You may have heard about the major settlement reached by the National Association of Realtors that could completely change the way real estate works in the future.
But if you haven’t, or are unsure what’s changing, there are two new rules that have been set. Comes into force August 17, 2024.
The first is that compensation offers will be prohibited on Multiple Listing Services (MLS).
In other words, listing agents won’t be able to say they’re offering 2% or 3% to the buyer’s agent on the MLS.
The logic here is that this type of collaborative commission leaves the buyer out of the conversation, which is unfair if the buyer is the one who ultimately pays for it.
Although they may not pay it directly, the pre-determined commission may result in a higher selling price.
Furthermore, there is not a lot of transparency regarding fees, and consumers do not know that these fees are negotiable.
Simply put, the move aims to increase transparency and reduce fees for consumers by allowing buyers to negotiate with their agents separately.
But there may be some unintended consequences as a result, which I’ll talk about in a moment.
Another major change is that buyers must sign a written agreement before they can visit the property. At that time, compensation will also be discussed.
Real estate agents’ fees may be lower, but…
Now, as for the unintended consequences I mentioned, while the standard commission may be reduced by these new rules, from 2.5% to 1.5% or even 1% on the buy side, the question remains as to who will pay it.
As noted, the seller can continue to provide compensation to the buyer’s agent, but it cannot be included in the MLS.
Theoretically, this could be conveyed in other ways, such as listing them on the brokerage firm’s website, via phone call, text message, etc. At least that’s what some people think at the moment.
This could also change if it develops into a situation where the cooperative commission is completely banned and disbanded.
But for now, many real estate agents assume they can still make compensation offers through channels other than the MLS.
In theory, this means that nothing may change in some transactions. For example, a seller might ask their listing agent to offer 2.5% to a buyer’s agent. The buyer’s agent might ask the buyer for 2.5%.
The logic here is that they want to move the property quickly, and being stingy could backfire.
If they offer only 1%, or nothing at all, the buyer’s agent may need to make up the shortfall with the home buyer.
At this stage, the buyer may hesitate or may simply not be able to provide the funds needed to make the payment.
When all is said and done, the seller may lose the buyer and blame himself for not offering compensation and getting only a fair sale price.
On the other hand, the buyer may agree to get nothing from the seller and pay his agent himself to improve his offer (assuming there are multiple bidders).
So there are a lot of scenarios here and there is still a lot of uncertainty about how this will develop.
But some of the things I’ve seen so far are a real estate sign stating that the seller will offer the buyer’s agent compensation, buyers who forgo an agent and contact the listing agent directly, and some even signing a form saying they won’t tour homes that don’t offer buyer’s agent compensation.
It’s going to be very interesting. And as I said, it’s still unclear and there’s still a lot we don’t know.
How will home buyers pay buyer’s agent compensation?
Starting August 17, 2024, homebuyers will have a few options for paying buyer’s agent compensation.
They can maintain the status quo in the hope that the seller will make a similar offer, with the buyer’s agent’s fee deducted from the sale proceeds.
They can go directly to the listing agent and request dual agency, where the listing agent represents both the buyer and the seller.
They can hire a real estate attorney and guide them through the process for a flat fee, assuming such a setup is allowed.
Or they can foot the bill themselves by paying it out of their own pocket.
Some people seem to think that buyers will increasingly pay the buyer’s agent commission themselves.
While I don’t entirely agree with this view, given the fact that most Americans can barely raise money for a down payment and closing costs, this is likely to happen frequently.
If this happens, it could be a burden on some home buyers, especially those who do not have enough money.
Which brings us to the original question of this post. If they can’t pay in cash, can they finance real estate commissions instead?
Real estate commissions cannot be financed.
Currently, real estate commissions cannot be incorporated into the loan amount, i.e. financed.
This applies to all major loan types, including conforming loans backed by Fannie Mae and Freddie Mac, as well as FHA loans and VA loans.
Same thing TRUE From USDA loans as well, as shown in the screenshot above.
However, it is important to note that real estate commissions are not taken into account in the calculations of the maximum interested party contribution (IPC).
Therefore, you can have the seller pay the buyer’s agent and still get the full amount of the seller’s waivers for other things like lender fees and third-party costs, including title insurance and home appraisal.
both of them Fannie Mae and Freddie Mac Letters have been issued confirming that estate agents’ commissions will not count towards the IPC limits if sellers continue to pay them on a regular basis.
The Department of Veterans Affairs issued circular Because their regulations state that a veteran cannot pay real estate brokerage fees.
Under the settlement, veterans will be allowed to pay it, assuming that the buyer’s broker fee will not be included in the loan amount. Additionally, this will not be viewed as a waiver.
As for why real estate agent commissions cannot be financed, this has never been raised since the seller typically pays the buyer’s agent through sales proceeds.
This was not an issue at all before the historic settlement reached by the National Association of Realtors.
Another problem is the loan-to-value ratio restrictions. If a borrower has to add an additional 2-3% of the purchase price in real estate agent commissions to the loan amount, they may not qualify for the loan.
This is especially true when you are setting a 0% to 3.5% down rate, which is very common these days. The homes simply won’t appraise and the loan-to-value limit will be exceeded.
Is it possible that this will change in the future? It is possible but not necessarily likely for the issues mentioned above.
What about using lender credit to pay the real estate commission?
Now let’s talk about a possible solution if the seller won’t offer compensation to the buyer’s agent and you don’t have the money to pay it out of pocket.
One viable option may be to use lender credit, which technically cannot be used for real estate agent commissions.
However, if the lender’s credit is used to cover other costs, such as lender fees and third-party fees, it will free up cash to be used elsewhere.
For example, let’s say you have a $500,000 loan, and your buyer’s agent wants you to pay him 1%.
The 1% lender credit allows $5,000 in cash to be available to pay for these other costs, allowing the buyer to reimburse his agent with the freed-up cash.
It is still in its early stages, and it is not clear whether such an arrangement will be allowed. Ultimately, the Cooperative Commission may be at stake next. But it is worth considering.
Ultimately, it is likely to be better for most home sellers to continue paying the buyer’s agent through the sales proceeds.
This is supposed to maximize the number of qualified buyers/bidders and not exclude first-time homebuyers, who are most at risk due to limited funds.
The good news is that these real estate agent fees may go down as a result, saving buyers and sellers some money along the way.
Prior to creating this site, I worked as an account manager for a wholesale mortgage lender in Los Angeles. My experience working in the early 2000s inspired me to start writing about mortgages 18 years ago to help potential (and current) home buyers better navigate the home loan process. Follow me on Twitter for the latest news.
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