A new rule is on the books, and it improves transparency about who pays what to whom in real estate transactions.
Previously, when a REALTOR listed a client’s property for sale, the listing agreement would include a commission, and the REALTOR would promise to give half of the fee to the buyer’s REALTOR. This ensured that both parties in the transaction were represented by REALTORs, increasing the odds of a smooth and satisfactory process for everyone.
Before this new rule, if a listing agent met with a prospective buyer interested in one of their listings, the agent could say, “My services to you are free.” This wasn’t entirely accurate, but buyers, sellers, and agents all understood that, per the listing agreement, the seller was paying the commission for REALTORs’ work.
This new rule sort of feels like a tempest in a teapot, if you ask me. More transparency is good, but it’s not like people didn’t understand how agents were paid. Is the seller really paying the whole fee? There’s an argument to be made that without the buyer, there is no money in this transaction, so although the buyer isn’t paying a fee directly to the agent, it’s the buyer’s money funding the transaction. On the other hand, if the seller doesn’t bring their property to market, no one would be paying anyone anything.
In an effort to increase transparency, this new rule requires buyers to have a buyer-broker contract that specifies the relationship between the buyer and REALTOR, generally one of these:
- A contract that says the buyer’s agent will represent the buyer in the acquisition of a specific property.
- A contract that says the buyer’s agent will represent the buyer in the acquisition of any property.
- A disclosure at an open house that indicates the agent holding the open house is representing the seller only.
The contracts require outlining who will pay the commission, how much it will be, and what the agent will do to earn the commission. Commissions are often a flat percentage of the sales price but can be based on other formulas.
The next question is who will pay that fee. Many first-time homebuyers can barely come up with the 3% down payment and closing costs required for the most affordable loans. So, a common practice is to ask the seller to chip in to cover closing costs.
Now, with this new rule, when the buyer’s agent makes an offer on behalf of his client, the contract must specify that his fee will be paid by the seller. If the seller doesn’t want to pay that fee, then the transaction doesn’t proceed.
In my opinion, the biggest outcome of the new rule is that there’s a bit more transparency and anytime you can have open communication, everyone benefits. However, if the rule leads to people asking REALTORs to negotiate commissions, agents on both sides of transactions may either refuse or offer a different set of services for a smaller commission.
What I find irritating is the way the media is portraying all this—they’re acting as though REALTORs aren’t being forthright, and that somehow, if there’s a buyer-broker agreement, this transparency will lead to lower housing prices. I don’t think so. With this rule, several new legal forms are required and many existing forms got major rewrites. While I appreciate the Department of Justice wanting to reduce housing prices, this isn’t how it’s done.
I can tell you that at least in my office, REALTORS earn their fees by providing service that exceeds their commissions. If you drop their pay, you’ll get less from them. That’s just human nature. If you drop their commission by a third, it stands to reason that they should only do two-thirds of the work.
The value proposition of a REALTOR is easy to justify. Given that a house is the largest single purchase most of us make in our lives, it’s wise to have an advocate who can make sure we get what we’re paying for, that the other side plays fairly, and that we understand the agreements we’re making.
From disclosures to inspections to market evaluations, REALTORs assure that you don’t overpay or get stuck with a lemon. They also have extensive networks of reputable vendors, so inspections and repairs are done properly. And if you need legal advice or a good lender, they can connect you with the resources you need. Not to mention, they sometimes use their informal networks to get advance notice on properties coming onto the market.
Transparency is great, and REALTORs deserve to be paid for the value of their service.
If you have questions about property management or real estate, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.