Starting this weekend, potential home buyers will have to contend with some changes that could further complicate one of life’s most stressful experiences.
A settlement reached earlier this year with the National Association of Realtors (NAR) means buyers will now have to cover the cost of hiring a real estate agent.
Buyers can no longer rely on sellers paying a buyer’s agent a fee. They must pay it themselves. They also must sign a detailed contract before they can even begin house hunting with a real estate agent — a new hurdle for most buyers.
The goal of the change is to provide more transparency around real estate agent compensation and help homebuyers, but any new change comes with an adjustment period, and challenges have arisen in areas where the new rules were implemented early.
“This is probably a growing pain,” said Avi Sinai, a California real estate lawyer, “and hopefully in 12, 16, 18 months, things will calm down.”
A sign stands in front of a home for sale in San Rafael, California. (Justin Sullivan/Getty Images) (Justin Sullivan via Getty Images)
“That seems like a tall order.”
Starting Saturday, real estate agents who list homes for sale on a widely used agent database will no longer be able to advertise homebuyers’ real estate agent fees on that database.
This means that the seller won’t have to pay a commission of typically 5% to 6% of the sales price to the real estate agents on both sides of the transaction – the buyer’s and seller’s agents usually split that commission between them.
Currently, buyers must sign a contract and negotiate how much they’ll pay their agent before they can even begin touring potential homes — an added expense that many buyers, especially first-time buyers, can’t afford.
“Do you know how many typical American buyers keep 3 percent of the sale price in cash and give it to their buyer’s agent?” says Wayne Hussey, an attorney at Legal Shield, an online legal services and documentation provider.
“That seems like a tall order.”
A home that was listed for sale last year in Austin, Texas. (Brandon Bell/Getty Images) (Brandon Bell via Getty Images)
“Buyer’s problem”
NAR’s new rules don’t prohibit sellers from paying some or all of their commission to a buyer’s agent, they just can’t list it in the real estate agent’s property listing database.
In fact, the concession to pay a portion of that fee may be in the buyer’s offer or may be a negotiated term between the buyer and seller at the contract stage, but there is no guarantee that it will work in the buyer’s favor.
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“What if as a seller you pay 2% to the buyer’s agent, but the buyer has agreed in their contract with their agent to pay 3%? What happens to that extra 1%?” Mr Hussey said.
“That’s a buyer’s issue.”
Also, asking a seller to help pay the buyer’s agent’s commission can be a deal-breaker when there are multiple bids, something one mortgage broker detailed on Twitter in a deal he was working on with a buyer.
The seller indicated he did not want to pay a commission. There were six offers, two of which required a buyer’s agent commission. The winning bid was $55,000 above the asking price, with no conditions such as commission.
“If you’re a buyer who has to charge a fee, it’s going to be very difficult to win,” said Melissa Savenko, a real estate agent in Richmond, Virginia.
“And I think that’s a realistic possibility.”
A Re/Max real estate agent shows a potential buyer around a home listed as a short sale in Coral Gables, Florida, in 2014. (Joe Raedle/Getty Images) (Joe Raedle via Getty Images)
“Exclusive relationship”
Another problem arises when buyers sign contracts with real estate agents.
For example, one client represented by Sinai discovered he still had to pay a buyer’s commission to a real estate agent when purchasing a home, even though he thought he had cut ties with the agent months prior.
That’s because when you tried to make an offer on a house you found online a few months ago, you unknowingly entered into an exclusive buyer representation agreement with the real estate agent.
To do this, the buyer hired an agent to help him with the purchase process. The agent directed the process on the buyer’s behalf by sending the buyer numerous documents to sign. Among the documents was a contract that stipulated that if the buyer found a home to purchase within the next six months, with or without the agent’s help, the buyer was obligated to pay the agent a commission.
Their offer on the first house was rejected, and the buyers decided to move away from that agent and used a different agent to find the house they ultimately planned to buy.
“Now then, [agent’s] “The brokerages are demanding fees even though they have no involvement in the transactions,” Sinai said.
“But we’ve never sat down and discussed an exclusive relationship or had any discussions on the phone or email,” he said. “People don’t realize that they have to see these documents and whether this locks me into an exclusive relationship.”
A real estate salesperson with Re/Max Advance Realty shows a home that was listed for sale last year in Cutler Bay, Florida. (Joe Raedle/Getty Images) (Joe Raedle via Getty Images)
“We’re just going too far.”
A big reason home buyers don’t know what to look for in a buyer representation agreement is because many of them have never had to before.
According to the National Association of Realtors’ (NAR) most recent Buyers and Sellers Report, only 41% of U.S. buyers have a written contract with a real estate agent, compared to just 34% of first-time homebuyers.
Prior to July, only 18 states required a buyer representation agreement. Now, the NAR settlement makes it mandatory.
This means buyers will need to do more thorough research before signing with a real estate agent, and they may find themselves in a situation where they have to sign paperwork just to tour an open house without an agent.
“The California Association of Realtors recommends that if you’re a buyer who’s just dropping in, have the seller’s agent sign a legal document stating that they’re not represented,” Sinai said.
“So maybe we’ve gone too far?”
A housing development in Cranberry Township, Pennsylvania. (AP Photo/Jean J. Puskar, File) (Associated Press)
“The most valuable asset they own.”
Still, Sinai believes the NAR settlement is “a good first step in the right direction.”
“This puts the incentives in the right place for all parties,” he said.
Buyers also have more power when entering into a contract with a real estate agent. A novice buyer may want more support and feel more comfortable with a traditional commission structure (2.5% to 3% commission), but a more experienced buyer may come up with a better commission agreement that suits their needs.
Savenko said a la carte services may also become more common. Some agents may simply want to show homes, while others may write offers and negotiate contracts with buyers for a fixed fee. Still others may offer services for an hourly or flat fee.
Buyers may have more choices than ever before.
And all three experts agree that the new methods could weed out bad agents: If buyers have to engage only with an agent, that agent will have to prove their worth more than before. Good agents will get more work and others will leave.
“This should be like the relationship you have with your lawyer, financial advisor, doctor or dentist,” Savenko said.
“These people are helping to purchase what will, for most people, be the most valuable asset of their lifetime.”
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Janna Herron is a senior columnist for Yahoo Finance. Follow her on X. Jana Herron.