Real estate contracts have always been complicated. But now, home buyers are required to sign agreements with their agents that specify the fee and services before the search begins – the result of a landmark $418 million settlement with the National Association of Realtors that upended the traditional commission structure.
These documents can be confusing – and some are rife with language that could end up seriously costing buyers. Consumer advocates have already raised concerns that the contracts, or “Buyer Representation Agreements,” can be long, dense and even deceptive.
The new rules – which kicked in Aug. 17 but were already affecting deals once the settlement was announced in March – have had the initial effect of modestly lowering fees. The average commission per agent was 2.55 percent in July, down from 2.62 percent in January, according to a Redfin report.
One of the biggest changes is that sellers are no longer on the hook for paying the commissions for both sides. This also means the onus is on buyers to negotiate ahead of their search what they want from their agent, how much they’ll pay and whether the eventual seller will pay part of the buyer-agent commission.
While buyer-agent agreements have long been common in some states and were already required by many real estate companies, these changes mean they now entail broader negotiations – which makes scrutinizing the fine print all the more important.
The Washington Post reviewed eight contracts and spoke with consumer groups, realtors, lawyers and other experts so buyers know what to look out for.
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Commissions
Commissions are the fees agents get when a sale closes. Under the old system, the commission for both sides – paid entirely by the seller – typically totaled between 5 and 6 percent of the sales price. Now, sellers must decide whether to offer compensation to buyer agents in addition to their own. And buyers must decide what type of payment (such as a flat fee or percent commission) to offer their agent and what specific services they want.
What home buyers should look out for: Some consumer advocates suggest buyers should push for a flat fee based on their housing budget and make sure they fill out the commissions field on any contract they agree to. Realtor groups also emphasize that both payment and expectations should be clearly spelled out upfront.
“The consumer can decide what services they want from their real estate professional and what they’re willing to pay for,” said Kevin Sears, president of the National Association of Realtors. “It’s just a matter of how much help you want, and how do you utilize that expertise.”
Why it matters: Housing prices have soared in recent years, which means commissions – which are pegged to the sales prices – have grown in dollar value as well. Paying a flat fee for specific services could save money if prospective buyers are willing to handle much of the search themselves.
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Additional fees
Contracts can include extra fees on top of a commission, such as administrative, transaction or retainer fees. While they aren’t new, buyers need to be aware of agreeing to these fees in the upfront agreements.
What home buyers should look out for: Administrative or transaction fees, some totaling as much as $600, can slip past buyers. These fees are usually not justified because such services should be covered in commissions, according to the Consumer Federation of America. However, retainer fees might be increasingly necessary in case buyer agents have to assist clients for a long time before being compensated at the close of a sale, according to the CFA.
Why it matters: Commissions are the primary way brokers are paid, and those costs can already set back cash-constrained buyers. Additional fees could add to that strain.
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Cash payments
It’s long been common for real estate deals to include payments directly from the seller to the buyer at closing to help cover costs like appraisal fees, taxes, title search, renovations or even agent fees. In other cases, payments go directly from the seller to the buyer’s agent as a sort of finders’ fee.
What home buyers should look out for: A range of terms – including “concessions,” “additional compensation,” “bonuses,” “incentives,” “rebates” or “valuable consideration” – appear in draft contracts to describe such payments. Some contracts, like one circulated in North Carolina in July, allow for these payments as long as they’re disclosed and both sides consent.
Why it matters: When concessions go to the buyer, they offset the cost of buying a home – effectively lowering its price. Seller payments given to agents without the buyer’s knowledge, however, have been criticized by some consumer advocates as a form of bribery that could compromise an agent’s ability to objectively represent the buyer.
Under the new rules, “it will be harder for brokers to try to collect this type of incentive since their buyer agreement states they can’t make more than what they told their buyer they charge,” noted Wendy Gilch, deputy director of Consumer Advocates in American Real Estate.
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Conflict of interest
Both the NAR and consumer advocates alike say buyers should be aware of “dual agency” agreements, such as those allowing the buyer’s agent to represent other buyers bidding on the same property, or letting an agent represent the buyer and the seller.
What home buyers should look out for: Blanket agreements allowing dual agency could harm both buyers and sellers due to the inherent conflict of interest, according to the CFA. If an agent’s role as the buyer’s representative shifts to a “facilitator” who works for both the buyer and the seller, the two sides need to discuss and approve.
Why it matters: A dual agent may not be seeking the best interests of either. Such a conflict should be disclosed so buyers can decide whether to find their own independent agent.
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Termination
There are cases when buyers might want to back out of their contract with their agent while they’re still searching – for example, they could find a different agent offering better terms.
What home buyers should look out for: The fine print can sometimes make it hard to back out. A template contract distributed in July by a North Carolina realtors’ group, for example, specifies that a buyer who withdraws from a contract without mutual consent from both sides would be considered in breach and may still be liable for the agent’s fee on a subsequent sale during the specified time period.
Why it matters: Fines or legal claims can be brought against the buyer for violating the termination clause of a contract. Even if the buyer has legal grounds for quitting an agent, attorney fees can be substantial.
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Default fees
Terminating an agreement with an agent during the search is one thing. But the stakes become much higher once an offer is accepted and both sides sign the sales contract. At that point, the buyer typically has to put down a deposit, or “earnest money,” that acts as an incentive to stick to the deal unless certain “contingencies” aren’t met – like the mortgage approval or a home inspection falling through. If the buyer walks away from the deal unilaterally, without a contingency, they have to forfeit this deposit.
What home buyers should look out for: Sometimes a buyer might decide to quit the deal for reasons other than those spelled out in the contingency clauses – say, a sudden financial emergency. In those instances, they would have to hand over not just the earnest money, but possibly also the money to cover agents’ fees. Several draft contracts reviewed by The Washington Post hold the buyer responsible for paying commissions when they “default” on a sales contract.
Why it matters: While default situations are rare, they can be costly. Buyers should make sure that the sales contract includes detailed contingency language to cover a range of potential risks to the sale, and be aware of any default penalties, just in case.
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Arbitration
Some buyer-agent contracts might include binding arbitration agreements, which would limit buyers’ ability take a matter to court.
What home buyers should look out for: Any binding arbitration clause that limits the buyer’s right to litigate a dispute or caps damages could be risky. In Oregon, for example, a draft contract distributed to agents warns that both parties are “giving up the right to have the matter tried by a judge and jury” and notes that the right to appeal is also limited.
Why it matters: Such agreements would force consumers to resolve complaints through mediation or arbitration. Consumer advocates recommend trying to resolve small disputes out of court while keeping open the option to sue over larger matters.
(c) Washington Post