The day is finally upon us. On August 1st the Arizona real estate market will get a much-needed revamp.
I’ve written numerous articles about the class action lawsuits challenging my industry’s traditional commission structure and the blockbuster federal court decision and 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 the way Realtors represent and are compensated by buyers and sellers. The day of reckoning is next Thursday. That’s when the changes take place in Arizona.
As you may recall from my previous articles, the current system of sellers paying compensation to buyer agents has been criticized from both sides of the transaction:
SELLERS COMPELLED TO PAY 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 a lot.
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.
HERE ARE THE 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 (i.e. 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. I took a poll of 150 real estate agents on one of my recent training seminars. I asked how much buyers are likely to pay a buyer agent if they have to pay it out-of-pocket. The overwhelming opinion was that it will be considerably less than 2%-3% of the purchase price buyer agents are accustomed to earning from the seller now.
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. It could be 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 has 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
By the way, 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 sellers’ 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 buyer requested “concessions”. Doing this allows buyers to “build in” their buyer agent fee to the purchase price and their loan amount.
BIG CHANGES BEGINNING AUGUST 1st
Pretty big stuff, right? Lower commissions for sellers. Agents showing buyers the homes that fit them best instead of homes where that agent makes more money. It’s all effective August 1st.
Our industry will be better because of these changes, even though many, 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). As for those agents lambasting the change and resisting the inevitable, I offer these wise words by James Spader:
“If you find great difficulty in reckoning with the future, or even the present, I think it’s intuitive to start that process by reckoning with the past.
