The newly mandatory contracts are the result of a March court settlement with the National Association of Realtors that consumer advocates hope will end practices that led to seller agents paying their buyer counterparts half of the commission fee from a home sale. Proponents of ending that automatic split hope that having buyers pay their own agents will spur negotiations that could lead to lower commissions.
Contract templates now being circulated by Realtor groups would have buyers pay some of the commissions rather than just sellers, as is the case currently. But consumer advocates worry that most buyers simply aren’t equipped to vet the legal documents their agents ask them to sign, leaving them at the mercy of industry norms.
“Nobody in their right mind is reading these forms,” said University of Buffalo law professor Tanya Monestier, who has reviewed more than a dozen of the new contract templates.
The Justice Department has apparently taken notice of the new contracts. Monestier said the DOJ in July responded to notes she sent about contracts issued by several state associations, including the one drafted by the California association. Moreover, the California Realtor Association’s general counsel Brian Manson said in a June 21 article in the trade publication Inman that the association had received an inquiry from the department.
Lotus Lou, a spokeswoman for the association, confirmed Manson’s comments. The Justice Department did not respond to requests for comment.
Monestier described a draft from the California Association of Realtors, for example, as “dense, complicated and all over the place” to the point of incomprehensibility. “I think that’s by design,” said Monestier, who evaluated the California template at the request of the Consumer Federation of America.
In its June statement, the association rejected Monestier’s assessment, calling her critique of the forms “misguided,” “absurd” and insufficiently familiar with California law. The organization has made several changes that address advocates’ concerns, the group said.
Manson told The Washington Post that the group has spent months working on its draft contracts and has made several changes.
“The revised forms are greatly simplified, making them more transparent and easier for consumers to understand with the help” of their Realtors, Manson said in an emailed statement.
The Post reviewed template contracts and other industry guidance from Realtor groups in eight states. The Post sought feedback on the draft contracts from lawyers, real estate agents, consumer advocates, and others with knowledge of the industry.
Some in the industry believe requiring buyer contracts will do little to change commissions, which are typically 6 percent of the sale price, with 3 percent going to the seller agent and 3 percent to the buyer Realtor. NAR and its affiliates said that commissions have always been negotiable, and many buyer agents already ask their clients to sign upfront agreements.
Edward Rogers, the head of a real estate brokerage firm in the Philadelphia area, said he expects that negotiations on the buyer side will be rare even after the new rules go into effect. “I do believe it will happen, but I don’t think it will happen often,” he said.
Having commissions paid entirely from the seller side helps new home buyers, Rogers said. “Our marketplace is a lot of first-time home buyers, a lot of middle-class working families trying to buy homes, and they truly can’t afford, or they might not have the savings” to pay a commission.
The changes will ultimately benefit the industry and consumers by adding more transparency to the commission process, Rogers said. He advised home buyers to go over the new contracts with their agents and understand them fully before signing.
Southern California real estate agent Iain Phillips stressed the importance of easy-to-understand contracts. His brokerage has long used buyer-agent contracts but he said an initial draft of the California Association of Realtors’ buyer agreement was a “nightmare” with its length and confusing language.
“Especially for someone who has never purchased a home before,” he said, “they’ll be looking at that with a lot of questions.”
Consumer advocates say it’s important that home buyers understand…
Read More: New contracts for home buyers draw criticism over complexity