New rules from a National Association of Realtors (NAR) lawsuit settlement changed how Realtors are compensated. But will this mean savings for home sellers or home buyers? Read on to find out....
by Steve Reynolds, Broker Associate
What Happened?
As part of the agreement, the NAR agreed to change some rules about how the home buying process works.
Buyer's Agent Compensation Banned from MLS
Before a homebuyer can tour a home with an agent, they must sign a Buyer's Brokerage Agreement. The agreement outlines the agent's services, responsibilities and compensation.
Before the settlement, a buyer's agent could see how much the seller agreed to pay by checking the MLS. The MLS (Multiple Listing Service) is an agent-only web portal that lists important property information, some of which is not available to the public.
Buyer's Must Sign a Buyer's Brokerage Agreement
Does this mean I don't have to pay a commission to sell my home?
Before the ruling, it was common for the seller to cover both the listing AND buyer's brokerage commissions.
Since home buyers must now agree to pay their agent, it would seem that home seller's commission costs would be reduced.
Not so fast.
While sellers have every right to pay zero compensation to a buyer's brokerage, there are potential downsides.
3 Facts About Commissions
1
Home sellers have always been able to negotiate compensation with their agent. Nothing has changed here.
There's no fixed commission rate. There has never been a "standard" amount.
2
Sellers aren't required to pay any commissions. You can sell your house FSBO (For Sale by Owner), limited service, or flat-rate listing and potentially save thousands in commissions (if you're willing to do the work). You can also pay your agent (the listing brokerage) and choose to pay zero compensation to the buyer's brokerage.
3
Compensation Has Always Been Negotiable
No Standard Rate
Seller's Choice
Why would I pay the buyer's agent commissions when I don't have to?
Many buyers have only enough cash for their down payment and closing costs.
If they don't have the money to also pay their agent, they may skip your home and pick a house where the seller offers compensation.
Competitive Disadvantage
I'm thinking of selling my home. What are my options?
No Compensation
You can instruct your agent to offer zero compensation to the buyer's brokerage. You would only pay compensation to your listing brokerage.
You can compensate the buyer's brokerage directly at closing.
Direct Compensation
You pay the listing brokerage (at closing) and the listing brokerage will pay the agreed upon amount to the buyer's brokerage.
Brokerage to Brokerage Compensation
Your Options Explained
Most homebuyers choose to work with a buyer's agent. Under the new rules, all buyers must sign a Buyer's Brokerage Agreement. This contract outlines the agent's duties, responsibilities, and compensation.
Why this could save you a lot of money
Since buyers must agree to compensate their agent whether you (the seller) offer compensation or not, you could potentially save thousands by offering compensation only to your brokerage.
In other words, both the seller and buyer are responsible for paying their own representatives. This could potentially save thousands of dollars in commissions for sellers.
Why this may not save you any money
Many buyers have only enough cash for their down payment and closing costs. If they don't have the money to also pay their agent, they may skip your house and choose one where the seller offers compensation.
Or they may make an offer contingent on the seller (you) paying closing costs or other concessions at closing. This money, in an indirect way, could free up cash for the buyer to pay their agent.
Choosing Zero Compensation to Buyer's Brokerage
Under this scenario you choose to compensate the buyer's brokerage directly upon closing.
Why going "direct" could save you some money
Under the "old" system it was common (although not required) for the listing brokerage and the buyer's brokerage to split the compensation 50/50. For example, a seller might agree to a total compensation of 5%, with 2.5% of the purchase price going to the listing brokerage and 2.5% to the buyer's brokerage.
Under this method you may, for example, agree to pay your listing brokerage 2.5% (or other agreed upon amount--remember everything is negotiable), and directly pay a completely different amount to a buyer's brokerage. It could even be a flat amount as opposed to a percentage of the sale price. This has always been an option, but under the new rules we may see more sellers choosing this route.
Why this may not work
Think carefully about how much compensation you're willing to pay to the buyer's brokerage. If it's not enough to cover the buyer's brokerage fee and the buyer doesn't have funds to cover the shortfall, the buyer could choose to forgo an offer on your home.
Choosing Direct Compensation
Joe Smith wants to make an offer on your home. He signed a Buyer's Brokerage Agreement to pay his brokerage 2.5% compensation. He considers making an offer of $500,000 for your house. This would mean $12,500 in compensation to Mr. Smith's brokerage.
You and your agent are willing to offer $5,000 compensation, leaving a "shortfall" of $7,500. The buyer indicates he has only enough cash to cover the down payment and expected closing costs, so he may decide to:
Example
Figure out a way to come up with the additional $7,500 to pay his brokerage and proceed with his offer.
Ask for $7,500 in closing cost concessions from you, freeing up the cash to pay his brokerage.
Walk away and choose another home.
Under this scenario you pay the total agreed compensation amount to your listing brokerage, and the listing brokerage will then pay the buyer's brokerage a portion of that amount upon closing.
Why choosing brokerage compensation could cost you money
As with the direct compensation method, think carefully about how much compensation (if any) you should offer to motivate buyer's agents to bring their clients to see your home. Are we in a buyer's market?
If so, you may choose to offer a higher compensation amount. Hot sellers market? When there are more buyers than sellers, you may be able to cut your compensation offer and still attract plenty of qualified buyers.
Choosing Brokerage Compensation
The issues here are the same as with direct compensation. The only difference is instead of you paying the buyer's brokerage compensation directly, you'll pay your brokerage the entire compensation amount and they will then pay the buyer's brokerage.
Changes for Buyers
Old Rules
Buyer's Agreements are optional. You could view a home with an agent you just met. No paperwork required.
Buyer's Agreement required to tour homes with an agent. Exception: Open Houses.
Buyers must pay buyer's brokerage directly if seller doesn't offer compensation sufficient to cover the agreed upon fee.
New Rules
Impact
The Way Forward
Attracting Buyers
Consider how offering buyer's brokerage compensation might affect demand for your home.
Read the Market Temperature
Pricing and compensation strategies change with the market. What works well in a hot seller's market may fall flat in a buyer's market. Be flexible.
Talk to your agent about the best approach for today, but remember the end goal is to choose a strategy that nets the highest profit on your home. This may or may not include an offer of compensation.
Everything Is Negotiable
Summary
Who's who?
You may already be familiar with the roles of agents and brokerages, but just in case...
Sellers
Buyers
Listing Brokerage: The local brokerage office you choose to work with to help sell your home (Dalton Wade, ReMax, etc.).
Listing Agent: Your agent. They work for the Brokerage representing you in the transaction.
Seller: The person selling the home.
Buyer's Brokerage: The local brokerage office the buyer agrees to work with.
Buyer's Agent: The local agent representing the home buyer.
Buyer: The person buying the home.
Note: All compensation is always paid to the Brokerage, never directly to the agent.
Listing Agreement: The contract between the seller and the listing brokerage that spells out terms, responsibilities and compensation.
Buyer's Brokerage Agreement: The contract between the buyer and the buyer's brokerage that spells out terms, responsibilities and compensation.
Making sense of these new rules can be difficult. If you're thinking about selling your home and would like to explore the possibility of working together, I'd love to help.
Stephen Reynolds, Broker Associate
Dalton Wade Real Estate
260 1st Ave S
St. Pete, Fl 33701
Thinking about selling?
Or have a question about the new rules? Let me know!
Stephen Reynolds, Broker Associate
813-505-6796
steve@iownthis.town
Phil Wade, Broker
260 1st Ave S
St Petersburg, Fl 33701
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