The U.S. Department of Justice seeks to raise the level of transparency and price competition in the U.S. residential real estate markets. This is a worthy and long-sought goal. But because of how U.S. markets have been structured for more than 50 years, the mechanism to push markets into a more competitive era has proved a bit clunky. Rather than having the “sell side” pay the commission for both the seller’s broker and the buyer’s broker – and sometimes having relatively little say about it – the DoJ now seeks to decouple the buy side from the sell side to allow for more negotiating authority.
This is the goal. But it’s tricky to get there. The mechanism settled upon is that buyers now have to have a written agreement with their brokers. This is the centerpiece.
Enter the Mandatory Buyer-Broker Agreement
U.S. buyers are accustomed to just picking up the phone and asking a broker to see a property, no strings attached. That was a luxury afforded by the fact that the sell side typically paid commission for both brokers. Of course, commissions were (in reality) built in to the price of a home. So the buyer paid it too, in a sense. Now we’re going to get clear about those relationships, DoJ says.
Back in June, when I last wrote on this, it looked as if we’d have only one option. But now the New Mexico Association of Realtors (NMAR) and Sotheby’s (we develop certain of our own forms) have sought to make the transition to the new world smoother, by allowing for some flexibility.
Single-Property Agreements
If a buyer sees a single home that he or she wants to see and doesn’t anticipate more, he or she can sign a single-property buyer-broker agreement (the Sotheby’s-branded versions of these forms are below):
Multi-Property Agreements
If a buyer wants to tour homes with a broker over a weekend (let’s say) in a given area, we can provide for that eventuality too. A buyer and his or her broker can identify a group of homes, set a time period during which they’ll look, and still be covered. The intent here is to provide for the reality that a buyer may not know his or her broker well and that the establishment of their relationship is in its early stages:
Broad, Long-Duration Agreements
For those cases wherein the broker and buyer have a close working relationship and have established a track record of trust, the parties can agree that they’ll wok together for a period of (usually) six months or a year and that all properties they might look at would be covered by the agreement. Here, we seek to provide for the reality that many buyer-broker relationships are longstanding and built on years of trust. Nevertheless, it’s still got to be in writing!
So What’s The Point?
In each of these cases, the buyer and his or her broker establish the percentage of the sales price that would go to the broker as compensation. If the seller doesn’t offer sufficient compensation covering that amount as incentive to market the property, the buyer might make up the difference. Now and in the future, the buyer has stronger legal authority to engage in a negotiation over how much he or she might seek to pay his or her broker.
That’s a big deal.
So while it might seem an annoyance to sign a form beforehand, it’s critical to keep in mind that this is the first step in introducing more price competition. All this being said, the best brokers (especially at Sotheby’s) are well worth their salt and many transactions are an absolutely enormous amount of work. Don’t be surprised if the fee compression is quite gradual indeed.
Visit the New Mexico Association of Realtors.
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