The new mandatory contracts are the result of a March settlement between the court and the National Association of Realtors. Consumer advocates hope they will end practices that required sellers’ agents to pay their buyer counterparts half the commissions on the sale of a home. Proponents of ending the automatic split hope that having buyers pay their agents themselves will spur negotiations that could lead to lower commissions.
The model contracts currently being circulated by real estate groups call for buyers to pay a portion of the commissions, rather than just sellers, as is currently the case. But consumer advocates worry that most buyers simply aren’t equipped to review the legal documents their agents ask them to sign, leaving them at the mercy of industry standards.
“Nobody in their right mind reads these forms,” said Tanya Monestier, a law professor at the University at Buffalo who has reviewed more than a dozen new contract models.
The Justice Department has apparently taken note of the new contracts. Monestier said the Justice Department responded in July to memos she sent about contracts issued by several state associations, including the one drafted by the California association. In addition, California Realtor Association general counsel Brian Manson said in a June 21 article in the trade journal Inman that the association had received a request for information from the department.
Lotus Lou, a spokeswoman for the association, confirmed Manson’s comments. The Justice Department did not respond to requests for comment.
Monestier, for example, described a plan by the California Association of Realtors as “dense, complicated and confusing” to the point of being incomprehensible. “I think that’s by design,” said Monestier, who evaluated the California model at the request of the Consumer Federation of America.
In its June statement, the association rejected Monestier’s proposal. assessment, the caller Critics of the forms are “misguided,” “absurd” and insufficiently familiar with California law. The organization has made several changes that address advocates’ concerns, the group said.
Manson told the Washington Post that the band spent months working on its draft contracts and made several changes.
“The revised forms are greatly simplified, making them more transparent and easier for consumers to understand with the help” of their real estate agents, Manson said in an emailed statement.
The Post reviewed sample contracts and other industry guidelines from real estate agent groups in eight states. The Post sought comments on the draft contracts from attorneys, real estate agents, consumer advocates and others familiar with the industry.
Some industry insiders say requiring a buyer’s contract won’t do much to change commissions, which typically run about 6 percent of the sale price, with 3 percent going to the selling agent and 3 percent to the buying agent. NAR and its affiliates said commissions have always been negotiable, and many buyer’s agents already require their clients to sign agreements in advance.
Edward Rogers, a director at a Philadelphia-area real estate brokerage firm, said he expects buyer-side negotiations to be rare even after the new rules take effect. “I think it will happen, but I don’t think it will happen often,” he said.
Having commissions paid entirely by the seller helps new homebuyers, Rogers said. “Our market is made up of a lot of first-time homebuyers, a lot of middle-class working families who are trying to buy a home, but they really don’t have the means, or maybe don’t have the savings” to pay a commission.
Rogers said these changes will ultimately benefit the industry and consumers by adding more transparency to the commissioning process. He advised homebuyers to review the new contracts with their agents and fully understand them before signing.
Southern California real estate agent Iain Phillips stressed the importance of easy-to-understand contracts. His agency has long used buyer-agent contracts, but he said an early version of the California Association of Realtors’ purchase agreement was a “nightmare” because of its length and confusing language.
“Especially for someone who has never bought a home before,” he said, “they’re going to look at this with a lot of questions.”
Consumer advocates say it’s important for buyers to understand what they’re agreeing to before signing with an agent. “Comprehensible agreements have the power to empower buyers and transform their relationships with agents,” said Stephen Brobeck, a senior fellow at the Consumer Federation of America, a consumer advocacy group.
The group recommends that brokers and their clients have the right to terminate contracts at any time, without penalty. Broker fees should also be clearly stated as a dollar amount or hourly rate, the group says, while any additional fees should be deducted from the commission paid on a sale.
Brobeck’s organization also argues that seller concessions, which may include the seller paying the buyer’s agent’s commission, should be approved by buyers themselves, not their brokers. The consumer federation also opposes mandatory mediation or arbitration clauses.
Some draft contracts reviewed by The Post contain high fees and other provisions that could worry home buyers.
An Oregon bill suggests that a buyer who backs out after making a formal offer should be charged $2,500. A Texas bill states that a client would be liable for “the amount of compensation the broker would have received under this agreement if the client had not been in default” in certain situations where a transaction falls through.
Monestier, a law professor at the University at Buffalo, said homebuyers who back out of a deal through their own fault Consumers could owe tens of thousands of dollars on top of their deposit. “No consumer would realize the implications of this default clause. (…) It would be a complete surprise to them,” she said.
Lori Levy, general counsel for Texas Realtors, said there may be “limited circumstances in which a buyer’s actions could rise to the level of breach for which the broker should be able to be indemnified under the agreement,” adding that failing to buy a home would generally not constitute a breach of contract.
Others fear that these contracts could undermine a key element of the NAR agreement.
Under the current system, real estate agents who list homes on the organization’s Multiple Listing Service (MLS), a national directory of homes for sale, often offer to split commissions with buyers’ agents. The lawsuit settlement will end the practice of including such compensation offers in listings in the database.
Buyer rights advocates have argued that if buyer agents no longer benefit from traditional commission sharing, they would be forced to negotiate rates with their own clients. While new state real estate group models include provisions for home buyers paying their own agents, the contracts could also allow buyer agents to be paid directly by sellers outside of the MLS.
“Nothing in the NAR agreement prohibits home sellers from compensating buyer brokers outside the MLS,” said Nick Gaglio, outside antitrust counsel for Florida Realtors. “Such offerings are a pro-competitive way to increase buyer interest in a home and thus improve returns for home sellers.”
A Texas draft contract simply replaces commissions with “bonuses” that the buyer’s agent can collect from the seller, Monestier said.
Levy, general counsel for Texas Realtors, said the bonus language gives buyers control by providing transparency into compensation. The draft form specifies that bonuses can only be granted with the client’s written permission.
“The forms highlight what a buyer’s broker will earn and give the client control over whether or not to accept a bonus,” Levy said.
A Florida model includes a line specifying that the broker may obtain “separate compensation” from the property owner. Gaglio said the outside compensation provision has “nothing to do with the NAR regulation” and “simply reflects a common situation in which a broker provides separate services” to the buyer and seller.
One concern raised by consumer advocates is that the emerging models contain workarounds that allow buyers to settle with sellers, effectively maintaining the current industry standard in which each party’s agents are paid 3% of the home’s sale price.
A summer 2024 newsletter The Georgia Association of Realtors says members could put their listing on a personal website and include a statement about how buyer brokers will be compensated, for example, or use an MLS listing that promises a certain amount of money for “closing costs” without mentioning buyer broker compensation.
The language in the bills is consistent with predictions from some real estate agents that the industry could largely maintain the status quo. While some rules may be different, “it will be business as usual,” said Phillips, the California real estate agent.