Earlier this year, the National Association of Realtors (NAR) settled a lawsuit regarding the buyer’s agent commission. Although this commission has always been negotiable, changes are now being implemented across all buyer and seller contracts. Starting August 17th, the San Francisco MLS will no longer include the buyer’s agent commission by default, but there will be an option for sellers to offer buyers “credits” at the close of escrow. Most sellers still plan to pay the commission to the buyer’s agent, but only if a written buyer’s broker compensation agreement is in place. There are also several new forms required for both buyers and sellers. Let’s take a closer look at what has changed.
For Buyers:
It is now mandatory to have a written agreement between the buyer and broker before showing a property. Here are the new forms and a brief description of their terms:
1. CAR - Property Showing and Representation Agreement:
This agreement is non-exclusive and lasts for 30 days, covering up to 3 property showings. Either the buyer or the broker may cancel the agreement at any time. This form ensures that both parties have a clear understanding of the expectations and terms before any property visits take place.
Example Scenario: Suppose you are a first-time homebuyer interested in exploring various neighborhoods in San Francisco. This form allows you to visit multiple properties within a month without committing to a long-term agreement with a single broker. If you decide that the broker isn’t the right fit, you can cancel the agreement easily.
2. CAR - Buyer Representation and Broker’s Compensation Agreement:
This agreement can be either non-exclusive or exclusive and should not exceed 3 months. It is not property-specific but outlines the property type and location (city/county). The non-exclusive agreement can be canceled upon receipt of a cancellation notice, while the exclusive agreement is canceled 30 days after the cancellation notice is received.
Example Scenario: Imagine you have found a broker who understands your needs and preferences well. By signing an exclusive agreement, you ensure dedicated service for up to 3 months. If you haven't found a home within that time, the agreement will need to be renewed. It's important to note that a good broker will work with you as long as it takes to find the right home. I have personally worked with buyers for years before they found their perfect property.
3. CAR - Open House Visitor Non-Agency Disclosure and Sign-In Form:
This form establishes that no agency relationship is created and involves no compensation. It is used if a buyer does not wish to be represented by an agent and wants to make an offer on a property.
Example Scenario: If you prefer to handle the buying process on your own and visit open houses without committing to an agent, this form is essential. It allows you to express interest in properties without entering into a formal agency agreement.
Other Forms:
Many brokerages, such as Sotheby’s International Realty, have their own versions of these forms, which may differ in terms from the CAR forms. It is important for buyers to understand these differences and how they might impact the buying process.
- SIR Buyer Representation Agreement: Includes an option allowing clients to, at their sole discretion, choose not to see properties offering a commission below a specified percentage. This gives buyers control over which properties they view based on the commission structure.
Example Scenario: If you have a limited budget and prefer not to see properties requiring higher buyer agent commissions, you can specify this in your agreement. This helps you focus on properties within your financial comfort zone.
Buyers without the extra cash to pay the buyer’s agent’s commission can opt to avoid such properties. Most sellers recognize the advantage of offering commission to attract more buyers. The recent changes ensure that the buyer’s agent will only be compensated as per the buyer/broker agreement. For instance, if the seller offers a 3% commission and the buyer agreement specifies 2.5%, the buyer’s agent will receive only 2.5%. Conversely, if the seller offers 2% commission, the buyer must cover the additional 0.5% or they can add it in the offer.
For Sellers:
Previously, sellers would pay the listing agent 5-6%, who would then offer a portion of their commission to the buyer’s agent. The revised listing agreement now requires the seller to pay the listing agent X% and an additional X% if the buyer is unrepresented. A separate addendum specifies the amount the seller will pay the buyer’s agent, which can be included in the disclosure package. This ensures all parties are aware of the compensation before an offer is made. However, this form cannot be linked to the MLS if included in the disclosure package.
