5 Things Buyers Should Know about the NAR Settlement Agreement

1. Buyers need a Buyer Broker Agreement with a Realtor to see a home offered in the MLS

In order to see a property, buyers must have a signed agreement with the realtor before they are shown another agent's listing. The Exclusive Buyer Broker Agreement will be the preferred way to engage the long term services of a professional real estate agent or Realtor.  Historically, a buyer or a consumer could call up and say:

“Hey, I'd like to go see this house.”  

The Realtor, if they didn't know them too well, or if they were a friend and really just exploring, they might say 

“OKAY! Well, let's go!"  

The agent would probably check the MLS for an offered compensation in the MLS and head out the door.  They might have a verbal agreement:

“Hey, that's fine.  If we go see it, and you like it, I'd like to write up the offer for you.”

“That's no problem, let me know what time to meet you”

 That was the agreement.  They would take the people out, have a conversation, see the house and maybe write an offer and negotiate the deal.  It worked like that for a hundred years, but now the requirement is that you must have a brokerage agreement signed with the client before you go and show a property that is not your listing. That's one of the items which is now required within the agreement between the National Association of Realtors and the Department of Justice to settle the class action lawsuit.  It's a big change for realtors, and if you've bought houses in the past, a big change for you.

2. How is the Buyer’s Agent Compensation Negotiated

The next change, which affects both buyer and seller, is the negotiation around who will pay the buyer’s agent’s compensation.  Historically, the buyer brought the money to the closing table, and the seller brought the title to the property, to the closing table.  They made an exchange or a sale. 

There was a ratified contract negotiated.  Due diligence was carried out on the condition of the property: material defects, title defects, and if there was a loan, an appraisal of the property.  When these items were completed, they went to the title company or law firm, and executed closing documents, mortgage and loan documents, and the buyer paid the seller all the money that was in the transaction.  The seller then allocated some amount of money to the real estate's listing brokerage, and that listing brokerage would pay the buyer’s broker according to the offer of compensation disclosed in the MLS.

So, it was a cooperative effort to incentivize buyers’ agents to bring buyers to see houses.  The seller would offer compensation through the listing broker.  Again, the money was brought to the closing table by the buyer, and the seller brought the house. And that's how the negotiation was understood, and that's how it operated. 

Today, the compensation for the buyer's agent is unknown to the seller.  It's not published in the Multiple Listing Service.  The compensation for the buyer’s agent is included in the agreement between the buyer and the buyer's agent: the Buyer Broker Agreement (BBA), The compensation is negotiated at that initial time of engagement between the buyer and the buyer's agent.  

3. Who pays the compensation for the Buyer’s Agent

When the buyer and their agent find a home that meets their needs, the buyer’s agent writes the offer with a price and terms which are satisfactory for the buyer.  They present the offer to the listing agent and the listing agent will present that offer to the seller.  The Seller may have authorized the listing agent to provide an offer of compensation to the buyer’s agent.  It may be more or less than the agreement in the Buyer Broker Agreement.  At this time, it is not required for the Buyer or Buyer’s agent to disclose the terms of the Buyer Broker Agreement.  Alternatively, the Buyer may include the Seller’s payment of the Buyer’s Agent compensation as a term in their offer.  In this case, the seller has the option to negotiate on the purchase price and/or buyer’s agent compensation.  

“At this price, I'm willing to pay the full compensation that you've asked that I pay for your agent.”

If the price is not what the seller is expecting and not what he would like, he can say, I'm only willing to pay half of that amount for your agent. You, Buyer, will have to pay the rest.  Or, Seller may counter the purchase price at a level where Seller is willing to pay the amount of the requested commission.  

 The negotiation of who will pay the buyer's commission may continue during the contract negotiation.  How much the buyer's agent will be paid was memorialized in the buyer broker agreement and may not be disclosed to the seller. But, it's still possible to negotiate and ask for the seller to pay that amount on behalf of the buyer. 

4. Can the Compensation for the Buyer Agent be Financed?

Yes.  The traditional exchange between Buyer and Seller still remains:  the Buyer brings all of the funding to the closing or settlement, and Seller brings rights of ownership to the property.  The Buyer may bring all cash/liquid funds, or they may obtain a mortgage-backed loan from a lender. So the buyer can either pay their agent directly or they can include it in the mortgage.  Currently, in order to include it in the mortgage, it must be included in the purchase price and will be subject to a bank-ordered appraisal. If Buyer and Seller both feel strongly about the value derived from their agreement, then appraisal should not be an issue. 

5. Why is it likely for the seller to continue paying the buyer's agent's commission?  

Currently, there is a larger than typical supply of existing housing in the market.  In our area, there are about four months of inventory available for buyers.  Only one in four houses will sell each month. We would call this buyers’ market because the buyers have a great selection of properties to choose.  Interest rates are higher than in the past, and Homeowner's insurance in Florida is  also very expensive. Thus, Buyers are being very careful when spending on houses.  When the market swings the power towards the buyer, the seller will be incentivized to pay the Buyer's Agent, rather than force the buyer to pay their own agent. Additionally, if the seller is willing to accept a price. that includes the compensation for the buyer's agent, then the buyer is able to finance the buyer’s agent’s compensation.  In an effort to avoid over-expanding: Sellers are willing to make palatable terms available to Buyers in a Buyers’ Market.  When Sellers had the power (low inventory, aggressively high pricing), they named the terms about inspection repairs, post closing occupancies, waived appraisal contingencies, etc.  Sellers may not be as open to footing the bill for the Buyer’s Agent if the market turned stronger for the Seller.  

In summary, if the buyer and the buyer's agent can negotiate an acceptable price to the seller that would include all or a significant portion of the buyer's agent's compensation, that’s a great opportunity to save cash. It's a great opportunity to save cash, be smart, and build wealth.