What’s the Deal With the Mandatory Buyer’s Agreements?
^ a frisky lil’ anti-trust lawsuit sneaking up on the real estate community to cause some annoying but ultimately good chaos and change
Most people learn what a social faux pas is at a young age. I had an adorable habit as a child of announcing at the top of my lungs when I saw someone who had lipstick on their teeth, self-righteously singling my victim out and also making sure everyone within an earshot was aware of their makeup malfunction. I thought I was helping but my mom thankfully used this as a teaching moment about tact, reading the room, and not making someone uncomfortable.
Most people tiptoe around sensitive topics that are hard to breach, for understandable reasons, so today we’re going to dive into one directly involving the real estate industry. The NAR lawsuit around broker’s commissions and buyer’s agreements has left people with more questions than answers so we’re going to dive into it all.
High level:
- Broker’s commission was *always* negotiable and still is
- Since the lawsuit, sellers are still paying buyer’s agent’s commission in almost every single transaction (99% of transactions at Compass last month), the same if not more than prior to it
- The changes in the industry are all about disclosure of representation, which is great for both agents and customers as it will eliminate the business models of individuals who prey upon unrepresented buyers and try to bait-and-switch them
- Both buyers and sellers need expert help and professional representation in transactions and for a long time, agents have been undervalued and often mocked. This has allowed the conversation about what agents do, the services/time/years we work for free, and has allowed there to be more understanding and accountability from consumers as well.
^ all the bad players in the real estate community quickly being Oopma Loompa’d out
This topic effects everyone, not just consumers in New York City. So if you have found yourself on this newsletter but live somewhere other that New York, all of this applies to your market as well.
The skinny behind the lawsuit that started it all
Now I’m sure in some capacity you have heard about the NAR (National Association of Realtors) lawsuit, which aimed to make broker’s commissions more transparent. There was a lot of confusion around what the outcome of this lawsuit was and how this influences buyers. Most of the process is identical, how you buy a home and how much it costs will stay exactly the same. I’ll cover the commission aspect shortly but the most impactful change this lawsuit has prompted is that ALL buyers in New York City (and the country) MUST have buyer’s agreements signed with their designated buyer’s agent prior to stepping foot into a property. This agreement is required so that representation, commission, obligations and duties, and all terms for both parties are clearly spelled out. If a buyer’s agent takes a buyer out without this document signed, there can be penalties and recourse as representation has not been formally agreed upon. So let’s dive into it before we discuss the document!
First, straight from the NAR itself, click here for the settlement in a nutshell.
The main point of this entire lawsuit was to make sure broker’s fees were negotiable, which they always have been aside from a few rotten apples. There were some bad players who were violating Antitrust laws by advertising that commissions were fixed which caused this huge lawsuit to come into play. In my 12 years of real estate, every transaction I’ve been a part of has been negotiable. When I meet sellers, I recommend that we offer a buyer’s commission, seeing that 90%+ of buyers have agents and it is universally agreed upon that it is of utmost importance for buyers to have competent representation for a deal to be successful. It is up to the seller whether or not they want to offer that commission and what commission it is. As a buyer’s agent, there is an offered commission for buyer’s agents when you make an offer, but I have taken less commission than offered a handful of times through side negotiations in order to get the price to a place where there is a meeting of minds. Commission has always been negotiable but now we have to memorialize that in an agreement prior to working with any buyer.
How the verdict of the lawsuit is being implemented
Since the NAR lawsuit’s goal was to make sure there is no price fixing, the agreement has to spell out what commission the buyer’s agent is required to be paid. A buyer’s agreement will have a certain percentage or amount that he/she is required to be paid in the event of a transaction. Once we locate a property you’re interested in, I will speak with the seller’s agent about if and what the commission is being offered. If it is less than the commission that we have spelled out in our buyer’s agreement, we can offer that the seller pays the additional difference between what they’re offering and what I require. If it is more than the commission I’ve put in the agreement, with your permission I can amend the contract to allow my brokerage to be paid the higher amount. In the situation where the seller is offering less and if they refuse to pay the difference, technically the additional commission falls upon the buyer. We can have a candid conversation because I have never lost and will never lose a deal over commission; I’ve given up commission before to make deals happen. But as we’ll cover in a minute, most sellers are paying full commission, the ones who are not tend to be unrealistic and ill-represented, which reflects in their pricing, product, and marketing as well.
