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The real estate industry is starting to undergo some dramatic changes, especially in light of the recent Sitzer/Burnett v. National Association of Realtors case ruling in October that found the real estate industry guilty of collusion to inflate commissions by forcing home sellers to pay a broker fee to the homebuyer’s agent in addition to their own listing agent. A federal jury awarded $1.8 billion in damages to home owners who brought the class action suit forward in Missouri.
More recently, the National Association of Realtors announced on March 15 an agreement to settle the above case, as well as other lawsuits regarding broker commissions by paying $418 million in damages and eliminating certain objectionable rules related to real estate commissions. The trade association also agreed to put in place a new set of rules, including one that would require a buyer’s agent (those who represent the buyer in the real estate process) to enter into written agreements with their clients to help them understand exactly what services and value will be provided, and for how much. These changes are scheduled to go into effect in mid-July, according to the association’s announcement.
Additionally, the U.S. Department of Justice has been scrutinizing the structure and elements of listing agreements, suggesting inevitable shifts in how real estate agents are compensated and by whom.
All of this will have far-reaching implications in the industry: It is now clear that sellers do not have to offer 2.5% commission to the buyer’s agent.
Even prior to the Sitzer verdict and the association’s pending settlement, brokerages could see the writing on the wall. Not surprisingly, they have been training agents to ask buyers to sign agreements committing them to work exclusively with a particular agent and compensating them for their services.
While these anticipated industry changes are expected to benefit both buyers and sellers in the long term, there are a number of details that buyers should consider before signing any agreement with an agent.
Tips for homebuyers
Choose the right agent
Many buyer’s agents will request that potential buyers sign buyer representation agreements – a contract between a homebuyer and a real estate agent that outlines the terms and conditions of their working partnership. While some agents will fully explain the terms and ramifications, others may attempt to gloss over its significance or slip it in unnoticed. It’s essential for buyers to understand the agreement fully to avoid unexpected commitments, such as how much commission they will be expected to pay. This is particularly important since it’s been the longstanding practice for sellers, rather than buyers, to have paid the commission fees for the buyer’s agent.
Although the notion of paying for their own agent might catch buyers off guard, this structure offers several benefits. It encourages competition among agents, which should enhance service levels and exert downward pressure on commissions. Further, compensation can be tailored to the agent’s level of competency and time invested, ensuring fair remuneration for their services. For instance, a buyer who finds a home independently and receives no advice on disclosures or financing options may pay a lower rate; whereas, a buyer from outside the area who requires extensive analysis and guidance over months of house hunting may find great value in an agent’s services, justifying higher compensation.
Finally, this structure also reduces the risk of agents steering buyers toward less-desirable properties solely because of higher commission.
The level of experience, expertise and quality of service, however, varies significantly among agents, making it crucial for buyers to conduct thorough interviews, akin to sellers interviewing listing agents.
Factors a buyer should consider include:
- Developing a list of priorities
- Researching and interviewing three to five qualified agents, making sure to ask detailed and specific questions
- Signing agreements with one or more of the chosen agents
Through this process, the buyer will be able to ascertain the pros and cons of each agent.
Limit the geographic scope of the representation agreement
Local expertise is very important in real estate. Nevertheless, some buyers sign agreements committing themselves to working with one agent despite considering various geographic areas.
Most buyers would be better off working with different specialists from different areas. For example, one agent could focus on the Los Altos to Atherton area; another on the Hillsborough, Burlingame and San Mateo area; and a third on the Saratoga and Los Gatos area. Agents who claim expertise across all areas probably lack true specialization in any particular locale.
Beyond localized knowledge, buyers benefit from agents who are aware of competing agents in different areas, motivating them to act diligently to secure the perfect property before their counterparts do.
Limit the duration of representation agreement
Buyer representation agreements should strike a balance between giving the agent adequate time to demonstrate their expertise, work ethic, responsiveness and value and not holding the buyer hostage if they’re dissatisfied.
Generally, contract periods of 90 and 120 days suffice. If the buyer is happy with the level of service provided, they can always extend the agreement.
Consider an agent’s access to off-market homes
Properties that are sold without being listed on the Multiple Listing Service (MLS) and without marketing through other channels, such as local newspapers, TV commercials, paid online ads and direct mail, tend to sell for less money than similar properties that receive extensive promotion. While this is generally very bad for sellers, it can result in a good buying opportunity. Therefore, an agent’s ability to access these off-market properties is a significant advantage to his or her buyers.
Typically, high-volume buyer’s agents are well-connected to off-market properties. Similarly, brokerages that handle substantial volume in specific cities or neighborhoods often possess valuable insights into these less-promoted properties.
This guest column was written by contributing writer Michael Repka. Repka, CEO and general counsel for DeLeon Realty, Palo Alto, formerly practiced real estate and tax law in Palo Alto. He formerly served on the Board of Directors of the California Association of Realtors. He can be reached at DeLeon Realty.