Big Industry Changes Coming Next Week!
This isn’t a new topic, and I’m not sure how in depth I will go into the details of the big lawsuit that NAR (National Association of Realtors) settled last year (along with many individual brokerages), but there are some distinct changes to the way real estate is practiced that will officially go into effect starting next week, on August 17th. And that’s what I’m talking about today.
There is so much conversation about what this lawsuit is/was about, and so many opinions flying around online. Even people who have never been part of a real estate transaction have strong opinions and feelings! Ultimately, I think there will be good that comes from this lawsuit, and I think it will open the door to some potentially really unethical behavior from the bad agents among us. There are also new lawsuits on the horizon, this time from buyers. It’s a bucket of fun times.
More transparency is always better, but in some ways, the results of the settlement create less transparency, which is never a good thing. Let’s dive in.
How things have worked until now:
For decades, the list agent and the seller have decided the overall commission of the entire transaction. Then, a portion of that overall commission was offered to the buyer’s agent.
Is the seller officially ‘paying’ this? Is the commission just coming out of the proceeds of the sale? It is the buyer’s money after all. This is one of the main points being argued in this big lawsuit. How do you perceive this? I’ve always perceived it as - the seller is deciding, and in one way that’s not really fair, but it’s the buyer’s money, and a lot of things get paid out of the proceeds of the sale. To me it was the buyer’s money, so the seller wasn’t really the one paying, they were just deciding how much was getting paid. Others definitely have a different perception than this.
The buyer’s commission was communicated via the MLS, if a seller is working with a real estate broker. And you had to offer the same amount to all buyer’s brokers across the board, you can’t offer varying amounts to different agents because you like them, or don’t like them, or you think they are better or worse at their job.
Historically, buyer’s agents didn’t always exist. Back in those days a seller had an agent, and the buyer was on their own. For better or worse. And to be clear, the seller’s agent has no allegiance or responsibility to the buyer, which is the same today.
Properties are priced by looking at comps - comparable sales of similar properties in the immediate/nearby surrounding area. Part of this lawsuit was saying that the commission was added onto the price of the home, but that just isn’t true. It’s deducted from the price. It has nothing to do with the value and is not a factor in pricing a home. If we suddenly stopped paying buyer’s agents, the price of homes wouldn’t magically decrease by 2.5 - 3%. But don’t we all wish.
Until now, buyer’s didn’t have to have a formal written agreement with their broker the same way that a seller has a listing agreement with their’s. Some agents did have that, most did not. We always have a formal buyer consultation where we walk new clients through the entire buying process, explain how we are paid, how everything works, the contracts, etc., and we communicate that if you want to work with us, you can’t also work with other agents.
Changes in place as of August 17:
To be clear, a seller never had to ‘offer’ coop commission to a buyer, but now it is being discussed more, and more sellers are choosing to lower the coop they are offering, or offer zero. Keep reading to find out why this matters.
Starting next week, everyone has to have a written agreement, both sellers and buyers. It can be exclusive or non-exclusive, but now buyer’s have to sign a ‘contract’ outlining their relationship with an agent. It also outlines how much your agent is asking to be paid. This is an important aspect here. We don’t work for free, we never did. Many agents were not skilled in communicating how buyer’s agents got paid, which is part of the problem. Before now, the vast majority of listings already accounted for our commission, in Chicago many times it was 2.5%, sometimes it was lower. Now, we talk through everything in far more detail and you sign an agreement that if the seller isn’t paying the commission that we work for (the specific percentage is discussed), that you as the buyer have to pay for it yourself. Or we try to get it covered as a credit from the seller as part of the transaction. So in the past, we might not have said anything if a slightly lower coop was being offered, now we are agreeing on the front end what we are working for, and we find out property by property if the seller is accounting for it, or if we need to approach it a different way.
No offers of compensation to buyer’s agents can be shared on the MLS. This is one aspect of this settlement that I have a problem with, because it creates less transparency. It also creates a lot more work, as we will have to individually reach out to each and every individual list agent for anything you want to see to find out if the seller is accounting for our commission yet or not. It’s important for the buyer to know. Some brokerages are advising their agents to tell sellers not to communicate what they are willing to do at all. If I call John Doe agent from that brokerage to schedule a showing and ask if the seller is offering a coop, they will say ‘we are not communicating that’. So it’s an unknown variable, are they open to negotiating the commission as a credit, or will they just say absolutely no, and you will have to pay it in cash? Are list agents telling every buyer’s agent the same coop commission if their seller is offering one? Is that number the same number they agreed to with the seller? These are areas where I think less scrupulous agents will try to take advantage. Time will tell.
I think this will make real estate a more difficult industry to get into, which I think is a good thing. The bar for entry into this field is alarmingly low, given the high stakes. Sure, most agents wash out within their first two years and move on, but still. It was easy to get into because you didn’t have to necessarily do much to start working with a buyer before now. You could meet someone at an open house, and just try to forge a relationship and see if you could get it to stick. A lot of people told buyers that they worked for free (was never true/accurate), and you didn’t have to get a formal contract/agreement like you do as a list/seller’s agent. Now you are required to have that buyer’s agreement signed, so it will be harder to get and work with buyers. Hopefully this increases the caliber of real estate brokers overall.
Buying property, whether for your primary residence or for an investment is a big deal. It’s a lot of money and it shouldn’t be taken lightly. I’ve always been kind of surprised my how casually people approach it, especially when it comes to who they work with/who represents them. Having to sign a document, formalizing the relationship between buyer and broker is a good thing. It makes the whole thing feel more real, and more serious. Who you work with matters, you should work with someone you feel comfortable with, someone you can trust, that you know is giving you expert guidance and has your best interests at the forefront.