What Buyers Should Know About the New Real Estate Practices

As you may know, new rules have been implemented regarding the way commissions will be handled in real estate transactions, and how buyer agents will be paid. Buyers will now have to sign buyer-broker agreements prior to visiting any homes with their agents. Some brokers have used these agreements for years, but even if you are familiar with them you need to understand how they have changed.

The biggest change with these agreements is that now buyers are required to specify how much they will pay their agents at the close of escrow. The media has spread a lot of mis-information and many buyers or buyers-to-be do not understand that sellers can offer concessions to buyers, which their agent can negotiate on the buyers’ behalf. These concessions will be paid through escrow toward buyer closing costs, and can help buyers pay their agents, fully or partially.

If the sellers do not agree to a concession the buyers will have options, and these can be discussed with their agents. But the the crux of the matter is that there are options. For example, the price to be paid to the buyer’s agent can also be deducted from the offered purchase price in the offer. Each situation may differ depending on many factors, so it is important to discuss with an experienced buyer agent.

Here are some things that are important in this new landscape:

1. Buyers should have their own representation. I have always been a stickler for pointing out the problems with dual representation, which is not allowed in other states but is still allowed in CA. From a legal standpoint, and for the safety and protection of buyer rights, this should be illegal. It allows a listing agent to represent both the buyer and seller – and as it is IMPOSSIBLE to be a fiduciary to opposing sides, this can lead to negligence, which is one of the main causes of action in real estate lawsuits.

I understand that people want to “get a deal” and save money – believe me, I like saving money too – BUT when one is involved in one of the biggest legal transactions in life (purchasing a home) it is necessary to have a representative who can protect you from legal issues that could make your life a nightmare.

2. All commissions are – AS ALWAYS – negotiable. Commissions have always been negotiable. The idea they have not been is one of the false claims made by the media, saying that the National Association of Realtors (NAR) controlled commissions. Now, while I am not a fan of NAR, all parties to real estate transactions need to understand that they have choices when working with agents.

There will be some agents who may offer low flat fees to represent buyers, and there will be many buyers who will choose that option – that’s their prerogative. If you are a buyer who wants to go for cost over substance, make sure you understand what you are paying for. It may not be full service and offer you protection from issues that can lead to legalities. As always, there will be choices and lots to consider, so my advice is to ask the right questions and make sure your legal rights will be protected.

3. Real time – how all these changes work in real time remains to be seen, and I feel that it will take some time for all parties to get moving in this new world. I can offer this – I had my first buyers sign the new buyer-broker agreement recently, and while I provided detailed information on how the new commission rules work and how they will be impacted, it was one of the most difficult conversations of my career.

I feel the conversation becomes all about money, and it puts a bad taste in my mouth. I offer my clients service that many agents cannot, due to my legal background. Yes, there is a big benefit to clients there, but the new way of doing things has put an emphasis on cost instead of service, and that is unfortunate for everyone. It will also lead to mass commission-cutting from the lower tier agents, which usually equals poor representation (as they go for quantity with the low rates).

Of course, we are all motivated in different ways. My best advice is to think carefully about whom you choose to help you when you are making one of the biggest financial decisions of your life, and how much peace of mind is worth to you.