These agreements can be per-property or for a set amount of time. If you value the service given to you and want an agent who is working for you and with you around the clock, you are best served having an exclusive buyer’s agreement with your real estate broker for a set amount of time. Seeing finding a home in New York (or anywhere) can take time, most agents start with one year exclusive agreements.
But how many sellers are paying commission?
Now, I know the question everyone is asking is: how many sellers aren’t paying commission? Since it’s illegal now to advertise commission to other agents publicly (agents must directly inquire), Compass has been keeping track internally of seller’s commissions being offered on Compass sale-side deals, since commission is spelled out in the exclusive agreement. Here are the numbers from January in Manhattan (Brooklyn was almost identical, happy to share those if you’re interested!):
– – – – – – – –
- 2573 new listings listed in March in Manhattan (538 were listed by Compass – 21% market share)
- 238 already in contract
- 17 already sold
- 66 already taken off the market
- Average buy-side commission: 2.62% (the same as in February)
- 2034 listings had the buy-side commission blank in Compass Search
- 1 listing offered zero % buyer commission or 0.19% (in February it was 0.53%) – Turn this around: 99.81% of all Sellers paid the buyer brokers commission!
- 0 listings offered 1% buyer commission or 0.00% (in February it was also 0.53)
- 5 listing offered 1.50% buyer commission or 0.93% (in February it was 0.27%)
- 34 listings offered 2% buyer commission or 6.31% (in February it was 6.67%)
- 311 listings offered 2.5% buyer commission or 57.70% (in February it was 54.13%)
- 178 listings offered 3% buyer commission or 33.02% (in February it was 35.20%)
- 0 listings offered 4% buyer commission or 0.00%. (in February it was 0.53%)
- 0 listings offered 5% buyer commission
- 0 listings offered 6% buyer commission
Less than 2.5% – 8.35% (in February it was 9.60%)
Less than 3% – 66.98% (in February it was 64.27%)
– – – – – – – – –
So clearly, sellers and seller’s agents know that buyers agents are crucial to the deal because buyers need to be educated, prepared, and properly represented in order to successfully transact. Since this mandate came into play this past summer, every property I’ve had buyer’s entertain where I inquired about commission, it has always been 2.5-3%. I have yet to personally see lower.
What the buyer’s agreement outlines each party owes the other
In addition to the commission, the exclusive itself outlines what both parties owe each other.
Verbatim, what the agreement says:
- Buyer’s Broker’s Representations and Services. Buyer’s Broker shall: (a) use reasonable efforts to identify Potential Properties that meet the purchasing priorities, as set by Buyer; (b) arrange for showings of Potential Properties that are suitable for Buyer (c) assist Buyer in negotiating terms of an offer for Potential Properties at a price and on terms acceptable to Buyer; and, (d) generally advise and assist Buyer throughout a sale and purchase transaction.
- Buyer’s Duties & Representations and Warranties. Buyer agrees to (i) provide Buyer’s Broker with their purchasing priorities and timely consider properties selected by Compass or Buyer, (ii) submit through Compass any offers to purchase or acquire property, and (iii) provide accurate and relevant personal information to Compass related to the purchase of a Potential Property. Buyer also agrees to act in good faith toward the completion of any purchase agreement regarding a Property entered into in furtherance of this Agreement. Buyer understands and agrees that Buyer must take steps to protect itself including by investigation of information and discovery of the legal, practical and technical implications of discovered or disclosed facts. Buyer agrees to read all documents provided to Buyer in a timely manner.
How I describe to my buyers what that means as far as my business goes:
What I owe you: I have 12 years of experience and pride myself on only taking on clients I can give 100% of my time and effort to. My clients are my utmost priority and my job is to make sure you do not over pay; you don’t miss any properties; to make sure you buy something that preserves resale value; to do everything in my power to make sure you do not lose out on your dream home when we find it; to make sure nothing is wrong with the property; to successfully guide you through the purchase process as swiftly and painlessly as possible; to articulate, premeditate, and capitalize on market dynamics; to educate you on the market and the process from my years of knowledge; to serve as a rational soundboard for all mental musings; to help you understand what it is you want and help craft that notion into something tangible with the options on the market; to be by your side as your priorities change and to help realize those changes and translate what that means for properties; to make sure you are fully prepared and qualified to purchase an apartment; and to be your advocate, educator, and representation in every sense of the word. And to make this a fun and exciting experience!! But since I give my job my absolute all, I only work with people who are working with me, which has been my business model since day 1. I’m always happy to provide references and am very proud of how much I care about the work I do. My role doesn’t end at the end of a transaction; I am always here for real estate advice and will do everything I can to maintain my position as your trusted advisor for all things real estate (and martinis and American history). As with any relationship, if something isn’t working or you need more/something different from me, articulate those needs and I know I’m not perfect so I always welcome the ability to grow and better myself as a professional.
