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When negotiating compensation with agents, buyers should settle on a dollar amount that pays them no more than 2 percent of a home’s sale price, according to advice released Tuesday by the Consumer Federation of America.
In advance of an Aug. 17 deadline to implement new rules under a proposed nationwide National Association of Realtors settlement, CFA released proposed criteria for both seller contracts and buyer contracts that were primarily aimed at an industry audience.
But on Tuesday, the consumer watchdog offered advice to consumers on how to deal with the settlement’s business practice changes, including a prohibition on listing brokers making offers of compensation to buyer brokers on multiple listing services, sellers no longer being required to offer buyer-broker compensation, and a requirement that brokers and agents sign contracts with buyers they are working with before a buyer tours a home.
The new rules require changes in agent practices that may confuse consumers, particularly because “many agents will try to preserve seller compensation of buyer agents to maintain 5 [percent]-6 percent overall commissions,” according to CFA.
Steve Brobeck | Consumer Federation of America
“The new rules provide both opportunities and risks for consumers,” said Stephen Brobeck, a CFA senior fellow, in a statement.
“Knowledgeable homebuyers and sellers will be able to take advantage of the opportunities and avoid the risks.”
‘2% or less,’ in dollars
CFA offered three primary pieces of advice, including that consumers discuss and negotiate their agent’s compensation in dollar amounts and that that amount add up to no more than 2 percent of a home’s sale price.
“The basic reason that the industry has been sued by the U.S. Department of Justice and by private citizens is because for a century, Realtors have colluded to set rates which now typically are five [percent] or six percent,” CFA said.
“The class action settlement, for the first time, effectively allows buyers to negotiate their agent’s compensation. Buyers should take the opportunity to do so, setting a goal in dollar terms of two percent (of home sale price) or less. And so should sellers, who have had the same opportunity but frequently have decided not to pursue it.”
Asked how CFA arrived at that 2 percent figure, Brobeck told Inman, “The 2 percent or less is my best judgment as a realistic goal most homesellers and buyers could aspire to and attain. Already in some markets, most buyer agents are charging 2 percent (but listing agents are unfairly charging more).”
He pointed out that in areas of New York City outside of the footprint of the Real Estate Board of New York (REBNY), which has commission rules similar to NAR’s, overall commission rates range from 3 percent to 4 percent.
“I am not changing from the prediction of many years ago that with decoupling, rates will eventually decline to an average of 3 percent (for double-dips) and 4 percent when two agents are involved, though there will be much greater variation in rates depending on the competence, efforts and out-of-pocket costs of the agent,” Brobeck said.
Asked why CFA advised that buyers pay a dollar amount instead of a percentage, Brobeck said he was currently writing a report on that issue.
“Briefly, because many consumers don’t fully understand the dollar costs of small percentage commissions, because percent commissions disincentivize buyer agents to negotiate low home prices, and because the simplicity of current commissions facilitates industry collusion to maintain 5 [percent]-6 percent rates,” he said.
Regarding seller negotiations with listing agents, CFA emphasized that there was “much evidence that some Realtors will try to discourage” negotiation between buyers and buyer agents by having sellers commit to specific pre-emptive offers of buyer agent compensation and by having buyer agents tell buyers that sellers will provide that compensation.
“We suggest, and some industry leaders now agree, that sellers should not agree upfront to provide any buyer agent compensation but should wait for buyer offers,” CFA said.
“And if buyers need help compensating their agents, they should make that request in offers on properties. (If buyers had the opportunity to include agent compensation in their mortgages, this would be much less of an issue.)”
Vet the agent
CFA also suggested that buyers and sellers vet their agents according to these three factors:
- Is the agent also a broker or associate broker? Brokers are required to undergo more training and frequently have more experience than agents.
- Has the agent sold many properties recently, and have they received favorable reviews from clients? Zillow, Realtor.com and Homes.com can provide this information about most agents.
- Will agents provide contract forms and proposed terms at the outset, give sellers or buyers adequate opportunity to read and evaluate both, and then be willing to discuss them?
“Selecting a competent, honest agent is more important than ever, especially for buyers,” the consumer advocacy group said.
Don’t sign contracts to pay the agent just to see a home
Once a consumer has chosen an agent, CFA encouraged buyers and sellers to evaluate the contracts the agent presents them with, especially filled-in blanks.
“Many contracts are impossible to read and understand,” CFA said. “Don’t sign them. Feel free to seek advice from an attorney or other independent expert.”
Asked for clarification, Brobeck told Inman, “[D]on’t sign contracts you can’t read and understand. Beyond that, don’t sign contracts with anti-consumer content. See if the agent will rewrite. If not, talk to an agency that uses consumer-centric forms. If that doesn’t work, consider contacting the listing agent. If you end up as a customer, make sure an attorney reviews the proposed agreement.”
CFA considers these contract terms to be “especially unfair”:
- Any commitment to compensate an agent before the consumer has decided to be a client of that agent. This includes buyer agents who want buyers to commit to paying them before a property showing, when “most buyers will not have adequate opportunity to evaluate the agent,” Brobeck told Inman. “One industry member said to me that the first showings are like an audition for the agent. So buyers should sign a touring agreement that is short, understandable and of short duration (perhaps just a day or week) with no financial obligation. Then sign the more permanent contract just before making an offer.” However, CFA reminded consumers that if a buyer agent shows a house that the buyer later purchases with the help of another agent, “according to NAR rules, the first agent can assert procuring cause and claim a portion of the commission,” Brobeck said.
- Any blanket commitment to agree to dual agency, where one agent (or agency) works with both seller and buyer.
- Requiring approval of binding arbitration that, if there is a dispute, effectively prohibits a buyer or seller from going to court.
- Any seller contract form that combines listing agent and buyer agent compensation, or any seller contract that requires buyer agent compensation. “Both these provisions would violate the spirit and probably the letter of the new Realtor rules,” CFA said. “Also, any buyer contract that allows the buyer agent to collect more compensation than the buyer negotiated. This is prohibited by the new rules.”
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