If a seller’s side opts not to pay a buyer’s agent commission, the cost-to-buy burden could further distance lower-income and minority homebuyers.
By JEFF LAZERSON | email@example.com | MortgageGrader.com | December 12, 2022
* Article originally posted in Orange County Register on December 8, 2022.
On the heels of an ongoing antitrust probe by the Department of Justice into the sales practices of the National Association of Realtors, the California association is releasing next week an updated real estate purchase agreement that could upend how a homebuyer’s agent is paid their commission.
In difficult-to-understand verbiage, CAR’s new purchase agreement (called an RPA) includes language in its “Seller Payment to Buyer’s Broker” section that includes a checkbox indicating a “buyer has entered into a written agreement to compensate buyer’s broker.” It also includes language indicating a seller has agreed to pay the obligation … unless otherwise agreed.
It’s all new and something many in the industry, from sales agents to mortgage brokers, have never seen.
So why now?
The updated RPA is an effort at transparency in reaction to antitrust allegations from the U.S. Department of Justice, according to June Barlow, general counsel at the California Association of Realtors.
CAR’s updated RPA comes two years after a complaint filed in 2020 by the DoJ alleging that its mothership, the National Association of Realtors, put “illegal restraints” on competition amongst its members.
The complaint by DoJ, which was withdrawn in July 2021 so the agency could pursue further action, would have required NAR and its local associations:
— Modify its rules and provide greater transparency to homebuyers about the commissions of brokers representing homebuyers;
— Cease misrepresenting that buyer broker services are free;
— Eliminate rules that prohibit filtering multiple listing services based on the level of buyer broker commissions; and
— Change its rules and policy limiting access to lockboxes to only NAR-affiliated real estate brokers.
The new language in the RPA essentially opens the door to more choices as to how to split a home sale commission. It also opens the door to a buyer paying their broker’s commission.
Previously, the commission was typically split and paid by the seller. For example, 4% to the seller’s agent and 2% to the buyer’s. The homebuyer and seller were often not privy to what each was paid — unless they told their clients.
But in my experience, many Realtors would not even show properties to a prospective buyer when there was a low buyer’s-side commission, say 1% or 2%. Especially when other properties were available with a 2.5% or 3% commission to the buyer’s side.
Beyond the commission skirmish between agents, this change to the purchase agreement has the potential to ruin the opportunity for buyers to get on the road to homeownership as mortgage lenders do not allow real estate commissions to be financed into the mortgage. And, in practice, this has the potential to violate federal and state fair housing laws as it concerns Black and Hispanic homebuyers. More on these issues in a bit.
On top of the down payment and other closing costs, homebuyers face the real financial challenge of hiring their own buyers’ agent if the seller or their listing agent do not agree to pay the buyer’s agent at closing.
Yes, buyers can also go directly to the seller’s listing agent for each separate listing they’re interested in. There is an inherent conflict of interest though, as it would be impossible for a listing agent to do their best for both the seller and the buyer at the same time.
And yes, a homebuyer hiring and paying his or her own agent has always been an option, too, though seldom used.
“Use of the buyer-broker agreement is not widespread in California,” said Gov Hutchinson, vice president and assistant general counsel at the California Association of Realtors.
In practice, though the seller has always indirectly paid the buyer’s agent through sales proceeds at the close of escrow. In my 35 years of mortgage experience, I have never read an RPA where there was an addendum or verbiage added indicating the buyer was paying their own agent’s commission.
Previously, the common practice was the listing agent or brokerage shared a percentage of the commission with the buyer’s agent or brokerage. For example, say a seller is charged a 5% sales commission by their listing agent. The listing brokerage and the buyer’s brokerage each get 2.5% of the sales price at closing.
“That was a 75-year-old business practice,” said Bram Klein of Keller Williams Realty of the typical commission split. “Many of our first-time homebuyers struggle to put down just 3.5% to purchase a home in Orange County.
And if the commission shifts to the buyer?
“This just increases their financial burden and may postpone their purchase by months or years,” Klein said.
Full disclosure: Klein refers homebuyers to me at my mortgage brokerage.
Consider the bare minimum it takes for a first-time buyer to purchase a home for $400,000. Three percent down is $12,000. Let’s assume non-recurring and recurring (property taxes and homeowners’ insurance) costs come to $6,000. And say a buyer’s agent wants 2.5% for his or her effort (commissions are, in fact, negotiable).
If the home seller or the listing agent won’t pay the buyer’s side commission of $10,000, then the buyer must cough up $28,000 instead of $18,000. That’s 56% more money coming to the table.
Obviously, those added dollars (down payment, closing costs and commission) soar with higher home prices. Paying a buyer’s agent say 2% on an $800,000 home could cost the buyer $16,000.
Barlow, CAR’s attorney, maintains this updated RPA is not going to change much in terms of the sellers continuing to pay the buyers’ agent commission. “At least early on (it won’t change much),” she said.
“Requiring a buyer to pay the buyer’s agent commission out of pocket is going to create additional hurdles for low-income buyers,” said Anne P. Bellows, partner at law firm Goldstein, Borgen, Dardarian & Ho. “That, in turn, is likely to disproportionately hurt Black and Latino home seekers who, on average, are coming in with steeper affordability challenges.”
“Housing practices that have a disparate adverse impact on people of color may violate the federal Fair Housing Act and California’s Fair Employment and Housing Act,” said Bellows. “In some cases, defendants can avoid liability if the practice is necessary to achieve an important business purpose and there are no feasible alternatives that would have a less discriminatory effect.”
“We are doing our best to see that doesn’t happen (disparate impact),” said Barlow. “That is out of our control.”
Next week I’ll look at lender allowable closing cost credits and CAR’s efforts to get the mortgage industry to finance agent commissions.
Freddie Mac rate news: The 30-year fixed rate averaged 6.33%, 16 basis points lower than last week. The 15-year fixed rate averaged 5.67%, nine basis points lower than last week.
The Mortgage Bankers Association reported a 1.9% mortgage application decrease from the previous week.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $726,200 loan, last year’s payment was $1,408 less than this week’s payment of $4,509.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with 1 point: A 30-year FHA at 5.375%; a 15-year conventional at 5.125%; a 30-year conventional at 5.75%; a 15-year high balance conventional ($726,201 to $1,089,300) at 5.75; a 30-year high balance conventional at 6.125% and a jumbo 30-year purchase, fixed at 6.125%.
Note: The 30-year FHA conforming loan is limited to loans of $562,350 in the Inland Empire and $647,200 in LA and Orange counties.
Eye catcher loan program of the week: A 30-year jumbo purchase mortgage locked at 5.25% for the first five years with one point cost.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or firstname.lastname@example.org. His website is www.mortgagegrader.com.
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Jeff Lazerson - Mortgage Columnist since 2011