can the fiduciary responsibility that a listing broker has with the seller, be diluted, and the same agent be able to concurrently negotiate in the buyer’s best interest? Especially with the newer buyer broker comp scenario, it becomes more difficult.
As constructed here are some of the pertinent changes in the “Proposed” NAR Settlement:
- Now a mandatory Buyer Broker written agreement will be required that conveys;
- a specific fee to be paid
- The fee must be ascertainable
- Buyer’s Broker may not receive more compensation from any source that exceeds the amount or rate in the agreement with the buyer (no hidden compensation)
- The offer of Compensation field will be eliminated from the MLS
- Offers specific to compensation in the MLS to the Buyer’s Broker, or conveying in the MLS the Listing Broker Compensation (Combined Compensation) are not allowed even in the Agent Private Remarks field.
- Seller potential financial concessions to buyer CAN be mentioned in MLS as long as it’s not tied to agent compensation. That may include some kind of Broker fee, or buyer help with closing costs.
- Concessions paid should be conveyed in the MLS at closing as that will have an impact on the value that an appraiser will use for loans; what potential sellers and agents will use for closed sale comparables on future listing pricing and terms evaluations; and by buyers to determine the appropriate price and terms to be used on an offer for another property.
Note: aside from the agent commissions over 50% of transactions in 2023 already had some level of concessions for buyers fee’s. Because of high interest rates loan rate buydowns, or closing costs like title and escrow fees, where sellers helped the buyers get into the property. That would be from the seller directly to the buyer.
- Offers of buyer-broker compensation would be allowed in a system specifically on the agent’s “own listings” but not any other brokerage’s listings in the system.
The real estate industry will not go away, but how representatives get paid, and transactions negotiated will change. Brokerages and agents will have to adjust the way they do business.
The seller can still pay and include the buyer’s broker compensation in the transaction, just needs to compare the net against the list price, other terms, and competing offers.
A 100% or a smaller percentage of buyer’s representative’s fees can still be covered by the seller. If a percentage of the contractually negotiated fees are not covered by the seller, how are the buyers going to pay their representatives? That will have to be determined upfront when negotiating with the buyer’s broker or may have to submit offers only properties with sellers willing to work with their financial capabilities.
The type of real estate market will have an influence on commissions, and the type of transaction that will be viable to negotiate. In a tight seller’s market, it’ll be harder for a buyer with limited resources to compete with multiple offers and get sellers to compromise price or terms. When it’s a buyer’s market when there’s a lot of available inventory competing for a buyer, there will be more flexibility for a buyer to negotiate what they need.
It’ll be advantageous for a seller to not be closed off to a buyer’s potential offer requesting concessions and be flexible when marketing the property. They can say “I’m not paying the buyer’s closing costs”, but the more buyers that find their property attractive and submit offers, the better chance to finding the best price and ultimate terms.
Buyers and both buyer and listing agents need to be cognizant and educated not just on loan program’s primary underwriting guidelines but limitations on percentage of concessions allowed. Even before the additional commission element, I see too often agents negotiate transactions that never stood a chance to close on face value.
Both buyers and sellers need representatives with high negotiating skills, and experience. Agents and brokers will have to convey their unique value to justify their fee structure. Not all agents and brokers will charge the same. How seasoned is the representative? I’ve been in the industry for close to 40 years, have managed brokerages, trained agents and loan officers, understand lender’s guidelines, have transacted through numerous economic cycles, have negotiated through difficult unique proceedings, and can put together transactions that can close. How’s that going to compare to an agent only in the business a few years, with only a handful of transactions under their belt?
There’s value to both the listing agent and a seller to make sure that a buyer’s representative is professional. An astute listing agent will know that an offer from a seasoned agent will have a higher possibility of not having issues arise during the escrow period, and higher probability of closing.
Also escrows and title companies scrutinize transaction much harder when a principal is not represented by a professional. Principals should not have the illusion that an escrow will help put a transaction together. Their job is to only act as a neutral third party to execute the terms conveyed in the purchase agreement.
This whole commission scenario is still a moving target, a lot can still change, but theoretically, it should be closer to being solidified in the next few months. I’ve always said a good agent is worth their weight in gold… a bad one is overpaid.
If you are in the Los Angeles area, and have any questions or real estate sales or financing needs, feel free to contact me
Ron Henderson GRI, SRES, SFR, RECS, CIAS, CREN, GREEN
President/Broker
Multi Real Estate Services, Inc.
Gov’t Affairs Chair – California Association of Mortgage Professionals (2017-2018)
Chairman – OutWest Marketing Meeting (Real Estate Education)
BRE #00905793 NMLS #310358
www.mres.com
ronh@mres.com
Specialist in the Art of Real Estate Sales and Finance
Real Estate market, mortgage rates, Los Angeles, San Fernando Valley, Conejo Valley, Simi Valley, Woodland Hills, West Hills, Calabasas, Chatsworth
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