Homebuyers will soon bid for houses and agents
The day is coming when real estate agents may ask homebuyers to sign on the dotted line before showing them a single property.
For decades, buyers have typically made an offer on a house before sealing a deal with their agent. But that is set to change around summertime as — following a long court fight over fees — the U.S. real estate industry makes a fundamental shift affecting how agents get paid.
Listing agents and buying agents have long split a 6% commission on home sales. The money was subtracted from proceeds paid to the seller. Under the new system, sellers will no longer pay the buyer agent’s 3% cut, and both home sellers and homebuyers will be able to negotiate how much they pay an agent.
“Buyers could negotiate that down to 2%. And many will,” said Stephen Brobeck, a senior fellow at the Consumer Federation of America in Washington, D.C. “Buyer agents will agree to that because they’re afraid that the buyer will go to another agent.”
They’re also concerned that they might not get paid at all.
So the industry is creating contracts that homebuyers will be asked to sign to ensure that buyer agents get paid; consumer advocates say such agreements favor the broker over homebuyers.
The Consumer Federation of America reached that conclusion after examining 43 buyer-agency contracts in 37 states — including from the Pennsylvania Association of Realtors — that were written by real estate trade groups for brokers to use as models.
“The Pennsylvania Association of Realtors model contract is not the worst but still not great,” Mr. Brobeck said.
Consumer advocates point out that in the PAR contract, homebuyers have no ability to sue a real estate agent, and buyers are unable to get out of agreements if they want to.
“You, as a consumer with even a serious complaint, are required to go through arbitration — which is expensive and nerve-racking — and you’re not likely to do that and that prevents you from ever litigating a matter,” Mr. Brobeck said.
“Consumers ought to have the right to litigate,” he said. “There’s no guarantee they’re going to win, but they ought to have that right.”
A spokesperson for the Harrisburg-based Pennsylvania Association of Realtors said brokers have the freedom to create their own contracts. The organization publishes a library of standard real estate forms that members can choose to use.
“This includes several forms that create business relationships between a buyer and a buyer broker,” said Hank Elmer, chief legal officer. “Except for specific provisions that are mandated by state law or the Realtor code of ethics, the terms of these contracts are negotiable between the buyer and the broker.”
Uncertain real estate changes ahead
The real estate industry shakeup came last month after the National Association of Realtors agreed to pay a groundbreaking $418 million settlement to resolve a case alleging price fixing.
Home sellers had accused the trade group and several of the
nation’s biggest real estate brokers of conspiring to keep commissions artificially high and of forcing home sellers to pay for buyer’s agent commissions.
A federal judge is expected to approve the settlement this summer. When that happens, the standard 6% real estate commission split between listing and buying agents will be a thing of the past, and commissions will be up for negotiation.
State real estate associations have taken the lead in creating model contracts that will likely be the norm going forward. Pennsylvania’s model falls short of protecting the interests of homebuyers, industry experts say.
“The only way out is if the broker allows you,” said Wendy Gilch, a housing industry advocate and owner of the Franklin Park-based website Selling Later.
She contacted her state representative, Arvind Venkat, D-Franklin Park, to ask why the Pennsylvania Real Estate Commission does not provide a template for buyer agency agreements, since the state agency handles licensing of agents and polices the industry.
Mr. Venkat showed Ms. Gilch a response he received Jan. 19 from the Pennsylvania Licensure Committee staff, indicating that state regulators have no plans to get involved in the buyer agency agreement issue.
“The state Commission is not charged with creating forms for those in the industry to use in their transactions, only the forms that applicants and licensees must submit to the board,” the state official wrote. “I don’t see the Commission establishing industry templates because this really isn’t their mission.”
Ms. Gilch said the model contract written by PAR leaves room for the industry to operate essentially as it did before the settlement. “My biggest gripe is that if you look at how they word ‘commissions’ in this buyer agency agreement, it only lets the consumer negotiate the minimum an agent makes.”
She said the contract doesn’t address what happens in a scenario in which the buyer offers to pay the buyer’s agent 2.5%, but the seller offers a 3% commission for the buyer agent.
“The buyer agent ends up pocketing the extra half percent instead of letting the buyer apply it to the closing costs or use it as a rebate,” Ms. Gilchsaid. “That’s a big problem.”
Downtown attorney Bruce C. Fox also considers worrisome the language in the buyer agency contract provided to brokers by PAR.
“It doesn’t discuss or provide for a buyer rebate in the event that a seller pays a commission to the buyer agent that is greater than what the buyer’s agent has agreed to,” Mr. Fox said. “This will potentially result in the buyer and agent interests not being aligned, as the agent is incentivized to get the buyer into a property with an excess commission.”
Mr. Fox is the lead attorney in a class-action lawsuit brought on behalf of all sellers of residential real estate in Western Pennsylvania. His case followed the federal case in Missouri that made headlines in October for its $1.8 billion jury verdict on behalf of home sellers.
He said Pennsylvania’s buyer agency agreement provides space for unexplained transaction fees that may have nothing to do with the services the agent actually provides. It also automatically opts buyers into dual agency agreements — where the listing agent represents both the seller and the buyer — without a clear opt-out provision or box.
“Dual agencies are fraught with peril because it’s very difficult for the agent to properly represent the seller and the buyer” at the same time, Mr. Fox said.
In the event that a real estate broker goes out of business or merges, the PAR contract allows the broker to transfer the contract to another broker with no cancellation or opt-out option for the buyer.
The contract also contains “overly broad, aggressive, holdharmless language” that favors the broker even when agents provide incomplete and incorrect information to the buyer, Mr. Fox said.
“And people are just being asked to sign these forms,” he said. “The contracts are rarely, if ever, negotiated.”
‘It’s an irrational pricing system’
The real estate industry might try to preserve the existing commission standard if safeguards aren’t put in place to prevent buyer agents from cutting deals with sellers, Mr. Brobeck said.
“If the buyer agent is getting 2% from the buyer, they can talk to the listing agent and see if they can persuade the seller to give him another 1% so that he ends up with 3%,” Mr. Brobeck said. “The ability to do that is going to preserve the existing system and also allow steering of clients.”
For example, he said, buyer agents could steer clients to listings where the buying agent is promised a higher commission from the seller.
“This is a cooperative industry,” Mr. Brobeck said. “Agents depend on each other. It’s that cooperative nature that allows collusion to take place.”
With the guaranteed 6% commission going away, he said he believes more buyer agents will collect a retainer from homebuyers, something he believes is justified since agents get paid nothing for their work unless they close a deal.
“The system is actually very unfair, not only to consumers, but also to many agents. It’s an irrational pricing system,” he said.
A buyer agent who shows 20 properties gets paid the same as the agent who shows one property that the buyer found on Zillow. Also, buyers who aren’t serious can waste an agent’s time and resources with multiple showings, Mr. Brobeck said.
“If agents got a modest compensation for each showing, that would make things more equitable in the industry,” he said. “But it would also discourage some people from wasting the time of agents.
“The retainer should be modest and related to the amount of work the agent does,” Mr. Brobeck added. “And it should be subtracted from the commission as a credit to the buyer if there is a sale.”