The National Association of Realtors (NAR) proposed settlement of litigation, recently given preliminary approval by the Court, has raised questions about whether buyers with limited resources, especially first-time home buyers, can afford closing costs. The settlement will require buyers to sign written buyer agreements that clearly disclose how much and by whom their broker are compensated.
While the settlement does not address this issue directly, the Department of Justice (DOJ) Statement in the Nosalek lawsuit does: Buyers would have the ability to request in their purchase offer that the sellers pay a specified amount to the buyer broker from the proceeds of the home sale. This article suggests a way this could be done while increasing the chances buyer agent compensation would be negotiated.
Before any interaction between buyer and seller agents, potential sellers and buyers would sign contracts with their brokers The buyer agreement would state what services would be provided by the buyer broker and what compensation they would receive. Similarly, the seller agreement would state the services provided by the listing broker, their compensation and whether the listing broker is authorized to offer compensation to buyer brokers or advertise seller concessions to buyers. When the buyer found a property, they would like to make an offer on, the buyer would submit to the seller (through their agent) an offer that included both the home price and the buyer broker commission. Both elements of the offer would then be negotiated by seller and buyer with the assistance of their agents.
Here is an example of how that might work. A buyer submits an offer of $400,000 for the home and $12,000 in compensation for their broker. Expecting to net $392,000, the seller could then counter-offer with $404,000 for the home and $12,000 for the broker. The negotiation would continue until the parties agreed to the terms of the sale. In the process, the buyer or seller’s broker might even agree to reduce their compensation to facilitate the sale. The final sales contract would be a document that supported the distribution of the funds at the closing.
This proposed process would allow the seller to agree to the amount they are willing to pay the buyer broker. The seller could request that their agent not show them any offers that requires them to provide this compensation. In a seller’s market, that may well occur. But the listing agent would also have the opportunity to explain to their client that many buyers will need seller assistance in compensating their buyer broker. The listing agent should advise the seller to evaluate each offer based on the net sale proceeds after all commissions are paid. The buyer agent should advise the buyer to submit an offer that exceeds other offers that do not include buyer broker compensation. In the previous example, if the buyer was planning to offer $400,000, they may consider offering $412,000.
This proposal would also require little change in forms. The form with the buyer offer to the seller could add a blank that would specify any buyer broker compensation that the seller would pay on closing. The final sales contract could add blanks to reflect the final buyer broker compensation and any seller broker compensation. Under our proposal, only after the buyer, buyer broker, seller, and listing broker acknowledge their agreement to the terms of the sales contract would the signing of the sales agreement be executed by the buyer and seller.
This proposal does not solve all problems facing buyers with limited resources. Home prices and interest rates are relatively high, and a significant number of recent buyers are facing financial challenges. However, the proposal does provide a way for these buyers to retain professional representation in the homebuyer process while ensuring their broker is compensated under the current rules of the Federal housing agencies and the GSEs when the buyer may not be able to do so out of pocket.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the editor responsible for this piece: [email protected]