A few months ago, we shared news of recent class action settlements against the National Association of Realtors (“NAR”) and major real estate brokerages. These settlements in conjunction with pressure from the Department of Justice (“DOJ”) resulted in upcoming changes to the real estate industry taking place this month (August 2024). Click here to read our previous blog.
These changes will affect both homebuyers and sellers. Today, we will focus on the expected impact on homebuyers:
TRANSPARENCY AND CHOICE
The goal of these changes is to add transparency by matching agent commission negotiations and payment to the party receiving the service. Homebuyers will now be more aware of the cost to hire their Buyer Agent when they directly negotiate representation terms with their agent. This may encourage homebuyers to think more about their choice of agents and demand the best representation for themselves.
AFFORDABILITY
Affordability has been an on-going challenge in the national real estate market due to the quick rise of mortgage interest rates beginning in 2022 (click here to read). On top of that, home prices have been climbing steadily since the end of the Great Recession (click here to read). Many homebuyers struggle to come up with their 20% down payment plus closing costs. If you add, on top of that, the need to pay their Buyer Agent through escrow, their closing costs increase; typically by 2.5% to 3% of the purchase price. The issue is that lenders generally do not allow the financing of agent commissions. This is particularly difficult for first-time homebuyers that do not have home equity to roll into their new purchase. Read on to explore ways around this result.
COST PERCEPTION – ECONOMICS 101
If the payment of the Buyer Agent commission is shifted from seller to homebuyer, will the total cost of buying a home change for the homebuyer?
Before this rule changed, the Buyer Agent fees were collected from the seller’s net proceeds through escrow but the cost of those fees were passed onto the homebuyer in the form of a higher price; the fees were “wrapped” into the purchase price. If the cost of the Buyer Agent fees are now directly paid by the homebuyer instead, the cost of the home should be less. The combined acquisition cost to the homebuyer remains the same. What is different is that the homebuyer has increased their upfront costs since they currently cannot finance the Buyer Agent commissions. However, their mortgage lessens since these fees are no longer wrapped into the purchase price.
Market prices are affected by supply and demand. The demand for homes should not change just because the Buyer Agent payment structure changes except at the entry level where some buyers may not be able to save for these additional upfront costs.
A few additional notes on this point:
- Typically, funds coming into escrow have been, and will continue to be, homebuyer and their lender funds. The seller does not usually put funds into escrow.
- In the long run, the market will find its equilibrium. In the short term, some market participants may benefit and some may be disadvantaged.
- This bears repeating, it is still perfectly legal to request that the seller pay the Buyer Agent commission on behalf of the homebuyer.
- The value of the Buyer Agent does not change (keep reading for more on this).
MYTH THAT THE BUYER AGENT HAS BECOME UNNECESSARY
The biggest hidden pitfall is that either the seller or the homebuyer will now view the Buyer Agent as unnecessary. A Buyer Agent serves their client and provides value to both the seller and the homebuyer. We’ll address the value to the seller in a future blog post.
Some homebuyers may choose to put themselves at great risk powered by a false sense of security that they can go this alone. Or, just as risky, use the Seller Agent to represent both the Seller and them (dual agency) regardless of obvious conflicts of interest.
Going it alone can be the biggest hidden costs that the homebuyer ever incurs. So many things can go wrong during a real estate purchase transaction. Homebuyers should have an experienced and knowledgable agent who can provide protection to the homebuyer from start to finish. We actually protect our homebuyers long after the deal has closed escrow by being there if problems occur after closing or when they embark upon improvement projects. Real estate is a long term proposition and we build long term relationships with our clients.
Some homebuyers think that they have the relevant technology to do their own home search. Even if that is true, they may not also have solid relationships with skilled inspectors and service providers necessary to progress safely through the process. A Buyer Agent has seen the issues that come up during the contract period time and time again and they are equipped to address these issues finding the right solution for their client.
Buyer Agents are match makers, consultants, advisors, protectors, negotiators, therapists (sometimes), communicators, coordinators, problem solvers, your contact resource, and (most likely) your friend. That is a lot to replace or forego.
RISK OF LAWSUITS
Due to the false feeling that Buyer Agent’s may not be necessary, we expect real estate transaction litigation cases to increase. Without an experienced Buyer Agent, communication is lacking. Tensions rise and lawsuits are filed. Most lawsuits occur when one side of the transaction is not represented or, is poorly represented
PUBLIC POLICY
The supposed drive behind the DOJ pursuing NAR was under the guise that broker commissions were keeping housing prices artificially high. The theory was that if sellers did not pay Buyer Agent fees, housing costs would decrease to a more affordable level. This assertion must assume that homebuyers will go unrepresented? But, that sure doesn’t seem to be looking out for the consumer who only makes home purchases every now and then and lacks in depth knowledge and understanding of the process, likely risks, and pitfalls. Now they are left to find their way while the seller and their Seller Agent on the other side are free to take advantage. Sadly, the hardest hit will be those who cannot afford to pay a good agent. They will have to settle for a discount agent who provides less service leaving the homebuyer exposed. Or, no agent.
Moreover, many economists believe that housing prices will not shift due to these changes. Click here to read the article
As noted above, housing prices are based on supply and demand and these factors will drive housing prices just as they always have. To mend our housing crisis, we need more supply to meet the demand.
HOMEBUYER CONFUSION
Certainly, in the beginning, there will be confusion as everyone tries to find their “best practices” in this new environment. In time, a new normal will exist. However, at least during this transition period, opportunity to take advantage of homebuyers will be rampant. Since most homebuyers enter into real estate transactions infrequently, they may not be very knowledgable about the process. They may not know the difference between title insurance and property insurance. Sometimes, you don’t know what you don’t know.
It is most important during this transition that a homebuyer has a qualified advocate on their side.
VALUE CONFUSION
A big part of our service to our homebuyers is providing our opinions of the asking price. We do this by looking at recent comparable sales. The key here is “comparable.” Without public reporting of Buyer Agent commissions paid, we are no longer comparing apples to apples. Pricing can be skewed based on how the Buyer Agent Commission is paid. This will likely be an issue for appraisers too
For example, a recent $2,000,000 sale of a similar home where the seller paid the Buyer Agent may be the same as a sale of $1,950,000 where the homebuyer paid their Buyer Agent commission. We don’t want our client to overpay by $50,000 so this information is valuable but more difficult to track.
CONCLUSION
With every change comes challenge. Knowledgable and experienced real estate agents will quickly navigate the new way of doing business in this industry. They adapt well and adapt fast.
As a homebuyer, choose your Buyer Agent with the same informed due care that you invoke when you hire an attorney, a consultant, or any trusted advisor since your agent is protecting you in what may be the biggest purchase of your lifetime.
Need to know more? Contact Team Plunkett today and put our knowledge to work for you!
