Washington, D.C. – On August 17, all Realtors must conform to new rules agreed on by the National Association of Realtors (NAR) in their settlement of class action litigation.  Two rule changes are particularly important:  First, sellers will no longer be required to compensate buyer agents.  Second, buyers will be required to sign contracts that set the amount of compensation that buyers will owe their agents.  These two new rules require changes in agent practices that may confuse consumers, in part because many agents will try to preserve seller compensation of buyer agents to maintain 5-6 percent overall commissions.

“The new rules provide both opportunities and risks for consumers,” said Stephen Brobeck, a CFA senior fellow.  “Knowledgeable home buyers and sellers will be able to take advantage of the opportunities and avoid the risks.”

Here are CFA’s three suggestions to home sellers and buyers about how to cope with the new residential real estate marketplace.

Suggestion One:  Selecting a competent, honest agent is more important than ever, especially for buyers.  For the first time, buyer agents will be required to obtain written approval before showing buyers any property, so the agents must understand often complex (and frequently unfair) contract forms and be willing to explain them.  In selecting an agent, CFA suggests that both buyers and sellers consider the following 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?

Suggestion Two:  Read and evaluate buyer or seller contracts (often called “agreements”), especially blanks that are filled in.  Many contracts are impossible to read and understand.  Don’t sign them.  Feel free to seek advice from an attorney or other independent expert.

The following contract provisions are especially unfair:

• Any commitment to compensate an agent before the consumer has decided to be a client of that agent. Some buyer agents will press buyers to sign this commitment before showing them a property, and a few dishonest listing agents (at open houses) may try to do so also.  Increasingly, buyer agents will offer buyers the opportunity to sign “touring agreements” that do not require a financial commitment.  But it is important to remember that if a buyer agent shows a house that is later purchased, they can claim a portion of the commission.
• Any blanket commitment to agree to dual agency, where one agent (or agency) works with both seller and buyer. Dual agency can be particularly unfair to sellers who lose fiduciary (loyal) representation from their listing agent.  Dual agents are not permitted to provide either buyer or seller any information or advice that may harm the other party.
• Requiring approval of binding arbitration that, if there is a dispute, effectively prohibits a buyer or seller from going to court. Mediation is also restrictive but usually does not limit legal remedies.
• 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.  Also, any buyer contract that allows the buyer agent to collect more compensation than the buyer negotiated.  This is prohibited by the new rules.

Suggestion Three:  Discuss and negotiate commissions and any other agent compensation, in dollar amounts.  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 or six percent.  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.

There is much evidence that some Realtors will try to discourage this negotiation by having listing agents press sellers to commit upfront to specific buyer agent compensation and by having buyer agents assure buyers that sellers will provide this 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.  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.)

Recently, CFA issued detailed criteria for evaluating both seller and buyer contract forms.