Clearing the Confusion: Sweeping "New Rules" in Real Estate for Buyers & Sellers

It's been one month since the nationwide roll out of the "new rules" affecting the residential real estate industry. You may have heard something about this if you are considering buying or selling a home. If what you've heard is confusing, you are not alone. There is considerable miscommunication surrounding the "new rules". So find your comfy chair, as I like to say, and read on. You may want to skip your favorite beverage this time as there is much to absorb. Let's dive in. I promise to keep this as straight-forward as possible, without the need for "cliff notes".

The root of the confusion about the "new rules" in real estate is that realtor compensation, which has always been negotiable by the seller, has now become more flexible in a way that wasn't previously commonplace. Let me explain.

Traditionally, when a home was listed for sale on the Multiple Listing Service (MLS), the listing realtor would negotiate with the seller the compensation to be paid to the listing agent, as well as compensation to be paid to the buyer agent's brokerage who brought the buyer.

Under the "new rules" as a result of the National Association of Realtor's (NAR) lawsuit settlement, compensation for the buyer agent must now be negotiated directly between the buyer and the buyer agent. Thus, the "uncoupling" of realtor compensation.

Just like sellers who enter into an agreement (listing agreement) when they list their home with a realtor (listing agent), buyers nationwide are now required to enter into an agreement with a realtor (the buyer agent) if they want representation when purchasing a home. This agreement is known as the Buyer Representation Agreement (B-R-A).

Although 18 states have been using a Buyer Representation Agreement prior to the August 17th national implementation of the "new rules", buyers in every state are now being asked to sign a Buyer Representation Agreement. By signing a B-R-A, buyers are formally entering into a "client" relationship with a buyer agent. Under the "new rules", a signed B-R-A is required if buyers want to schedule a private showing of a home. (Note: There are some nuances to the "new rules" about this if you are house hunting. For example, you can attend an Open House without having signed a B-R-A.)

One of the key terms in the agreement is the specific compensation that the buyer agrees to pay the buyer agent's brokerage in the event the buyer's offer is accepted by a seller and gets to the Closing table. This might be expressed, for example, as either a specific percentage of the purchase price or as a flat dollar amount.

It is important to mention that realtor compensation has always been paid by the buyer. Realtor compensation traditionally has been reflected in the home's purchase price which was distributed to the participating brokerages at the Closing by the seller. And under the "new rules", this can still continue. Here's why.

Although buyers will now have a signed B-R-A, they may find that for the house that they are purchasing, the seller agreed to provide a "buyer incentive" when they listed their home. Here's an example. The seller may be offering to pay buyer agent compensation of 2%. If the buyer negotiated 2% with the buyer agent as indicated in the B-R-A, then the seller would be paying 100% of the buyer agent compensation. In this example, there would be no potential out-of-pocket expense to the buyer for realtor compensation. Under this scenario, the buyer pays 0% of the buyer agent compensation. This is great news for the buyer!

Let's look at another example. The seller may have agreed to provide buyer agent compensation, however it is less than what the buyer negotiated directly with the buyer agent. In this example, the seller is providing buyer agent compensation of 2% and the B-R-A specifies that the buyer agent compensation is 2.5%. So what does this mean if you are the buyer?

The buyer would be responsible for .5% of the purchase price (unless the B-R-A was amended). Let's say that the purchase price in this example is $515,000. The buyer would be out-of-pocket for $2,575 (or .5% of the purchase price) for the services provided by the buyer agent. This amount is paid to the buyer agent's brokerage. In this "hybrid" scenario, both the buyer and seller pay a portion of the buyer agent compensation.

Alternatively, the seller may choose to not offer any buyer incentive, i.e. buyer agent compensation from the seller is zero. In this scenario, the buyer agent compensation would be paid 100% by the buyer at the Closing.

If your head is spinning just a bit, take a look at the chart below. Each of these 3 scenarios is summarized for a quick comparison.

If the house you fall in love with happens to be a home where the seller is offering buyer agent compensation that is less than what you negotiated with your buyer agent, you do not need to go immediately into panic mode. That's why you entered into a Buyer Representation Agreement! Who you choose to represent you in the purchase of your dream home matters and hopefully, you selected a top-notch realtor who is a great negotiator!

When your buyer agent presents your offer, it may be possible to include a provision about the buyer agent compensation. As part of your offer, for example, your buyer agent may recommend adding in a stipulation which states that your generous offer is contingent on the seller paying the buyer agent compensation of x (fill in the blank). The terms of your offer can be negotiated!

As the buyer, you have many decisions that are in your control. You get to decide, for example: what towns you want to consider; your offer price strategy; what terms you want to include in your offer; whether to participate in a "multiple bid" process; etc. And very importantly, you get to decide which homes you would like to see!

The homes you choose to see are up to you. As the buyer, you determine your home search criteria, and that might include whether the seller is providing a "buyer incentive", i.e. buyer agent compensation. Thus, by choosing which homes you'd like to see, you can minimize the financial impact that may potentially arise under the "new rules" in real estate.

 

There are a number of reasons why the seller may choose to provide a "buyer incentive". Here is a way to think of it. Imagine for a moment you are shopping at your favorite retailer, either in-person or online. You evaluate the item to see if it meets your needs. You also look at the price tag. If the price is too high, you may decide not to make the purchase. You then visit a different retailer in search of the same or similar item at perhaps a better price. And you find that the second retailer is providing a special discount on the item. So where would you make the purchase - - the first retailer with the high price or the second retailer that is offering a special discount? Chances are, you would choose the second retailer because you would save money. The second retailer essentially "incentivized" the buyer.

