‘The biggest change in 100 years’
A mandatory new contract is about to rewrite the rules of home buying.
Buying a new home has always been stressful, but somewhere before the messy stuff — the loan applications, inspections, contracts, and wire transfers — there was joy in the house hunt.
Maybe you’d start by poking around Zillow before a Realtor friend hears you’re in the market for a change of scenery. She might offer to spend her Sunday driving you around to a few homes. No pressure, she’d say — her services are free. You float through living rooms and bedrooms, orchestrating home makeovers in your head. Maybe you find a house you like; maybe you don’t. That evening, you and your agent chat about next steps over a glass of wine. The headaches come later; at this point, it’s all about possibilities.
As of Saturday, those carefree days are gone. Now, before a real-estate agent so much as opens a door for you, they’ll probably ask you to sign what’s known as a buyer-representation agreement. The contract will lay out the terms of their services and how much they expect to be paid. This kind of agreement used to be optional, at least so early in the game, and most agents decided it wasn’t worth the hassle. They reasoned that because of the way agents’ commissions were structured, buyers didn’t really have to worry about those details, and they feared — maybe correctly — that the formality would scare off potential clients. Now they no longer have a choice.
The new rule, which is part of a sweeping legal settlement, promises to fundamentally rewire the housing market. It’ll force buyers to think seriously about how their agents get paid, something they rarely had to consider in the past. Some buyers could find themselves legally bound to a clumsy agent or on the hook for thousands of dollars. Real-estate agents, on the other hand, may struggle to get would-be clients to sign on the dotted line. Those who can’t “communicate value” — a catchphrase among brokers that basically means “convince buyers that your services are worth a few months’ pay” — risk flunking out of the business. This may sound like a huge headache for both parties, but there are real upsides. Buyers may be more likely to vet their options before settling down with an agent, and many could actually spend less on commissions. Those who panic at the prospect of paying their agent out of pocket will almost certainly be able to find workarounds.
One thing is clear: Casual home shopping is a thing of the past.
“It’s a huge behavior change for Realtors,” Laura Ellis, an executive at Baird & Warner, a Chicago-area real-estate brokerage, told me recently. “It’s the biggest change in over 100 years.”
Home sellers have always had to think, at least in passing, about agent commissions. The typical seller hires an agent who agrees to market the home in exchange for a cut of the sale price (usually between 5% and 6%). The seller’s agent then lists the home on a multiple listing service, a local database where other agents can find details on homes for sale, and promises to split their commission with the buyer’s agent. Let’s say the seller brings in $500,000 from the deal. They’ll hand 5%, or $25,000, to their agent, who then gives half, or $12,500, to the buyer’s agent. A buyer might stress over a down payment and grumble over shelling out a few thousand dollars for title insurance, but they never had to sweat the money changing hands between agents.
The power of the multiple listing service ensured the payments flowed this way. A seller’s agent was required to offer some compensation to the buyer’s agent when posting a home on the database, and while it could technically be as little as $1, most stuck with the status quo of 2.5% to 3% of the sale price. I’ve written a lot about why the system worked this way, but the important thing to know is that it exposed the industry to all kinds of accusations. Critics complained that it made no sense for a seller, who hopes to collect the highest possible price, to funnel a percentage to the buyer’s agent. They also feared that buyers’ agents might “steer” clients away from homes that dared to offer less than the going rate. They argued that MLS rules discouraged negotiations and forced buyers and sellers to pay too much in commissions.
At the center of this system was the National Association of Realtors, the powerful industry group that effectively controls about 97% of local multiple listing services, oversees roughly 1.5 million agents who pay to be members, and pretty much sets the ground rules for buying and selling homes in America. A few years ago, a group of disgruntled sellers sued the NAR, claiming that they’d been strong-armed into paying the customary 5% to 6% of the sale price in commissions. Last October, the plaintiffs scored a surprise victory in the first case to reach trial. As more suits piled up, it became clear that the NAR would need to cut a deal. In March, the organization agreed to pay $418 million to settle. It also agreed to update the rules governing local multiple listing services and agents who use them.
That brings us to Saturday, Aug. 17. As of that date, agents can no longer advertise commissions on the MLS, which means the databases can no longer be used as a cudgel to make sure agents get paid the typical commission. The catch is that listing agents can still technically offer commissions to buyers’ agents pretty much anywhere else — on their websites, over the phone, on billboards if they want to. This could allow for business as usual: A listing agent might still offer to split a commission with the buyer’s agent through any of these alternate avenues. But in order to keep using the MLS, buyers’ agents will have to abide by another rule that will further upend the old way of doing things.
