If you’re trying to buy a house, the process just got more complicated. In the past, if you saw a listing you liked on Zillow, you could call an agent and quickly set up a showing. Now, before the realtor will even open the door, they’ll make you sign a contract.
It’s one consequence of a deal with the National Association of Realtors (NAR) that went into effect last weekend. In March, the organization agreed to settle a lawsuit that said it had artificially inflated real estate commissions—home sellers have typically paid 3% to their own agent and 2%-3% to the buyer’s agent, and that amount was rarely negotiated. (NAR denies wrongdoing, but agreed to pay $418 million to affected consumers.) As part of the agreement, buyers are supposed to now sign an agreement saying that they’ll pay their own agent’s commission instead. The settlement says they have to sign something before taking a tour—and most agents are taking that opportunity to tell buyers that they have to sign an exclusive agreement for months, even though the settlement doesn’t say that’s necessary.
Buyers should be careful before they sign anything, says Douglas Miller, one of the attorneys behind the NAR case and the executive director of Consumer Advocates in American Real Estate (CAARE), a nonprofit that educates consumers about the real estate industry. We reached out to Miller to get some tips for buyers—with the disclaimer that this article isn’t legal advice.
Ask for a showing agreement first
Realtors are asking buyers to immediately sign contracts committing them to be new clients. But Miller says the settlement doesn’t require that. Instead, you could sign a “showing agreement” that says you’ll pay a certain amount to be let in to see houses, perhaps $25 a house. Then, if you want to move forward, you can later sign an agreement for full brokerage services. (Whether a broker will agree to this is another question—but Miller argues that it’s the first place to start.) It’s also permissible for the seller’s agent to unlock the door for you without signing an agreement and to host an open house.
The commission you pay is negotiable—and you should argue for a flat fee
When you sign a buyer agreement with a realtor, they’ll probably send it to you with their fee filled in. That’s often as much as 3% of the purchase price of the house. Then they’ll tell you that sellers are likely to continue covering that cost like they did in the past. (Despite the lawsuit’s effort to stop collusion, realtors are still talking to one another about these fees.) But it’s better for both buyers and sellers if the buyer can negotiate a flat fee. On a $500,000 house, for example, you could offer to pay a flat fee of $5,000 rather than 3% (or $15,000), and ask the seller to pay for it in a seller concession. For the seller, it makes your offer more attractive. (Sellers can choose not to offer buyer’s agents anything, but in reality, most are probably going to still offer a percentage or agree to a concession when they get an offer.)
If broker fees are truly opened up, “it’s likely to increase the pool of houses on the market,” Miller says. “Sellers who couldn’t sell before because of the commission—6% is a lot of money—all of the sudden, a whole new pool of sellers are going to be able to afford to sell.”
Whether it’s a flat fee or a percentage, the contract should also specify that the agent only gets paid when there’s a successful closing. Another common clause says that if a buyer chooses not to close, the agent will still get paid. (These clauses aren’t new, but in the past, the buyer agreement was often slipped in with dozens of other pages of paperwork when clients were making an offer to buy a house—and clients might not have read them.) Miller also suggests adding a clause that says if the seller offers a bigger fee to the buyer’s agent, the remainder will be paid to the buyer or used to lower the purchase price of the home. (His nonprofit has some suggested language.)
Keep an option to terminate the contract at any time
Right now, when realtors send clients a buyer’s agent agreement, it usually says that the buyer has to work exclusively with that realtor for a certain period of time, even if the buyer wants to change their mind. Miller suggests that when you sign a contract like this, you should strike any clause that says it can only be canceled “by mutual agreement.”
“Guess who’s not going to agree to cancel?” he says. “I’ve had multiple cases like this where the [agent] tricked the buyer into signing and said, ‘you can cancel anytime.’ Then the buyer tries out the agent and they’re terrible, and now they’re stuck for six months with this broker who they hate.” The situation is especially problematic if a buyer has to sign an agreement like this before they’ve seen a single house with the agent.
It could be challenging to get an agent to agree to strike out clauses, especially if they work with a large brokerage that wants to use contracts exactly as they were written. But because there are so many realtors—as of last year, twice as many realtors as homes for sale—it should be possible to shop around and find someone willing to be more flexible.
The settlement might lead to new business models
After years of hearing his legal clients complain about the real estate industry, Miller decided to get a broker’s license himself to prove that the system could be better. “The whole concept was that you could hire an attorney to do everything a realtor does, and provide legal advice, and do it for half as much as a realtor,” he says.
He’s not looking for new clients, but argues that other lawyers could replicate the same lower-cost model if they also got their real estate license. He says that others should be trained and allowed to let buyers into homes for small fees. “Why aren’t there showing services using security companies?” he says. “Why can’t you have an Uber driver who is bonded and insured and trained how to secure a house? You don’t need realtors to show you 10 houses that you’re not going to buy.”