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In case you haven’t heard, the real estate industry has been under assault. After years of litigation over claims that the real estate industry conspired to fix commissions, the National Association of Realtors has entered into a settlement agreement, agreeing to pay $418m and to make changes regarding the disclosure and payment of broker fees.
The Traditional Broker Fee Model
Typically, in a real estate transaction the buyer-broker’s fee, or “co-broker fee”, is paid out of the seller agent’s commission. Most properties for sale are listed on a local database known as a multiple listing service (MLS). NAR sets the base rules for MLS, and one rule, called the Participation Rule has required that for every property listed on MLS, the listing broker must offer compensation to an agent who brings a successful buyer to the closing table.
NAR Settlement Agreement
Approximately 88% of homes are listed on MLS. Critics claim this near monopoly combined with the requirement that a seller’s agent offer a co-broker fee unfairly inflates broker fees. The NAR settlement agreement imposes several changes in broker business practices designed to increase transparency and fairness. It is expected that brokerages across the country will adopt these changes to avoid future litigation. Some of the more important rule changes include:
1. Any requirement that a seller offer a co-broker fee to list on
MLS is prohibited.
2. Any co-broker fee offered by the seller may not be disclosed on
MLS. (This information may be disclosed elsewhere, for
example on an agency website.)
3. Seller agency agreements must provide how much the seller is
willing to pay a buyer’s agent.
4. Buyers must enter into a written agency agreement prior to
touring a property with an agent.
5. A buyer’s agent may not state their services are free or available
at no cost to the buyer.
6. Agency agreements must disclose that broker fees are not set by
law and are fully negotiable.
The rule changes are expected to take effect by mid-August.
What Next?
The court must approve the terms of the settlement agreement before the new rules are finalized, which is expected to happen. Some industry experts predict broker fees could decline by as much as 30%. Biggest declines would occur in regions where 6% is the standard broker fee, for instance the Midwest where the lawsuits were filed. Massachusetts, where a 5% fee has been more typical, will be less affected.
Tips for Sellers and Buyers
If you’re thinking about entering the market, the first question you may ask is whether to hire an agent at all. For sellers and buyers alike, it is conventional wisdom (and this author’s opinion) that hiring an agent is likely to result in a better outcome.
Most studies have shown that sellers generally achieve higher net sale prices when employing a full-service brokerage. See For Sale by Owner: Fact and Fiction. Moreover, in today’s market, Massachusetts sellers by and large are still offering to pay a buyer-broker fee, which makes it easier and more budget-friendly for buyers to be represented.
With that in mind, here are 3 things to consider as you embark on your next real estate transaction:
1. Select the right agent: Selling or buying a home is one of the
most financially consequential undertakings you will ever
make. Choose an agent based on credentials, experience, and
trust. There’s nothing wrong with hiring your neighbor or
cousin to sell your home. But don’t hire them for that reason.
Avoiding an awkward moment at the next family barbeque is no
reason to hire an agent. Interview and choose your agent as if
you were hiring a contractor to build a $200,000 addition on
your home.
2. Understand your agency agreement: Although agent
agreements are largely boilerplate, you should carefully read
and understand it before you sign. Ask your agent questions if
you don’t understand any of the agreement terms. Or confer
with a lawyer. I’m always happy to review an agency agreement
for a friend, family member or client. Even if it doesn’t result in
new business for me, that kind of good-will benefits everyone in
the long run.
3. Discuss the buyer-broker fee: If you’re a seller, discuss with
your agent the pros and cons of offering a lower co-broker fee,
or none at all. Are you reducing transaction costs or instead
putting yourself at a competitive disadvantage? What would
negotiations with the buyer look like? What happens if the
buyer is unrepresented? Are you ok with your agent
representing both you and the buyer? What would a dual agent
fee be?
If you’re a buyer, are you willing to pay some or all of your
broker’s fee? Can you even afford to? Unless there is a shift in
current practices, this remains a choice most buyers will not
have to make, as co-broker fees continue to be offered in the
vast majority of transactions.
In the meantime, stay tuned for updates if and when the new rules become final. Should you have questions regarding any real estate or legal matter call us at 781-829-2003.