Beware of These Red Flags in Your Realtor Contract.
Buying or selling a home has always been a little crazy. The moment you walk into a Realtor’s office to inquire about a home or contact a local agent to sell your home, you are embarking on a roller coaster ride of emotional and financial pressure. Checks are written. Houses are being cleaned . The cookies are baking.
But traditionally, you could hire an agent to sell your home without a contract, and if you bought the home, you were spared the hassle of paying a real estate agent’s commission , which was almost always paid by the seller. who paid about 6% of the sale price to their agent, who then (usually) split it with the buyer’s agent. Of course, in a sense, the buyer paid this fee because the seller likely increased the price of his home to offset the cost, but the illusion existed.
Everything changed recently. In March, the National Association of Realtors (NAR) settled several lawsuits and, as part of the settlement, agreed to blow up the entire system. As a result, starting this month, there will be two big changes to the property market: buyers will have to start paying their agents directly, and everyone will have to sign a contract, even if you just want to look at a house. Until things get settled and standardized, these contracts are like the Wild West—anything can happen. Here’s what to consider if you’re looking to buy or sell a home anytime soon.
Maintaining separation
The biggest change that will occur in the market is how agent commissions are handled. Instead of the seller paying the entire commission and his agent splitting it with the buyer’s agent, both agents must receive payment directly from their clients, and the seller’s agent is now prohibited from advertising that portion on the Multiple Listing Service (MLS) (known as a ” compensation offer ” ), which was common practice to involve buyer’s agents.
The idea here is to reduce overall costs: as a seller, you no longer have to factor the 6% discount into your calculations. If fees remain at traditional levels, you’ll only need to pay 3%, which could save you a lot of money. And if you negotiate a lower fee (which you absolutely can), you can save even more.
That is, unless the contract you sign with your agent preserves the old system by calling it something else. Some draft contracts that agents have circulated maintain a 6% commission split with the buyer’s agent, calling the commission a ” bonus “. The mechanism for the seller to pay a commission, which is then shared with the buyer’s agent, remains the same, just in a different language. It’s okay if that’s what you want, but don’t blindly agree to pay more than you need.
Fines
In any contract your real estate agent hands you, it’s important to look out for penalties, especially for not selling. Some draft contracts following this agreement include significant penalties if the buyer backs out of the sale after making an offer—which you can traditionally do within reason. Sometimes these penalties are aimed at paying the buyer’s agent the full commission he would have earned, which can be a significant amount you’ll have to pay even if you’re not actually buying the home. You should never agree to this.
You should also keep an eye out for penalties for terminating a contract with a real estate agent. If you have worked with an agent for some time and they are unable to find you a home, or the deal falls through and you are unhappy with their performance, you have the right to terminate the contract at any time without paying any financial penalties.
Commission clarity
Part of the settlement that NAR agreed to includes a clear explanation of a) what your real estate agent will do (what services are provided) and b) how much you will pay for those services. This should be clear and transparent in the contract, whether they work for a general commission as a percentage of the sales price or charge you an hourly or flat fee for specific services.
There should also be language that states that any costs not specified in the contract will be covered by the agent’s commission and not an additional commission that you will have to pay.
Exclusivity
As a home buyer, you retain the right to work with multiple agents if you choose, unless you sign an exclusive agreement. Exclusivity clauses have their benefits: the process becomes more streamlined, and the agent can be more focused and focused because he knows you won’t suddenly announce you’ve found a home with someone else. But it should be a conscious choice based on your needs, so before signing, make sure there is no exclusive language that you are not aware of.
The new rules also require you to sign a travel agreement, even if all you want to do is tour the house . This is a formal agreement with an agent, but is limited to one property rather than hiring an agent to find a property . You should review it carefully to make sure that you are not making any commitments beyond that and that there is no exclusivity that binds you to that agent once you have made a decision on that particular home.
Arbitration
Finally, as with any contractual agreement, be aware of any provisions that specify how disagreements will be resolved. Mandatory arbitration clauses may prevent you from filing a claim and may even force you to use a particular arbitration service rather than giving you any choice in the matter. Arbitration is not necessarily a bad solution, but don’t agree to it unless you decide that the lower costs and faster results offset some of the disadvantages , including the possibility that your case may be heard by a poor quality arbitrator. and the fact that you often have no recourse if a decision goes against you. Of course, this problem is not unique to the real estate world, but it is always worth keeping an eye on.
The new real estate rules are still being worked out and things are a little crazy out there. Read these contracts carefully and be prepared to insist on changes if you don’t like what you see. One rule of real estate hasn’t changed: everything is negotiable.