The National Association of Realtors has agreed to a settlement of a lawsuit involving commissions in real estate transactions. The two major parts of the settlement are that sellers or their agents cannot offer compensation to buyer’s brokers within multiple listing services (MLSs) after August 17th. Additionally, after that date, Buyer’s brokers must execute a written agreement with their clients prior to showing any properties to be able to receive compensation, the agreement must include the commission due to the Buyer’s broker upon successful closing.
Sellers can continue to offer compensation directly or their broker can offer a portion of their commission as compensation to a buyer’s broker. The critical change is that, if there is an offer of compensation, it can’t be mentioned or disclosed anywhere on the MLS. Compensation can be offered on non-MLS services or advertising. Also, a buyer’s broker can contact the seller’s agent to determine if there is an offer of compensation from the seller or broker on a particular property and, if so, the amount. The seller’s broker can provide a written agreement to the buyer’s broker stating the amount of compensation that the seller’s broker will provide upon successful closing. If the seller will pay all or a portion of the compensation directly to the buyer’s broker, a new clause in the purchase contract will contractually obligate the seller to make the payment at closing.
After August 17th, buyers and their brokers will either be required to execute an agency agreement that includes fixed compensation or a fixed compensation agreement without an agency relationship. The agency agreement includes a timeframe that the agreement is in effect, the compensation agreement does not. Overall, I think this is a good change because the buyer and their broker should determine the amount of their broker’s compensation, not the seller or their broker. In the past, many buyer’s brokers would accept the compensation that was offered from the seller or their broker. The buyer’s broker can subsequently agree to accept a smaller commission, but not more than the amount stated in their agreement.
In the early going, there will be negative impacts with the written agreement requirement. The biggest will be prospective buyers unwittingly agreeing to long-term agency agreements with weak or incompetent brokers. There have already been complaints filed with the Colorado Division of Real Estate that some buyer’s brokers have told prospective buyers that Colorado state law requires them to sign an agency agreement prior to viewing homes. This is false on two counts. First, the new rules were agreed to by the National Association of Realtors and MLSs to settle a lawsuit, the State of Colorado does not have any requirements related to offers of compensation or buyer broker’s agreements. Secondly, buyers can elect to start working with a broker with a compensation agreement related to homes shown by the brokers that are eventually purchased, this agreement does not create an agency relationship or a commitment to continue working with the agent for a specific time period. Unlike sellers and their brokers, historically buyers have not interviewed and vetted brokers prior to committing to work with them and most brokers would work for buyer clients without an agreement, so if a buyer realized they made a mistake choosing an agent, they were not obligated to continue working with him/her. Buyers should not agree to an agency agreement with a term over a month until they are 100% certain that the broker has the competency, experience, and demeanor they want and expect. Otherwise, they will be contractually bound to the broker for the stipulated period.
Brokers will have to start using the revised contract to buy real estate starting August 17th. The big change is a new section that breaks down who will be paying the buyer’s broker’s compensation. There are three options: 1) Seller will pay, 2) Seller’s broker will pay, or 3) Buyer will pay; it can be one of these or a combination of two or three. As an example, a buyer and their broker agree to 3% compensation. The buyer is interested in a particular home, and it is learned that the seller’s broker is offering 1.5% compensation; the remaining 1.5% can be paid by the seller, buyer, or partially by both. If the buyer wants 100% of the compensation deficit paid by the seller, then the contract would be submitted with the seller paying 1.5% and the seller’s broker paying the 1.5% they offered prior to the contract being executed. As stated earlier, the buyer’s broker can agree to accept less than the compensation included on the initial agreement.
In the past, if a seller or their broker paid compensation to a buyer’s broker, it’s been built into the purchase price of the property. that will not change going forward. What will change is that if the offer of compensation from the seller and/or their broker is less than what the buyer and their broker agreed to, the payment of the remaining compensation will be addressed in the purchase contract.
