Buyers’ Agents are getting a lot of attention thanks to a recent ruling on real estate commissions and it’s important to know why they are crucial to selling a home.
Recent signals by the Federal Reserve to cut rates in the new year are expected to usher in an improved market for buyers in 2024. As interest rates continue to decline,it will not only increase buying power but it will also increase inventory as sellers who also need to buy are encouraged by lower mortgage rates to list their properties for sale. At the same time, new home builds are increasing as contractors see their building costs decline.
And with more buyer activity, there will be increased competition amongst buyers for the limited properties available for purchase. Buyers’ Agents, with their market knowledge, connections, and negotiation skills, are even more valuable to a buyer in this heated market, and they stand ready to assist buyers in the purchase of their next home. Recently, there’s been an intense focus on buyers’ agents’ commissions, thanks in part to October’s Stitzer-Burnett antitrust judgment, which found that the National Association of REALTORS® (NAR) and several large real estate franchisors conspired to inflate commissions. The jury awarded damages of more than $1.8 billion and the verdict is being appealed even while similar cases are being filed throughout the country.
It’s a developing story and one that has many perspectives – sellers, buyers, brokerages, and real estate agents – in the mix. But it’s buyers’ agents who will be key to helping navigate the debate for their clients.
Very simply, a Buyer Agent is a real estate agent or licensed real estate agent who represents the interests of a buyer in a sales transaction. Buyers don’t have to use an agent to buy a home, but most benefit from the knowledge, contract expertise, negotiation skills, and helpful connections during the transaction and beyond that a professional real estate agent provides.
In our region, when a real estate agent reviews the Buyer Agency Agreement, it’s usually the first time a client learns what their agent will do for them during their home purchase process. It outlines the tasks an agent is required to perform as well as what the buyer is responsible for and includes a paragraph about how the Buyer Agent is paid. These agreements have been used in real estate since the 1990s and help ensure that all parties understand the agency relationship – including loyalty to the client, confidentiality about the information shared, fiduciary responsibility, and required disclosures – and offer clients the opportunity to ask questions and negotiate terms before a home search begins.
But the most important assurance the Buyer Agency Agreement offers is that a client can trust that their agent will represent them to the fullest extent and put their interests first. The seller has their agent negotiating on their behalf so it makes sense for a buyer to avoid any conflicts of interest by also having their representative – their champion! – during the sale. In short, a Buyer Agency Agreement ensures a buyer has exclusive representation in a transaction and that there’s transparency and accountability for everyone involved.
Like buyers, sellers can represent themselves, but most hire a real estate professional to list a property and protect their interests during the transaction. In the Washington, DC metro area, the majority of homes are sold with agents, and commissions from these sales are paid to brokerages, most of whom have affiliated agents as independent contractors.
Traditionally, sellers have paid their listing agent’s fee/commission, and the listing agent splits that commission with the buyer’s agent (also called a co-op fee) for bringing a qualified buyer and managing the transaction to settlement. How much commission a seller chooses to pay, and whether to offer a co-op commission, is always negotiable. These fees are disbursed at settlement, meaning both the seller’s listing agent and the buyer’s agent get paid at the end of the transaction. In the meantime, both agent sides are incurring business and operating costs that they will pay with the commissions they eventually earn from their brokerages.
One of the arguments in favor of co-op fees is that it helps buyers’ purchasing power. If buyers were required to pay the agent’s fee it would greatly reduce buying power, adding commission expense on top of hefty down payments, closing costs, and inspection fees. This would significantly impact first-time, FHA, and veteran (VA) buyers, especially those with limited equity. Rising home prices have already kept many of these buyers on the sidelines and could exclude an entire group of would-be homeowners. Many in the industry worry that buyers will instead choose to be unrepresented in a transaction rather than hire an agent, opening themselves up to being at a significant disadvantage during negotiations, inspections, deadlines, and appraisals.
While the co-op fee is at the heart of the debate in the NAR and brokerage lawsuits, it doesn’t take away from the expectation that professionals like real estate agents should be paid fairly for their work in representing their clients and their client’s goals of homeownership. The question of who will pay for that compensation is one of the most hotly debated topics in real estate right now and will be for some time to come.
Don’t be afraid to ask your agent about commissions and how they may affect your home purchase. If you have questions, contact me. I’m happy to answer questions, provide guidance and clarification, and get to work representing you!
