Real Estate Law Changes 2024
How Real Estate Law is Changing In August 2024
Real Estate laws are constantly evolving, and on August 17, 2024 the Real Estate industry is poised for significant changes in the commission structure… read on for what these changes mean for you if you’re in the market to buy or sell a home.
WHAT DOES THIS MEAN FOR SELLERS?
For the last 50 years, Real Estate Agent’s commissions have been bundled into the purchase price, and split between the Seller’s Agent and the Buyer’s Agent. Sellers will still be allowed to do this, they just won’t be allowed to advertise it on the MLS.
Why would Sellers continue to agree to bundle the Buyer’s Agent commission? Well, it expands the Buyer pool for their property - Agent's commissions aren’t covered under a mortgage, and if the Buyer is getting a loan they will have to come up with a cash downpayment AND additional money to pay their Agent.
WHAT DOES THIS MEAN FOR BUYERS?
If you’re a Buyer, you will now be expected to sign a ‘Buyer Representation Agreement’ with an Agent before they are able to show you any properties. This can be in the form of a “one time” or “limited time” showing agreement if you are still getting to know your agent. From there, if you both agree that you would like to continue working together, you would sign a longer term agreement for a target area - this is where you agree to be loyal to your Agent, and are bound by the terms of the Representation Agreement. The terms can also be for a limited area, so you can have different Agents representing you in different cities or counties.
BEWARE: If you sign a Representation Agreement with more than one Agent in overlapping areas and timelines, and you purchase a home during the time outlined in your contract, you could be on the hook to pay multiple commissions.
Buyers will be able to negotiate commissions with their Agent when they sign a contract. That doesn’t necessarily mean that Buyers will have to pay the cost, though. When the Buyer makes an offer to the Seller, the question of who pays the Buyer’s Agent could become yet another point of negotiation.
CAN I GO STRAIGHT TO THE LISTING AGENT?
Yes. Although you will still need to sign a Buyer’s Representation Agreement with that Agent and pay them for their services.
CAN I JUST REPRESENT MYSELF?
Yes, that has always been possible. However even if you’re a VERY experienced Buyer, representing yourself can be risky. If you represent yourself as a Buyer in a real estate transaction, the Listing Agent will NOT be able to advise you on what contracts to use, what to look for in the disclosures, the nuances of the local laws, or offer you any advice.. Remember: when you are buying a house, you will be signing legally binding contracts, and doing so without representation could leave you vulnerable to costly litigation in the future.
WHAT DOES THIS MEAN FOR FIRST-TIME HOMEBUYERS?
Some real estate experts worry that First-Time Homebuyers and Buyers with low-to-moderate incomes will have a more difficult time paying a Real Estate Agent to represent them since they may already struggle to accumulate the cash they need for a down payment.
Commissions generally can’t be financed into a mortgage under Fannie Mae, Freddie Mac, and Federal Housing Administration (FHA) guidelines.We are hoping that government lending rules will change. But until commissions can be included in mortgages, we believe that in most cases we will still be able to negotiate with Sellers to bundle the Buyer Agent's fee into the purchase price, in the form of Sellers agreeing to raise the purchase price, thus allowing the Buyer’s Agent commission to be included in the mortgage.
Now, more than ever it’s important for Buyers to hire a very competent Agent.
OTHER CHANGES:
Any visitor to an open house will have to sign an ‘Open House Visitor Non-Agency Disclosure’. Get used to Open House Agents asking if you’ve signed a Buyer Rep Agreement. We promise it’s not to annoy you - we’re just adjusting to the new rules as well!
IF YOU'VE READ THIS FAR..
…and you’re interested in more information on the NAR settlement.. read on!
WHAT IS THE NAR SETTLMENT?
In 2019, a group of Missouri home sellers filed a class-action lawsuit against the National Association of Realtors (NAR), claiming antitrust violations and alleging that its practices inflated commissions. A jury sided with the plaintiffs, awarding a nearly $1.8 billion verdict against the powerful trade group that represents about 1.5 million real estate professionals last October.