Seller Considerations:
- Transparency: Including the listing agreement addendum in the disclosure package promotes transparency by clearly stating the commission details upfront. This can build trust with potential buyers who appreciate knowing the exact financial arrangements.
- Flexibility: Sellers can choose how much commission to offer, potentially attracting more buyers by offering competitive rates. By offering a 2.5-3% commission, sellers can attract more buyer agents, increase the number of potential buyers, and ultimately achieve a higher sale price for their property. Lower commissions may not draw as much interest and will most likely result in lower offers.
In Summary:
The primary goal is to give buyers the ability to negotiate commission with their agents. While buyer broker agreements have existed for years, many agents have used them to ensure exclusivity with their clients. Sellers aiming to get top dollar for their properties should offer to pay the buyer’s agent commission at the close of escrow, with the amount determined by the buyer broker agreement. Buyers who value their agents understand that having professional representation is crucial in a competitive market. Conversely, some buyers may prefer to minimize costs and not pay a commission.
Before the NAR settlement, many buyers went directly to the listing agent, hoping for a discount. However, the listing agent’s duty is to secure the highest price for the seller, making it challenging to fairly represent both parties, especially with multiple offers. In my opinion, little will change. Discount buyers will continue to use discount brokers, while serious buyers will hire professionals.
The Impact on the Real Estate Market:
Professional Representation:
The settlement emphasizes the importance of professional representation. Buyers who value expertise will likely continue to work with experienced agents, ensuring they get the best possible deal and avoid costly mistakes.
Example Scenario: An experienced agent can provide insights into market trends, property valuations, and negotiation strategies, ensuring the buyer makes informed decisions. This expertise is particularly valuable in competitive markets like San Francisco.
Seller Strategies:
Sellers need to adapt their strategies to the new commission structures. Offering attractive commissions can still be a key tactic to attract top-tier buyer agents and serious buyers. Transparency in commission offerings can also enhance the seller’s reputation and trustworthiness.
Example Scenario: A seller offering a higher commission than average might attract more aggressive marketing efforts from buyer agents, leading to faster sales and potentially higher offers.
Practical Tips for Buyers and Sellers:
Buyers:
- Understand the Forms: Familiarize yourself with the new forms and agreements. Ask your agent to explain any terms you don’t understand.
- Budget for Commissions: Plan your budget to include potential commission costs, especially if the seller’s offered commission is lower than your agreement with your agent.
- Choose the Right Agent: Select an agent who understands your needs and can navigate the new commission structures effectively. This is a significant purchase, so you want to hire a professional who will guide you through the offer process, disclosures, and all the details you need to know before purchasing a property. A good agent is there not only to assist with the transaction but also to be a reliable resource for you whenever you need them.
Sellers:
- Offer Competitive Commissions: Consider offering competitive commissions to attract top buyer agents.
- Be Transparent: Clearly outline commission offerings in the disclosure package to build trust with potential buyers.
- Understand the Market: Work with your listing agent to understand how the new commission structures might impact your sale.
- Stay Informed: Keep up-to-date with any further changes in real estate regulations and adjust your strategies accordingly.
Conclusion:
The NAR settlement marks a significant shift in how commissions are handled in real estate transactions. By giving buyers more negotiation power and emphasizing the importance of written agreements, the industry aims to create a more transparent and equitable process. Both buyers and sellers need to understand these changes and adapt their strategies accordingly.
For buyers, negotiating commissions and selecting the right agent will be crucial. Sellers must focus on transparency and offering competitive commissions to attract serious buyers. Ultimately, these changes highlight the value of professional representation and the importance of clear, written agreements in real estate transactions.
As the market adapts to these new rules, staying informed and flexible will be key to success for both buyers and sellers. Whether you’re buying your first home or selling a property, understanding these changes will help you navigate the real estate landscape more effectively.
If you're thinking of buying or selling in San Francisco, I can help you navigate this process to get the best price. Reach out to me today to ensure you have the professional support you need in this evolving market. Click here to contact me.
