Confusion Abounds with Buyer Brokerage Agreements Post NAR Settlement

Igor Stravinsky's "The Rite of Spring,” which premiered in 1913, was a groundbreaking ballet and orchestral work that revolutionized classical music. The piece is divided into two parts, depicting pagan rituals celebrating the arrival of spring, culminating in the sacrifice of a young girl who dances herself to death.

Stravinsky's score is characterized by its harsh dissonances, complex rhythms, and what was, in 1913, an innovative use of orchestration. The music features frequent changes in time signature, creating a sense of instability, and employs polytonality, stacking multiple harmonies to produce dissonant sounds.

While Rite of Spring has become part of the standard classical music repertoire, its 1913 premiere is one of the most infamous events in the history of classical music. The music's dissonant harmonies, complex rhythms, and primal energy, coupled with provocative and avant-garde choreography, were unlike anything the Parisian audience had ever experienced. The newness likely was uncomfortable to the audience and  quickly led to unrest.

As the performance continued, the tension in the audience escalated into chaos. Many listeners were outraged by what they perceived as a brutal assault on their musical sensibilities. Others were fascinated by the revolutionary nature of the piece. Shouts, boos, arguments, and even physical altercations broke out among audience members. The noise from the audience became so intense that the performers on stage struggled to hear the orchestra. Stravinsky, overwhelmed by the pandemonium his work had unleashed, fled the concert hall.

Some say Rite of Spring’s infamous premiere contributed to its impact and enduring position in classical music. There is merit to the general idea that a stark departure from the status quo may be required to effect change. And sometimes, not everyone is comfortable with or welcomes that change.

The real estate industry is experiencing a similar situation due to new rules relating to buyers’ brokers in residential real estate transactions. Earlier this year, facing a $1.8 Billion verdict, the National Association of Realtors (NAR) settled antitrust litigation claiming that rules requiring that the buyers’ broker commissions be listed on Multiple Listing Services (MLS) constituted price fixing in violation of antitrust laws.

What Did the NAR Settlement Require?

The settlement requires 1) that buyers’ brokers’ commission no longer be listed on the MLS and 2) that buyers’ brokers and their clients sign a contract establishing the commission amount before the broker shows homes to the buyer. On August 17, 2024, the NAR settlement took effect amidst much confusion by buyers and brokers regarding what the settlement requires.

Initial reports indicate that the settlement may have resulted in lower buyer broker commissions before it even was implemented. According to a Redfin report, by July, the typical home seller paid a 2.55% commission to the buyer's broker, compared to 2.62% paid in January (before the settlement).

How Some Real Estate Agents are Responding to the Settlement

According to news reports, confusion over the new buyers’ broker rules led to tension, discomfort, and perhaps even pandemonium similar to that of the Rite of Spring’s premiere. If one believes these reports, some brokers, apparently resistant to a paradigm change, are finding "workarounds" that may still violate antitrust laws.

One news article describes one brokerage company as having established a policy of “advising” agents to offer a 2.5% buyer’s broker commission to be taken out of the seller’s sale proceeds. According to the article, the buyer’s agent would email or text the seller’s broker to get information about their commission, whereas it previously would have been in the MLS listing.

Another article describes buyers' agents calling seller's agents to determine what commission the seller will pay before showing a home. And another article reported that a buyers’ agent was frustrated by having to call the seller’s broker for each home to find out the commission amount so they could sign a separate buyers’ broker contract specific to the home.

If these news reports are accurate, these brokers missed the point of the NAR settlement. The amount of buyers' broker commissions and who must pay those commissions are to be determined via arms' length negotiations rather than be fixed by an agreement between brokers.

The practice of brokers agreeing in advance on the amount of commissions (and who will pay them) is one thing the settlement sought to prevent. Yet, instead of abandoning the longstanding practice (which at least one court found violates antitrust laws), the brokers are responding to the settlement by engaging in telephone calls and text messages rather than looking up promised commissions on the MLS.

While these discussions may not be public and be more challenging to trace, these arrangements circumvent the desired result of commissions being negotiated between the parties rather than being dictated to them. Of even more concern is that these arrangements, albeit on a smaller scope, continue to resemble price fixing in violation of antitrust laws.

What Should be Happening

What is supposed to happen is that the buyer will negotiate with their broker in advance regarding how much and on what conditions the broker will be paid. Should the buyer decide to place an offer on a home, the buyer may, as part of their offer, request that the seller pay part or all of the buyer's broker commission.

Whether the seller pays the buyers' broker and how much the seller pays are to be part of the contract negotiations, the same as sale price, conditions to sale, deposit amount, and other sale terms have always been. Commercial real estate brokerage commissions have been handled this way for some time, and in time, the process should work well for residential real estate brokerage commissions.

One concern about this arrangement is that some brokers may be unable to pay their broker's commission in addition to their downpayment and closing costs. Further, buyers can't simply increase the amount of their mortgage to pay this additional cost – most lenders won't allow that. Plus, cash-strapped buyers may already be at the maximum loan-to-value permitted for their loan and cannot borrow more money against the house.

Although it may seem to be a change for buyers to pay their broker commissions, buyers should know they have always indirectly paid their own broker’s commissions. Because many sellers focus on how much cash they will get from a sale, broker commissions have always been among the expenses a seller considered when accepting a sale price. 

Sellers also should remember that until now, home prices have both buyer and seller broker commissions implicitly included in the price. With the unbundling of buyer and seller broker commissions, sellers shouldn’t expect to both receive top dollar for their home and not have to pay any part of the buyer's broker commission. Sellers also may need to be aware that while they might not want to pay an excessive buyer's broker commission, they need to be sensitive to the fact that buyers may lack the cash to pay those commissions themselves.

Buyer’s Broker Agreements

A critical element of the settlement is transparency in the amount of commissions. Buyers now will know in advance how much their broker will get paid. Further, buyers should not be required to sign a "standard form" agreement but should be able to negotiate how much they will pay for the services they want.

It is beyond the scope of this article to discuss what buyers should consider when negotiating their broker commission agreement. However, buyers should retain an attorney to review all documents for the home purchase, starting with the buyer broker agreement, before signing them. While an attorney may add to the upfront cost, sometimes, it may save buyers an unexpected expense later.

While requiring the written buyer's broker agreement is new in some states, other states already required brokers to enter into commission agreements with the buyers they represent. For instance, under Maryland Real Estate Commission (MREC) rules, buyer's brokers have been required to sign written agreements with their clients before providing services to them.

The agreement must outline the specific services to be provided by the broker, the terms of compensation, and the duration of the agreement. It’s also vital that the buyer and their broker agree on how long the agreement will last and when commission must be paid – as well as the percentage commission, which often is the sole focus.

Conclusion

Implementing the NAR settlement appears to have been nearly as chaotic as the premiere of Rite of Spring. However, if buyers brokers "listen to the music" rather than fighting the settlement, they may discover that the new requirements not only increase transparency in commissions but also can avoid misunderstandings and provide the opportunity to build more trust with their clients.

© 2024 by Elizabeth A. Whitman

Any references to clients and their legal situations have been modified to protect client confidentiality.

DISCLAIMER: The content of this blog is for informational purposes only and does not provide legal advice. No one should take any action regarding the information in this blog without first seeking the advice of an attorney. Neither reading this blog nor communication with Whitman Legal Solutions, LLC or Elizabeth A. Whitman creates an attorney-client relationship. No attorney-client relationship will exist with Whitman Legal Solutions, LLC, or any attorney affiliated with it unless a written contract is signed by all parties.