What you owe me: with the buyer’s exclusive agreement, you are working exclusively with me as your representation. You owe me the transparency of what it is you’re looking for, the materials needed to submit an offer when you’d like to make them, and have to act in good faith towards the completion of a purchase. If a buyer’s agent is going to make you a priority, it is only fair that their time is not being wasted if you, the consumer, are seeing properties with other agents hence why there must be a mutual agreement to work together exclusively.
If for some reason you’d like to terminate a buyer’s agreement to work with another agent or if you aren’t looking for a home anymore and want to pause, you can request a release form and you will be released from the agreement!
Why this is actually a huge positive for the real estate community
While this is a hassle with the additional paperwork, at the end of the day it protects both the buyer and their agent, which allows us as a team to focus even more acutely on the goal at hand – finding you a wonderful home you love, with great resale, as quickly as possible, and while having fun along the way. Sellers are required to have exclusive agreements with their seller’s agents, so it’s only fair that buyers and buyer’s agents have the same protections and disclosure put into place! As someone in a family of 9+ attorneys, I would say that I wouldn’t recommend going to court without a reputable lawyer in the same way that I wouldn’t recommend shopping for a home without someone working fully and entirely in your best interests.
And most importantly, it is going to weed out the bad players in real estate.
How consumers are being duped by agents who are not forthcoming about representation
If you are a consumer of New York real estate, you will know that Streeteasy is your main resource for publicly viewing properties, unless you have an agent who is sourcing you properties directly from their Multiple Listing Server. For people outside New York, Zillow or Redfin are the equivalents. Have you ever inquired about a property and then been linked to an agent who then says they’ll show you the property (and possibly others). You then go see the property and realize this person isn’t the listing agent but a random agent off Streeteasy claiming to be your representation without your agreement?
Agents can purchase what is called “StreetEasy Premier Agent” for thousands of dollars a month to have their likeness and contact information put over the information of the listing agent, who is the person you are actually trying to get ahold of. These agents who spend this obscene money are usually inexperienced/inept and don’t have a business of their own (which should be a red flag as to the caliber of the agent they are) so they pay oodles of money just for leads. They are trying to dupe you into visiting the property with them so they can collect half the commission of the sale as your representation. You’re going into this thinking you’re reaching out directly to the seller’s representative, when really it’s a random person who is trying to trick you into using them as your agent without your knowledge or agreement. Rarely do these agents talk about representation or the process itself and suddenly buyers find themselves in too deep and wanting a property so they just go with the flow. Now if these agents don’t have the representation conversation with you and get a buyer’s agreement signed prior to the showing, they are owed no comission at closing.
Streeteasy doesn’t care about the safety of the consumer and does not advertise that this bait and switch is happening. They make obscene amounts of money off this scam and do not vet the agents for their aptitude before slapping their information over that of the listing agent, who worked very hard for this listing. Streeteasy, Zillow, and Redfin take marketing material (photos, floor-plans, copy, etc) from agents who spend a lot of money and time on these materials, let alone years getting the listings, FOR FREE, then try to sell it back to them. It’s a truly heinous business model and finally these lawsuits for consumer rights are starting to unearth to everyone how disgusting the underbelly of the industry is.
But all is this hopefully coming to an end! Thanks to the brilliant leadership of Compass CEO Robert Reffkin and a few others, the toxic machine that is these money hungry listing platforms may be coming to an end. Follow this link to read more about how the brokerage community is fighting back to protect consumers and take the industry back.
The amount of times that I, as a seller’s agent, have had buyers come with “their agent” only to find out in the apartment, that their agent is not the seller’s agent…which leads to me, like some dramatic TV reveal, bringing to light this entire scam in front of the buyer and this sheepish agent who never disclosed their trickery to them. It makes for a deliciously uncomfortable situation.
How to avoid this? Under the premier agent information, there is usually a prompt where you can select to see the listing agents information. It’s small and somewhat hidden, as Streeteasy wants you to use the agent it makes money off of, even if they have no experience, are bad people, or horrible professionals. Or the safest way around this is to work with an agent you know and trust. In 90% of transactions, buyers have their own representation, so instead of getting the run-around and potentially getting legally bound to a property with an imbecile as your agent, find an agent who has experience, you enjoy, and will work hard for you.