Before they can even tour a home with a client, any agent who uses a Realtor-controlled MLS — which, again, is most of them — will have to get the client to sign an agreement that spells out a few things. First, the agent will have to say how much they expect to be paid. This could be a percentage of the purchase price, like 2.5%, but it could also be a flat fee or even an hourly rate. It just has to be a clear amount, not contingent on what the seller is offering. And unless both sides agree to amend the contract, the buyer’s agent can’t receive more than that amount down the line; if a seller offers 3% but the buyer’s agent agrees to only 2.5%, the buyer’s rep has to either turn down that extra money or pass it along to their client. The NAR has maintained that buyers were free to negotiate commissions even before the lawsuits. But now that’s much more likely to happen.
Again, a seller may still offer to pay the commission of the buyer’s agent as long as that offer is not made through the MLS. But they may choose not to offer anything at all, an option that could work out well for both parties. That’s because buyers, in their offers to sellers, can ask to get some money back so they can pay their agent directly. This is what’s known as a seller credit, and the nonprofit Consumer Advocates in American Real Estate recommends that buyers ask for it if they don’t want to pay their agent out of pocket. Sellers may agree to it in the interest of getting a deal done, especially since it could result in savings for both sides. In the old days, a seller might have unthinkingly offered a commission of 2% or even 3% to the buyer’s agent. But if you, as a buyer, negotiate a fee for your agent of only 1%, you’re basically saving the seller — and yourself — money.
But these workarounds are by no means guaranteed, especially in hot real-estate markets, and some in the industry fear that the quick fix of advertising commissions outside the MLS could open them up to more legal trouble down the line. In the meantime, more buyers may choose to forgo an agent, work out an alternative payment structure, or accept that they may have to fork over money to cover the gap between what they agreed to pay their agent and whatever the seller is willing to contribute.
Other terms of the agreement will also be up to the buyer and their agent. They can decide which services the agent will provide and for how long; whether they want to maintain an exclusive relationship or allow the buyer to work with other agents; what to do if the arrangement sours and one party wants to walk away.
The basic terms of a buyer-representation agreement should, in theory, be fairly simple to spell out: How much is the buyer going to pay, and for which services? But as with all modern contracts, there are complications. The Consumer Federation of America has raised concerns about the standard forms promoted by some state Realtor associations, saying even lawyers might struggle to parse the tiny typeface and thick legalese. It has argued that buyers risk agreeing to unnecessary fees or finding themselves legally bound to an agent who turns out to be a dud. After the California Association of Realtors, which has more than 180,000 members, unveiled a draft of its standard form, the CFA released a report written by Tanya Monestier, a professor of contract law at the University at Buffalo, that lambasted the draft as “virtually unreadable.”
Take, for instance, this section, which is meant to explain what happens if the same agent represents both the buyer and the seller:
“ACCOUNTING FOR PAYMENTS TO BROKER IF BROKER ALSO REPRESENTS SELLER: Notwithstanding paragraph 2D(2), if Broker has a listing agreement with the seller of the property to be purchased, no credit toward Buyer’s compensation obligation shall be given for the amount due Broker by seller for the compensation Broker is owed as the seller’s agent. Buyer will pay the amount in paragraph 2D(1), less any amount offered by Broker to buyer’s agents.”
Imagine 4,000 words of that. A tiny section that basically says “The buyer and the seller will each have to pay the agent separately” turns into word vomit.
“No buyer will understand this provision’s meaning,” Monestier wrote.
The California association did end up making substantive revisions, and said in a statement that “the complexity of the agreement reflects the complexity of California real estate transactions.” But the form is “still very lengthy,” Monestier told me recently. “It’s still very hard to slog through.”
Consumers may, understandably, be wary of signing a complex contract so early in the process, but the new setup has benefits. Sellers often interview several agents before picking the one who seems like they’ll reel in the most lucrative offers. Buyers should similarly vet agents with an eye toward the bottom line. After all, internet-savvy buyers don’t need agents’ help to find houses anymore, Ellis, the brokerage executive in Chicago, told me. But they probably still want someone to hold their hand through the rest of the process. And if you’re a buyer who just wants someone to open doors for you to get a sense of what’s out there, Monestier said, you can hold off on signing with an agent and deal directly with sellers’ agents.
Ultimately, this is about ensuring that both a buyer and their agent enter the relationship with a clear understanding of what they’ll get out of it. A buyer, Ellis said, might want to ask a prospective agent: “If I work with you, how are you going to get me the house that I want, the terms I want? How are you going to get me through this transaction as smoothly as possible?”
The idea that sellers pay both agents’ commissions has always been a clever sleight of hand. Buyer-representation agreements may be thorny, but at least they’ll make it impossible for buyers to ignore the costs of using an agent. Real-estate agents, like people in any other job, provide a service. And nobody works for free.
