What to expect on August 17th

Introduction

As you have probably heard from the news media, there will be sweeping changes nationwide in the way Real Estate sales are conducted.  These changes were the result of several Class Action lawsuits that finally came to trial at the end of last year.

For decades, we have always been required to have a written and signed Listing Agreement with Sellers.  We were never allowed to just stick a sign in the front yard and begin representing a Seller and say, “Don’t worry; we’ll figure it out later.”  We were always required to have a written representation agreement.  Now we are required to have a Buyer Representation and Compensation agreement signed.  For Decades, most Agents would simply put Buyers in their car and started showing homes and said, “Don’t worry; we’ll figure it out later.”  The fact is that those days are over.  Now both Buyers and Sellers must be afforded written representation agreements.

Why these changes are happening.

Much of the information in the media has been confusing, at times contradictory and certainly overwhelming.  In my opinion, the lawsuits had very little to do with Sherman Anti-Trust laws or Price Fixing.  These were only the engines that could be used to drive the lawsuits and made for great headlines.

One of the primary reasons behind the Lawsuits was a Lack of Transparency.  The Standard Forms we use in the Real Estate Industry vary from State to State.  Where these lawsuits originated, the forms were unclear, for both Buyers and Sellers, as to how Commissions were paid and shared between the Listing Brokerage and the Selling, or Buyer’s Brokerage.

In the areas where the forms were not completely transparent, the demand for homes was also not as robust as in the Bay Area.  Markets can and do vary widely throughout the country.  So, consider how a lack of transparency in the contracts and a less than robust market might have come into play in these areas:

• Sellers may not always have gotten their asking price or their expected sales price.
• Often, these Sellers viewed the Buyers’ Agent as the “enemy”, negotiating against the Seller for a lower price on behalf of their Buyer.
• Then upon finding out that they were also paying the Buyers’ Agent’s compensation, this felt like a double whammy.

There are also significant benefits to Buyers in these sweeping changes coming in August.  Research has shown that 60% of Buyers nationwide think that their Agent worked for free.  I believe all parties will benefit from a clear understanding that there is compensation being paid to an Agent on all sides of a transaction.  This strikes to the heart of the matter that most of the public does not understand how Real Estates transactions work.  One of the most telling studies conducted by the National Association of Realtors was that 80% of the public thought that MLS stood for Major League Soccer rather than Mulitple Listing Service!  Clearly, as an industry, we must do better at transparency and education.

Practice Changes as of August 17

While all these issues in Transparency and Competitive Market Conditions may not be entirely applicable in the Bay Area, it is easy to understand how these were viewed by Sellers in other areas.  Few Buyers, Sellers and Agents seem to remember a market when competitive offers and prices 20-30% or more above the asking price was not the norm.

The most important changes because of these lawsuits are:

• That Buyers’ Agents must have a written Representation and Compensation Agreement with their Clients.  These agreements are very similar to the Listing Agreement that we would have in place to authorize us to market your home for sale.  Buyer Representation and Broker Compensation Agreements will be required by law in all 50 states and must be in place PRIOR to showing a home.

• In the past, Sellers were always able to make offers of Compensation to a Buyer’s Agent through the Multiple Listing Service (MLS).  That will no longer be allowed after August 17.

• No offers of compensation are allowed in any remarks in the MLS.
• No offers of compensation can appear on 3^rd Party Aggregator sites (Zillow, Redfin, Realtor.com).
• Offers of Seller concessions to a Buyer, such as an offer to pay some closing costs, may still appear in MLS so long as they are NOT conditioned on an offer of Compensation to Buyer’s Broker.  A Buyer must be free to use those funds however they choose.
• A Seller’s authorized offer of Compensation to the Buyer’s Broker is still 100% legal.

Brokerage Websites will be able to advertise offers of compensation for their own listings ONLY.

Agents will be allowed to openly discuss offers of compensation authorized by their Sellers.

And all authorized offers of compensation may be advertised in all media.

That was just a quick summary of a complicated change to the Real Estate business. 

In the next edition, I will give a summary of the 3 main contracts you are likely to see; the Residential Listing Agreement, the Purchase Contract and the Buyer Representation and Broker Compensation Agreement.  In addition, I will explain a couple of new forms that will be required at Public Open Houses that are sure to raise a few eyebrows.  Thank you for reading.

At the end of the day, what has really changed in the fundamental way we are required to care for our Clients? Our professional duties to our clients have not changed.

What has changed is that all Buyers and Sellers must now treated with the same contractual imperative when working with a Real Estate Agent.