To settle that lawsuit, along with several similar suits, NAR agreed to pay $418 million to people who have sold homes in recent years. The group also agreed to two rule changes starting August 17th, 2024:
1. When agents list homes on the Multiple Listing Services (MLS) databases, they’ll no longer be allowed to advertise the buyer broker’s compensation.
2. Buyers will need to have written agreements with their agents - yep! you will have to sign a legally binding contract committing to your agent before you can see properties with them.
BACKGROUND
Traditionally, real estate commissions in California are structured as a percentage of the home's selling price, typically ranging from 5% to 6%, and are split between the Seller's Agent and the Buyer's Agent. This commission is usually paid by the Seller from the proceeds of the sale. While this model has been standard practice for decades, it has also been criticized for a lack of transparency and for not always aligning with the interests of consumers.
Though it’s always been possible to advertise a commission of less than 2.5% to 3% on the MLS, Listing Agents have often warned Sellers against doing so because Buyer Agents may “steer” their clients away from properties that advertise lower compensation. Fear of steering is a “strong deterrent” to Sellers who might otherwise reduce commission offers, according to the U.S. Department of Justice, which has an ongoing antitrust investigation into NAR’s practices.
Meanwhile, potential Buyers have had no incentive to negotiate the commission downward because that cost is baked into the home’s selling price. But since the money isn’t directly coming out of their pockets, Buyers have long been blissfully unaware of commissions, with some believing Real Estate Agent services are free.
DOES THE SETTLEMENT REDUCE REAL ESTATE COMMISSIONS?
Realtor fees have always been negotiable, and the changes don’t directly change how much Real Estate Agents earn in commission. There’s never been any obligation for the Sellers Agent to pay the Buyer's Agent. However, for the past 50 years, the Agent's commissions have been bundled into the purchase price, and split between the Seller's Agent and the Buyer's Agent. This has benefitted Buyers who are getting a mortgage, as their Agent’s commission has been bundled into the purchase price and they don’t have to come up with a cash down-payment AND additional money for their Agent’s fee.
WILL THESE CHANGES BRING DOWN HOME PRICES?
So perhaps the most burning question surrounding the NAR settlement is: Will the commission changes lead to lower home prices? Not likely!
Housing experts generally believe that any resulting drop in home prices would be modest, and while Sellers could price their homes lower because they no longer shoulder the cost of both the Seller and Buyer Agents, many Buyers will still be paying for their own Agent, just in a more direct way. Thus the overall cost of buying a home would remain the same.
General values in real estate are determined by the fundamentals of supply and demand, and the lack of housing supply is the main driver of rising housing prices, not Realtor’s fees. The shortage of affordable homes has been an issue for well over a decade but was exacerbated by the pandemic. More recently, high interest rates are driving many homeowners who locked in rock-bottom rates in 2020 and 2021 to stay put rather than sell and take out a new mortgage at a significantly higher rate - another reason why homes in our market have risen dramatically in value in recent years.
I recently sold my home. Am I getting a piece of that $418 million?
Possibly. As with any class-action lawsuit, a large chunk will go to attorneys, but millions of people who sold homes are expected to qualify for a piece of the settlement, including those who sold their homes as far back as 2014.
And although the settlement figure is huge, when one divides the amount by the number of potentially qualifying consumers it works out to be about $100 per person. The only people truly profiting are the class action attorneys who have submitted a request to the court for over $80 million in legal fees.
To find out whether you may eligible, go to:
realestatecommissionlitigation.com
WHAT HASN'T CHANGED
At Sotheby’s International Realty we’ve been training for months to prepare for the law changes, and to be able to explain the new contracts to our clients. As always, our mission is to deliver an elevated level of service to our Buyers and Sellers and as the changes get underway, don’t hesitate to reach if you have any questions. I look forward to the privilege of representing you in your next Real Estate adventure.
Guiding you home!