REAL ESTATE BUYER PAID COMMISSION REVIEW
Although preliminary approval has occurred regarding the NAR commission settlement, a final approval hearing will not occur until November 26th of this year. With the July enforcement date still intact, there remains some uncertainty going forward. Although we expect NAR to eventually provide guidance regarding contracts, they may be reluctant to pose any solutions until the agreement is finalized in the courts. We are left then with numerous questions but answers yet to be determined while inquiries regarding the impact upon buyers and their financing decisions require some attention. The following comments represent our current assessment of the situation and we will provide additional information as we receive it. We do need to clarify that this is a view of this situation from a Mortgage Broker’s perspective and the informaiton might be much different when viewed from the real estate broker’s point of view.
In spite of expectations regarding commission arrangements the announcement of the NAR settlement was somewhat of a surprise. While the settlement must still obtain final court approval, the mid-July effective date seems solid, providing a relatively short period for adjustment to a new commission process. The real estate community has proven its resiliency numerous times and we might accept this current challenge as a way to enhance our buyer/seller/borrower relationships.
The Past Briefly Revisited: For decades the commission, for the most part, was negotiated via the listing agreement wherein the noted commission amount was split between buyer and seller brokers. The full commission amount was “built into” the sales price and all parties were assured of compensation. More importantly, sellers and buyers were, for the most part, provided separate representation, thereby avoiding potential conflicts of interest that might accompany dual representation. Buyer/Broker agreements were recommended as an adjunct to the Real Estate Agency form as clarification of agent fiduciary obligations as well as commission payment agreements with all parties. In hindsight, the buyer/broker agreement may have been too often not made a part of the transaction.
Is Dual Agency the Answer: Some suggest what they believe to be an obvious remedy – buyers can rely upon listing agents in what is called a “dual agency” relationship. In other words, there is no reason for a buyer’s separate real estate representation. For the most part, real estate licensees avoid representing both buyer and seller in the same transaction because of the potential for conflict-of-interest issues. Think of this as much the same as asking an attorney to represent both litigants in a lawsuit.
Buyer/Broker Agreements Now Required: A buyer/broker agreement is no longer a voluntary document but will have to be executed early in the relationship. To avoid the perception that an agent is overly concerned about the commission arrangement, agents will need to become confident in presenting the array of services for which such compensation is rendered. Be assured that buyer representatives are critical to navigating the uniqueness that accompanies every real estate transaction. Some potential buyers, particularly those who previously wished to work with multiple licensees, may find it uncomfortable to sign multiple buyer/broker agreements. On the other hand, licensees will have the opportunity to explain the merits of remaining loyal to one selected real estate agent.
The ”Discount” Broker Conundrum: “Buyer-only/Broker” of the past often discounted their services in an effort to attract buyers. While this sort of bidding for buyers’ concept is a potential possibility it also challenges every licensee to identify the array of service that validates the commission. Buyers should become more acquainted with the time, effort and expense required to perform real estate representation at the highest level.
Possible Consequences: With affordability already a major issue for buyers, absorbing their own commission payment to their representative licensee could be prohibitive for some would-be buyers. The worst possible result might be that the confusion around buyer paid commissions might result in some buyers “giving up” on the prospect of home ownership? There are options, including asking the seller to pay the buyer’s commission, that should be fully discussed with one’s selected real estate representative. Another reason, perhaps, for having a buyer only representative.
Pricing In the Commission: As we are no longer able to rely upon the past format wherein the commission was automatically built into the asking or listing value of the home, some questions are likely to arise. Should sellers be advised to include a buyer commission portion in the list price in anticipation that buyers will seek sellers’ payment of their commission? If not included in the list price, will counteroffers occur resulting in sales above actual list price? Will this, in turn, pose issues for appraisers and lenders? Should sellers “offer” to pay the buyer’s commission as a marketing incentive? If sellers decline to pay the buyers’ commission, will it result in a marketing disadvantage with fewer buyer responses? Will paying the buyer’s commission along with potential other buyer concessions exaggerate the costs in the minds of sellers? Obviously, lots to discuss with the seller’s real estate representative.
Allowable Financial Concessions: An immediate concern was that asking the seller to pay the buyer’s commission would be considered an Interested Party Contribution (IPC). Generally known as a “seller concession” the IPC payments come with some limitations. Depending upon the type of loan and the borrower’s down payment amount, the allowable seller concession amount varies. For instance, with conventional financing, a loan with less than 10% down payment is limited to 3% in seller financial concessions. Although a down payment of 10% or more allows seller financial concessions equal to 6% of the purchase price, there may be a resistance point beyond which most sellers will be reluctant to pay such fees. (For your information: Maximum seller contributions for FHA & USDA are 6%, VA limit is 4% and the conventional IPC loan limit for investor loans is 2%. Conventional loans with an LTV of 75% or lower may have up to 9% seller concession funds)
Agency Responses: FHA was the first agency to indicate that seller paid commission on behalf of the buyer would not be considered an Interested Party Contribution (IPC). The Government Sponsored Enterprises (GSEs), more commonly known as Fannie Mae and Freddie Mac, announced that they will do the same for conventional loans. VA has yet to clarify its position but we anticipate that they will find a way to accommodate their veterans.
Initial Conclusion: The Plaintiffs in the lawsuit seemed convinced that their actions would result in savings to both seller and buyer. Experience informs us that seller savings (i.e.; reduction in commission – as exhibited especially by for-sale-by-owners) are not initially intended to be passed on to prospective buyers. Buyers in today’s market face affordability issues including acquiring sufficient down payment funds. Having to additionally pay their own broker fee could promote a sense of “I will never be able to purchase a home” attitude. Although, as noted above, there might be some discounted fees offered by buyer-only/brokers, it is difficult to imagine over time a significant reduction in commission expense. As commission fees have increased relative to home value increases, so have the Realtor costs of doing business increased. After an initial adjustment period and perhaps a few slight modifications, it is likely that the commission fee structure will resemble what is currently in place – sellers will in some fashion pay the buyer’s commission fee.
What Are the Benefits of the Buyer-Only/Broker Concept: Perhaps the most damaging aspect of the lawsuit and this discussion is the potential doubt cast upon the need for separate buyer representation. Every real estate transaction is unique and having a professional to walk one through the process is important. If you are a prospective home buyer, select your real estate licensee, stay loyal. You will be glad you did.