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Buying a home in 2024 after NAR changes

The changes in compensation for buyers agents have left some confused as to what their responsibilities and duties are. Nov. 22, 2024

NAR SETTLEMENT

In May of this year (2024) the National Association of Realtors entered into a settlement agreement after a series of class-action lawsuits were filed against the organization. The lawsuits alleged that their compensation model inflated home prices, created an uncompetitive market, and led to buyer's agent prioritizing their own profits over quality representation. In order to better understand this, and what it means for prospective buyers, we first need to go back to simpler times.

Pre-Settlement

Prior to the settlement, buyer's agents were normally compensated at closing paid by the seller. A home sale would come with it a total commission between 5% to 6%, such a commission would be split between the buyer's agent and the seller's agent equally. For instance, a 6% commission on a $500,000.00 would result in $30,000.00 in total commission compensation split between the buyer's agent and the seller's agent. Meaning that both brokers would walk away from the transaction with $15,000.00. Simple? Still with me?

Additionally, Sellers can have their agents list their properties in the MLS (multiple listing service). In such advertisements, seller's agents were mandated to include buyer's agents commission percentage. Meaning that buyer's agents would be able to see in home listings what their cut would be prior to having their clients step foot inside of the home.

Critics of this system stated that such an environment led to agents prioritizing homes with the highest commission, rather than the homes that fit the specifications as dictated by their clients. Additionally, that the model of compensation (5%-6% split between buyer and seller's agents) led to the price of commission being baked into the home price, further inflating property values in an already volatile period in real estate.

Post-Settlement

With the rule changes as a consequence of the settlement having gone into effect in August of this year (2024) several big changes were made to the home buying process.

  • Seller's agents will not be able to advertise commission fees to buyer's agents in the MLS.

This change was instituted in order to offset agents from engaging in what some critics call as 'steering,' meaning that agents purposefully 'steer,' prospective home buyers to those properties which will net the agent the biggest bag of cash at closing. This remedy was seen as a way of furthering client interests, and create more competition in the market

  • Buyers must now sign a legally binding representation agreement with their agent before they can begin touring homes together.

Perhaps the biggest change, real estate agents must now provide and go over with prospective clients a representation agreement which lays out the full terms of the brokers representation. This is normally a one-to-two-page document, that lays out the obligations of both the agent and the buyer during the home buying process. Brokerages are still tinkering with different forms, and different language used in said form, as the market attempts to find some level of uniformity.

  • Sellers do not have to compensate Buyer's agents

Again, another big change. As I explained, both buyers and seller's agents were compensated at closing, at the expense of the seller. Now, as the buyer's representation agreement will layout, there is no guarantee that a seller will pay the commission of the buyer's agent. Meaning that the buyer will be on the hook for their agent's commission at the time of closing.

  • Buyers can now negotiate their realtors commission percentage

I'm sure all of my realtor friends will appreciate me highlighting this. But home buyers can negotiate with their agent what their commission fee will look like. Running parallel to this change is the new rule that the buyer's agent cannot collect a higher percentage than what they previously agreed to in their representation agreement. Meaning that if an agent agrees to a 2% commission, and a seller offers to cover buyer's agent commission for 2.5%, the buyer's agent can only take 2% per the representation agreement.

My Thoughts on the Changes

I have a good handful of thoughts on the new changes, few of which are positive.

  • It presumes Buyers had no agency during the home search process

Perhaps 30 years ago when we all weren't as digitally connected, an argument could be made that those realtors do exist that steered their clients in the direction of their own pay day rather than what the client wanted. Those days have since passed. There are a plethora of platforms upon which sellers can market their homes, giving prospective home buyers access to nearly the same information that realtors have. Such access to information has made homebuyers more involved in the process of finding a home than ever before, leading to most agents receiving suggestions for homes rather than giving them. Agents could certainly bring clients to certain homes for ulterior motives, but whether or not the horse decides to drink from the well has always ultimately been the decision of the buyer.

  • Anything that involves a contractual obligation means attorneys will need to get involved sooner

Previously, we as attorneys only became involved in the process after an offer to purchase a home has been accepted and the contract proceeds to the attorney review period. Now with these newly introduced contractual agreements, prospective buyers should seek the services of an attorney to review said agreement, and assist in negotiating commission fees, prior to even beginning the process of finding a home all together. This will inevitably result in an upfront cost for buyers that they previously did not have to pay.

  • Sellers can refuse to offer a commission, leaving buyers on the hook for their agent's commission fees

In an age where real estate prices are reaching new heights and individual savings are at an all-time low, now is the time to change the rules of compensation. If a Seller is unwilling to compensate the buyer's agent, as is now their right, then the only recourse for the buyer's agent is to turn to the buyer and hand them a bill. Bear in mind, the buyer already had to come to closing with a good chunk of change in order to cover closing costs, but these new changes will result in a greater burden on buyers.

Take for instance my previous example, if you had negotiated a 3% fee with your agent on a $500,00.00 home, and the seller refuses to offer compensation to your agent, then the buyer is now on the hook for an additional $15,000.00 to be paid at closing to their agent.

In Closing

The changes to the NAR have altered the duties and obligations of both agents and home buyers, the market is still absorbing the impact of these changes, and it will be interesting to see moving forward how the process of home buying changes. The biggest thing for home buyers to understand is that these changes may come with it additional costs at closing in order to compensate their agents. If you're in the process of buying or selling a home, contact me today for a free consultation and contract review.