The newly mandatory contracts are the result of a March court settlement with the National Association of Realtors that consumer advocates hope will end practices that led to seller agents paying their buyer counterparts half of the commission fee from a home sale. Proponents of ending that automatic split hope that having buyers pay their own agents will spur negotiations that could lead to lower commissions.
Contract templates now being circulated by Realtor groups would have buyers pay some of the commissions rather than just sellers, as is the case currently. But consumer advocates worry that most buyers simply aren’t equipped to vet the legal documents their agents ask them to sign, leaving them at the mercy of industry norms.
“Nobody in their right mind is reading these forms,” said University of Buffalo law professor Tanya Monestier, who has reviewed more than a dozen of the new contract templates.
The Justice Department has apparently taken notice of the new contracts. Monestier said the DOJ in July responded to notes she sent about contracts issued by several state associations, including the one drafted by the California association. Moreover, the California Realtor Association’s general counsel Brian Manson said in a June 21 article in the trade publication Inman that the association had received an inquiry 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 described a draft from the California Association of Realtors, for example, as “dense, complicated and all over the place” to the point of incomprehensibility. “I think that’s by design,” said Monestier, who evaluated the California template at the request of the Consumer Federation of America.
In its June statement, the association rejected Monestier’s assessment, calling her critique of the forms “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 group has spent months working on its draft contracts and has made several changes.
“The revised forms are greatly simplified, making them more transparent and easier for consumers to understand with the help” of their Realtors, Manson said in an emailed statement.
The Post reviewed template contracts and other industry guidance from Realtor groups in eight states. The Post sought feedback on the draft contracts from lawyers, real estate agents, consumer advocates, and others with knowledge of the industry.
Some in the industry believe requiring buyer contracts will do little to change commissions, which are typically 6 percent of the sale price, with 3 percent going to the seller agent and 3 percent to the buyer Realtor. NAR and its affiliates said that commissions have always been negotiable, and many buyer agents already ask their clients to sign upfront agreements.
Edward Rogers, the head of a real estate brokerage firm in the Philadelphia area, said he expects that negotiations on the buyer side will be rare even after the new rules go into effect. “I do believe it will happen, but I don’t think it will happen often,” he said.
Having commissions paid entirely from the seller side helps new home buyers, Rogers said. “Our marketplace is a lot of first-time home buyers, a lot of middle-class working families trying to buy homes, and they truly can’t afford, or they might not have the savings” to pay a commission.
The changes will ultimately benefit the industry and consumers by adding more transparency to the commission process, Rogers said. He advised home buyers to go over the new contracts with their agents and understand them fully before signing.
Southern California real estate agent Iain Phillips stressed the importance of easy-to-understand contracts. His brokerage has long used buyer-agent contracts but he said an initial draft of the California Association of Realtors’ buyer agreement was a “nightmare” with its length and confusing language.
“Especially for someone who has never purchased a home before,” he said, “they’ll be looking at that with a lot of questions.”
Consumer advocates say it’s important that home buyers understand what they are agreeing to before signing with an agent. “Understandable agreements have the ability to empower buyers and transform their relationship to agents,” said Stephen Brobeck, a senior fellow at the Consumer Federation of America, a consumer advocacy group.
The group is recommending that brokers and their clients have the right to terminate the contracts at any time, without penalty. The broker’s fee should also be clearly stated as a dollar figure or hourly rate, the group says, while any additional fees should be subtracted from the commission paid in a sale.
Brobeck’s organization also argues that seller concessions, which can include the seller paying the buyer agent’s commission, should be approved by buyers themselves and not their brokers. The consumer federation also opposes mandatory mediation or arbitration clauses.
Some draft contracts, reviewed by The Post, contain heavy fees and other provisions that might worry home buyers.
A draft from Oregon suggests that a buyer who backs out after making a formal offer should be charged $2,500. A draft from Texas says a client would be liable for “the amount of compensation that Broker would have received under this agreement if Client was not in default” in certain situations where a deal falls through.
Monestier, the University of Buffalo law professor, said home buyers who back out of a deal through their own fault could owe tens of thousands of dollars beyond even their deposit. “No consumer would ever appreciate the consequences of this default provision. … It would come as a complete surprise to them,” she said.
Lori Levy, general counsel for Texas Realtors, said “there may be limited circumstances where a buyer’s actions would rise to the level of breach for which the broker should be able to be compensated under the agreement,” adding that failing to purchase a home generally wouldn’t constitute a breach of contract.
Others are concerned that the contracts will undercut a central part of the NAR agreement.
Under the current system, Realtors putting homes on the organization’s multiple listing service (MLS) — a nationwide repository of properties for sale — frequently offer to split commissions with buyer agents. The lawsuit settlement will end the practice of including those compensation offers in the database listings.
Advocates have argued that if buyer agents no longer get the traditional commission split, they will be forced to negotiate rates with their own clients. While the new templates from state Realtor groups do have provisions about home buyers paying their own Realtors, the contracts also could allow buyer agents to be paid directly by sellers outside of the MLS.
“Nothing in the NAR settlement prohibits home sellers from compensating buyer brokers off the MLS,” said Nick Gaglio, outside antitrust counsel for Florida Realtors. “Such offers are a pro-competitive way to increase buyers’ interest in a house and thus improve returns for home sellers.”
One draft contract from Texas simply replaces commissions with “bonuses” that the buyer agent can collect from the seller, Monestier said.
Levy, the Texas Realtors general counsel, said the language on bonuses puts buyers in control by providing transparency about compensation. The draft form notes that bonuses can only be provided if there is written permission from the client.
“The forms shine a light on what a buyer’s broker will earn and give the client control to agree to a bonus or not,” Levy said.
A template from Florida contains a line specifying that the broker can get “separate compensation” from the property owner. Gaglio said the provision for outside compensation has “nothing to do with the NAR settlement” and “merely 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 templates contain workarounds allowing buyers to collude with sellers, effectively maintaining the current industry norm in which agents for each side get paid 3 percent of the home sale price.
A summer 2024 newsletter from the Georgia Association of Realtors says members could put their listing on a personal website and include a statement as to 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 drafts aligns with some Realtor predictions that the industry could largely maintain the status quo. Though some rules might be different, “it’s going to be business as usual,” said Phillips, the California agent.