Countdown To Chaos (episode 3): 🗞 New Mandatory Buyer Agreements

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What’s On My Mind: New Mandatory Buyer Agreements

40 Days & Counting

As of the date of publication of this article, we are 40 days away from sweeping changes to the real estate industry, courtesy of the recent commission class action lawsuits. Are you ready? Is the industry ready?

Two of the biggest changes are (1) sellers can no longer offer buyer agent compensation in the MLS; and (2) all buyers must sign representation agreements with their agents assuming responsibility for payment of services.

In today’s edition of my Countdown To Chaos series, I'm looking at mandatory buyer representation agreements, including their newfound significance and terms you might be asked to agree to as a home buyer. Historically in my area, buyer agreements have been rarely used.

I was just starting to rigorously apply buyer rep agreements to my own business when the class action lawsuit gained traction and ultimately settled. I changed my practice not because I thought anything was wrong with common industry practices. My personal changes were more about educating buyers about picking a strong agent and committing to that agent.

I strongly believe many, if not most, buyers are going to be unpleasantly surprised when confronted with a formal legal relationship with buyer agents in the new paradigm. In my experience, buyers tend to think they are going to get the best deal by “keeping their options open.” This is a false narrative of course, but one I believe is strongly ingrained in home buyer culture.

Please note as you read this publication that my licensure, expertise and focus are California, but my observations can be used to ask specific questions to buyer agents in any state.

Home Buyers & Their Agents

At the top of this article, I mentioned two big changes coming in just over a month, but only change #2 appears on its face to apply to buyers. It's important to understand, however, that without express offers of compensation to buyer agents in the MLS (change #1), it is possible, and maybe even probable, that buyers will be faced with paying their agent themselves. 

This is a huge departure from historical practice and makes the new representation agreements signed with buyer agents all the more important to understand.

As an initial matter, do buyers even need an agent? I bring this up because it is most certainly a question buyers will ask themselves as they grapple with the strong possibility of yet another expense in buying a home. As I mentioned in Part 1 of this series, buyers could certainly skip representation and the hassle of who pays for the services, but really only if:

"they buy and sell frequently and know how to price an offer (especially in the new paradigm), size up the listing agent, negotiate a multiple offer scenario, schedule their own inspections (usually on a short timeline), wrangle their lender into funding on time, negotiate repairs based on inspections, and analyze and sign a whole stack of legally binding paperwork."

Clearly I tend to believe most buyers will make a grave mistake representing themselves. 😁 I also outlined a long list of services that buyer agents expertly provide in Part 2 of this series.

What about using the listing agent or another agent on the listing agent's team to make an offer, aka "dual agency?"

I wrote extensively about dual agency here. There is simply no universe where two competing parties (the buyer and the seller) can both maximize their outcome via one representative, no matter how noble the representative.

Will buyers really end up paying for their agent, along with all the other piles of money required to close a modern day home purchase transaction?

It remains to be seen how sellers will react to the new shift. There are solid reasons sellers should consider paying for the buyer's agent, reasons I'll address in a future edition of this series, but only time will tell how these changes shake out in practical application.

But no matter what sellers intend at the outset when they sign their listing agreement (where they historically agreed to pay the buyer’s agent), buyers will always be able to add a term in their offer asking for a seller credit to cover the buyer agent fee. Buyers, however, need to understand that not every competing buyer will include the same request in their offer, and a property might be lost because their offer is not financially on par with other offers.

Assuming you agree with me that you shouldn’t represent yourself, you will need to think about the agreement you sign with an agent to help you through your next steps.

What Do Buyer Agreements Look Like At This Stage?

The primary lawsuit instigating all these changes was settled only four short months ago and then preliminarily approved by the judge only in late April.

Final approval won’t even come before late November, but practice changes must start August 17th as part of the settlement. 

There are still a lot of people scratching their heads trying to make sense of the language of the settlement. Add to that, the DOJ making noise about how they might try to influence the new process, and you can see why I’m predicting “chaos” for the foreseeable future.

You can also see why new agreements are still very much in flux.

Realtor associations across the country have been scrambling to come up with new MLS rules and recommended buyer representation agreements. Here in California, the California Association of Realtors (the “CAR”) published their recommended agreement and related forms on June 25, 2024, and found their efforts immediately criticized, prompting an implementation postponement until July 10, 2024 (later this week at the time of publication). 

Suffice it to say, buyer representation agreements are still very fluid, even as the August 17th deadline looms large. Most agents in California use the CAR documents. Here’s hoping the revised version is simplified and more clear than the originally released version with its 4000 words and 39 internal cross-references.

According to the National Association of Realtors, buyer agreements going forward must include four components:

1. A specific and conspicuous disclosure of the amount or rate of compensation the real estate agent will receive or how this amount will be determined.

2. Compensation that is objective (e.g., $0, X flat fee, X percent, X hourly rate)—and not open-ended (e.g., cannot be “buyer broker compensation shall be whatever the amount the seller is offering to the buyer”).

3. A term that prohibits the agent from receiving compensation for brokerage services from any source that exceeds the amount or rate agreed to in the agreement with the buyer; and

4. A conspicuous statement that broker fees and commissions are fully negotiable and not set by law.

eXp Realty**, is offering an alternative to the CAR agreement. eXp’s agreement has generally been heralded as “much simpler, clearer, and pro-consumer than the CAR agreement."

If you know anything about me at this point, you know that I really dig “pro-consumer.” 🏡💪

eXp for the win.