It's really not much different when a home seller provides a buyer incentive. The seller is incentivizing the home buyer by offering to pay some or all of the buyer agent compensation. This saves the home buyer money. And if the buyer is saving money by not having to go out-of-pocket for all or a portion of the buyer agent compensation, guess what that means? The buyer has more dollars to spend on making a stronger offer on the house!  Buyers will have more cash for their down payment as well as other expenses post-closing, such as renovation/home design and furnishings.

Sellers take note! A great reason for sellers to provide a buyer incentive is that it can generate more buyer traffic that leads to potentially higher offers. Thus, a win for both the sellers and buyers. Buyers won't have to incur an out-of-pocket expense to pay the buyer agent compensation in securing their dream home.

As mentioned earlier, sellers now have greater flexibility when it comes to buyer agent compensation. Instead of providing a buyer incentive from the outset when the home goes onto the market, some sellers are choosing instead to have the buyers put it in their offers. What does this mean? In the offer contract, there is often the opportunity to state additional contractual terms of the offer. One of these terms might be that the seller agrees to pay the buyer agent compensation of (fill in the blank).

Some sellers may be receptive to paying buyer agent compensation but prefer to not be "locked in" to a specific percentage or dollar amount. From the seller's perspective, they don't want to "overpay". For example, if a seller commits to buyer agent compensation of 2.5% they may receive an offer from a buyer who entered in a B-R-A of 2%.

 It is important to note that when an offer is presented to the seller, the terms of the B-R-A are typically not disclosed. However, the seller would know what the buyer agent compensation is in the event the offer includes a request for the seller to pay the buyer agent compensation.

One additional change under the "new rules" in real estate is that the Multiple Listing Service (MLS) can no longer disclose how much the buyer agent compensation is that is being provided by the seller, if anything at all. This is something that historically, had been visible to realtors on the MLS. Since realtor compensation has always been negotiated, buyer agents would be able to know in advance of showing properties what the buyer agent compensation is, if they chose to look. In my realtor experience of over a decade, I firmly believe that for many realtors, finding the home that is best for their buyers is the true motivator in recommending which homes to see.

With the removal of the buyer agent compensation from the MLS (along with other aggregator internet sites), there is no longer any formal way to communicate the buyer incentive. This information, however, is important for two primary reasons.

As discussed above, home buyers need to be made aware as to how much the buyer agent compensation is that the seller will be providing because it impacts them financially. Under the "new rules", buyers will now need to factor in buyer agent compensation to their offer strategy. Buyers will be asking themselves how much can they afford to offer on their dream home if they need to pay all or a portion of the buyer agent compensation.

The second reason?  It is how realtors get compensated. Realtors only get paid when they sell (or rent) a property. Until the property "closes", the realtor is not generating any income. This means that realtors do not receive a paycheck for all their time and efforts while working with their clients. This frequently can extend for several months, and with the continued low inventory of homes, even years. There is no base salary for realtors. And when a home sells, the buyer agent compensation is paid to the brokerage, not directly to the buyer agent. The buyer agent gets a portion of the amount paid to the brokerage. It might not be as high as you think. And this does not reflect the multitude of expenses the realtor pays throughout the year.

So how do realtors and buyers find out what the buyer incentive is? Realtors are proactively reaching out to listing agents and asking whether the seller is providing a buyer incentive. This information is then shared with their buyer clients. 

Another way buyers are learning about the buyer incentive is by attending public open houses. Communication about the buyer incentive is being shared in marketing materials provided by the listing agent.

At Compass, buyers can also find the details of the buyer incentive for listings held by Compass agents by visiting https://www.compass.com/.

 

With the uncoupling of realtor compensation under the "new rules", if a seller decides not to provide any buyer agent compensation (compared to the "old rules" where it was baked into the purchase price) one might ask, "will sellers reduce the list price when the home goes onto the market for sale?" Does any retailer ever roll back prices on new inventory? Anything is possible, but highly unlikely.

The focus of this article was to clarify the important changes under the "new rules" and the affect on home buyers and sellers. Please note that there are more aspects of the "new rules" in real estate that I have not addressed in this article, but these are the most impactful changes to be aware of in New Jersey. There may be some variation, however, from state to state. You are welcome to reach out to me with questions or for more information.

 

In the post-NAR world, choosing the right realtor for you matters more than ever. As the landscape of real estate continues to evolve, the expertise and dedication of your buyer agent can significantly impact your home buying experience. And in some cases, can save you thousands or even tens of thousands of dollars with their local knowledge, as well as their negotiation expertise.

It's not just about finding someone who has sold the most number of homes. It's about partnering with a professional who understands your needs, advocates for your interests, and navigates the complexities of the market with finesse. Compensation structures may vary, but the true value of a great agent lies in their ability to deliver an elevated experience, insightful guidance, and unwavering support no matter how long it takes.

In these transformative times, make your choice wisely and invest in a top-notch realtor who is committed to turning your real estate dreams into reality. Your investment will pay for itself multiplied and in more ways than you can imagine. The right realtor can make all the difference!