Changes to Buyer's Agent Practices
The National Association of Realtors (NAR) has recently introduced significant changes to its policies concerning buyer’s agents. These adjustments aim to increase transparency and fairness in real estate transactions, particularly regarding agent compensation and the relationship between agents and their clients.
In the past, when a seller hired a real estate agent to sell their home, the listing contract included an agreed upon commission amount that covered both the fee for the listing agent and the buyer’s agent. The commission was typically between 5 and 6 percent of the selling price, split evenly between the two agents.
Because the commission for the buyer’s agent was set in advance, the public perception was that realtors were engaging in price fixing. This led to a lawsuit that has changed buyer’s agent practices to allow for more transparency.
About Real Estate Commissions
Both the listing and buyer's agent receive a commission for providing unique and valuable services to their clients. The listing agent provides services such as price analysis, marketing, open houses, negotiating with buyers and helping the seller through the closing process.
The buyer's agent assists the buyer in finding suitable properties, making appointments to view properties, advising the buyer on bidding and market conditions, and guiding the buyer through the closing process.
The cost of the commission was borne by both the buyer and seller. The cost was traditionally added to the purchase price, where the seller’s proceeds were reduced at closing. Additionally, the buyer’s loan included this amount in the purchase price, so the final sale price affected both parties.
Key Changes to Buyer’s Agent Compensation
One of the most notable changes is the modification of how buyer's agents are compensated. Previously, it was common for seller's agents to offer a commission to buyer's agents, which was typically included in the overall transaction costs.
The new policy emphasizes the need for greater transparency in this process, requiring that the amount of compensation offered to a buyer’s agent be clearly disclosed to the buyer. This ensures that buyers are fully aware of how their agents are being paid and can make more informed decisions.
Beginning August 17th, 2024, buyers will have to negotiate how much they are willing to pay the agent representing them. Sellers can still incentivize a sale by offering to pay all or a portion of the buyer's agent's commission.
When buyers begin working with an agent, or when they view an open house represented by an agent, they will now be required to sign a buyer’s representation agreement.
Additionally, when submitting an offer, along with the purchase contract, the buyer's agent may need to negotiate the payment of this commission. This will require additional forms such as the Seller Payment to Buyer’s Broker. This is a way to ask the seller to pay for all or part of the buyer’s contractual obligation to pay the buyer’s broker.
Commissions and Financing
Most buyers cannot afford to come up with the down payment and also pay the buyer’s agent commission outside of the loan. In the wake of the recent National Association of Realtors (NAR) settlement concerning buyer agent commissions, Fannie Mae and Freddie Mac, companies that guarantee most of the mortgages in the US, announced that they will not count buyer’s agent commissions as part of their interested party contributions (IPCs).
Buyers can typically request seller concessions (IPCs) towards the borrower’s closing costs, capped at a maximum of 2% to 9% of the property value. However, the inclusion of buyer agent commissions within these concessions would have posed a hindrance in obtaining a loan.
Fannie Mae and Freddie Mac have clarified, “Buyer agent fees have historically been fees customarily paid by the property seller or property seller’s real estate agent, and, as such, they are currently excluded from these financing concession limits. If these fees continue to be customarily paid by the property seller according to local convention, they will not be subject to financing concessions limits.”
The new changes will now require additional forms and a strategy to address the buyer’s agent compensation in both the purchase contract and when working with the lender.
These changes aim to strengthen consumer awareness by mandating that buyer’s agents provide clear, upfront explanations of their services and compensation. This shift is designed to empower buyers by giving them a better understanding of what they are paying for, and ensuring that their agent’s interests are aligned with their own.
Impact on the Real Estate Market
These changes could lead to shifts in the real estate market, potentially affecting how buyers and sellers negotiate commissions. With more transparency, buyers may seek to negotiate different terms with their agents, and some may opt for alternative models, such as paying agents directly rather than through a commission split with the seller's agent.
Overall, NAR’s policy changes reflect a broader trend towards increased transparency and consumer protection in the real estate industry. By clarifying the role and compensation of buyer’s agents, NAR hopes to create a more equitable and informed marketplace for all parties involved.
These changes have been a topic of significant discussion in the real estate community, with many agents and industry experts weighing in on how these new policies will reshape the dynamics between buyers, sellers, and their agents.
Contact us today to learn more about how these changes affect both buyers and sellers.