The eXp agreement is indeed simple. It is less than two pages and outlines the property type and geographic area defining the relationship. You are free to limit the geographic scope as narrowly as you desire. You could list a specific street, for example. Agents will want to define the area as broadly as possible. The time period defined in the agreement can be narrowly defined, as well. 

Interestingly, the eXp agreement only obligates you to pay a fee if you use the agent to make an offer. Make sure this term is in whatever agreement you sign, unless you are 100% positive you are ready to commit to the agent for the entire transaction.

I will hazard a guess that most agreements will not end up being as simple or pro-consumer as the eXp agreement, but all buyer representation agreements, no matter who they are offered by, are negotiable. Use an eXp agent or tell your non-eXp agent you want a representation agreement that looks like the eXp agreement.

The Home Buying Process, Part 1

I tend to think of the home buying process as a two part process - (1) finding “the one”; and (2) negotiating/closing on “the one.” Buyers have different needs in each stage and different agent skill sets are highlighted.

Part 1, in my mind, is that part of the process where you might consider going it alone without a formal agent relationship, at least at the outset.

For example, you might want to start your search on your own with open house visits. This isn’t particularly practical, but it can work for initial research. The alternative is to use an agreement like the eXp agreement, making it clear to the agent that you are only committing to the agent for the houses you tour with the agent.

The alternative is to set your own showings, although the current system does not make it easy to find the listing agent’s contact information. It’s also a huge wild card whether listing agents will be willing to make showing appointments with unrepresented buyers.

They might agree to show you the property in hopes of enlisting you in a dual agency relationship, but you can bet money they won’t try very hard to make a showing appointment absent this possibility, even though they owe their seller every obligation to show the property widely.

This opportunity (letting the listing agent think dual agency is a possibility) might be something for you to take advantage of in your early research, knowing that you are under no obligation to sign an agreement with anybody not expecting a commission to show you a home (ie, the listing agent).

Please read that paragraph again.

Listing agents should be willing to show the property without a buyer representation agreement. Nobody who doesn’t expect a fee from you needs a signed agreement with you.

Don’t let a listing agent tell you must sign anything to see the property. If they insist you sign an agreement, they are pushing a dual agency relationship that is not in your best interest and will prevent you from bringing in your own agent later.

The Home Buying Process, Part 2

Part 2 of the home buying process includes negotiating an offer and closing the transaction via the escrow process. It is my opinion that this is the real heavy lifting in the home buying process, and one fraught with risk if you don’t understand the whole picture and how all the moving parts implicate each other. This is the point when you should be very comfortable with the agent you intend to use and you should sign an agreement for services that will provide your most successful outcome.

Final Thoughts & Practical Application

If you agree with me that you need a great, independent agent to shepherd you through one or both parts of the home buying process, you will need to sign a representation agreement at some point. The topics you need to sort out for yourself ahead of signing any such agreement include:

• How much are you willing to pay for professional representation? Don’t assume good agents will work for an hourly rate (although this may evolve for “showing” agents).

• Do you understand and have a strong opinion about independent representation?

• Do you fully understand the distinction in finding and touring houses versus the offer negotiation and escrow process (ie, Part 1 & Part 2)?

• Do you understand that most talented agents will not be willing to take a lower compensation just because the rules have changed? If somebody is willing to take a big cut, make sure you’re comfortable that they are the most qualified agent for your situation.

• Do you understand that you can ask the seller for a credit as part of your offer to pay for your agent?

• Do you understand that asking for such a credit might make your offer less attractive than a competing offer?

• Do you have liquid resources available to pay your agent if the seller won’t provide a credit?

• Are you willing to walk away from a property if the seller won’t agree to a credit to pay your agent? 

Having thought about the foregoing topics ahead of time should make it easier to understand and navigate the representation agreement process. Use the eXp agreement as your guide.

If anything in the agreement you’re asked to sign is different than the eXp agreement, ask your agent to explain the significance of the differing language, and document your understanding in a follow up email. You will want this paper trail if there is a disagreement later about the agreement you sign.

Don’t be afraid to refuse to sign an agreement until you fully understand the terms and they say what you want them to say. Cross things out. Write in your own terms, but be aware that this is a legally binding agreement and unless you’re a lawyer, you may not fully comprehend the implications of what you’re writing or crossing out.

But at the end of the day, the universal truth is that “The Broker Fee is not set by law and is fully negotiable, as plainly stated in the eXp agreement.” You are fully within your rights to end up with an agreement that serves your highest interests.

Another pro-consumer aspect of the eXp agreement is the “easy out” cancellation policy. You can cancel any time, unless you’re under contract for a property that the broker helped you negotiate. 

I fully expect residential real estate to be the wild, wild west for six months to a year after August 17th, while the changes get ironed out in practical application. The changes are seismic for buyers, but they are big for sellers, too, in ways that will take some time for most sellers to appreciate.

So mark your calendars! You have just over a month to lock down a deal and expect the old rules to apply. 

Next week I’ll be looking at reasons why sellers will want to continue to pay to have a good agent in the transaction representing the buyer.

Disclaimer - you are not my client unless we have a written agreement in place. This article is offered for informational and/or entertainment purposes only. Neither I nor Silicon Beach Properties nor eXp Realty, Inc. is responsible for the consequences of how you implement the content of this publication and nothing herein is intended to address your specific situation. Additionally, the information contained herein may be outdated (legally and/or factually) by the time you consume this content, so consult a professional licensed in your jurisdiction for advice.

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Market Trendlines This Week In The Beach Cities

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