The real estate brokerage industry was just penalized in a major way, and to be honest it had it coming. Personally I agree that the industry was running itself in a monopolistic way that did keep commissions high and was negatively impacting the consumer.
One of the many changes that have been forced on the industry was the requirement of a buyer representation agreement just to show property which in some ways I agree with but it has some major flaws. Let’s look at the good and the bad and the ugly of these buyer rep agreements and how they impact consumers.
The good thing for buyers
First let’s talk about the good. Now buyer’s agents are no longer able to tell their clients that they work for free which was very misleading. Buyer’s agents are now being forced to have a buyer consult with their buyers and explain the process (hopefully truthfully and fairly) prior to showing homes. They must disclose their fee that they are going to charge in that document and they cannot charge anything more than that fee. This is pretty simple and straightforward, and on the surface seems to benefit the consumer until you take a closer look.
So what’s the problem?
Once you take a closer look it’s hard not to see the bad. At my company, 1 Percent Lists, we used this as an opportunity to completely simplify our documents. We now have a very simple one-page listing agreement. We have a very simple one-page buyer representation agreement. all of our documents are written so that almost anyone could understand them. And by anyone, I mean a teenager. Unfortunately, many brokers have not adopted the same principles. I have talked to brokers who are using a buyer representation agreement that is six pages or more long and filled with legal jargon that no buyer could reasonably understand. Understanding that legal jargon is where the ugly comes in.
The problem for buyers
The truly ugly of this situation is many buyers will not understand that they are committing to paying their buyer’s agent a commission if the seller refuses to pay it. I do not believe that real estate agents are taking the utmost care to put their clients first and make sure their buyer clients understand they are ultimately liable for this fee and once this buyer representation fee is set, it is non negotiable.
What I mean by this is an agent cannot simply say I am going to request 3%, however, I am willing to go down to a lower fee if the seller refuses to pay the higher fee. This is not allowed with the new agreement. So whatever is left over, the buyer owes. What makes this even uglier is that, according to lenders that I am speaking with, four out of five buyers cannot afford to pay this fee.
Agents are now getting buyers to sign up at a higher buyer commission than what was common prior to these changes and they are filtering which properties they show based on who will agree to pay that higher fee upfront. This has made the problem of steering dramatically worse.
Read our article on the effects of property taxes and insurance on home affordability.
What’s the solution?
A very simple solution would be to require that all buyer representation agreements very clearly disclose that the buyer is liable for any commission shortfall between the agreed-upon fee and what the seller is willing to pay. This should be incredibly hard to miss in the contract large font bold print.
Another option would be to set a cap on commissions, but also set a floor. For example, an agent could set a cap on what they would get paid at 3% and have a floor at a lower fee. But once again, make that buyer incredibly aware they would be responsible for making sure the minimum is met if a seller refused to pay anything.
Final thoughts
More open conversation is always a good thing, and more disclosure between an agent and their client is a good thing as well. Unfortunately, the way that the system is currently set up is not good for anyone. We are already hearing from sellers that are going to refuse to pay a buyer’s agent anything. I do not advise any of our sellers to take this stance, however, we are already hearing from some that are not willing to budge.
It is unethical for a buyer’s agent to refuse to show these homes. But I also feel it is unethical to have a buyer representation agreement that locks your fiduciary client into paying a fee that they likely cannot afford. This puts many agents, and their clients if they understand what they have signed many unfortunately will not, in an uncomfortable situation. Change needs to happen, but is this the best change that we could do?
If you’re interested in using a real estate broker that will put you first and explain things to you the right way, contact us for a consultation.
