The homebuying process can be challenging, especially when the rules of engagement change. Recent updates from the National Association of Realtors (NAR) have introduced new mandatory provisions including ones for written buyer agreements. We will be comparing the former requirements to the new ones and highlighting what these changes mean for homebuyers and realtors alike. See Table 1 at the end of this article for visualized comparison table by HOL.
Former Requirements ~ An Overview
Previously, the process for engaging a real estate agent when buying a home was relatively informal in many cases. Homebuyers often worked with agents under implied agreements without written contracts, which could lead to misunderstandings regarding the services provided and the compensation expected.
Under The Old System
Homebuyers were not required to sign a written agreement before touring a home.
The terms of service, including agent compensation, were often unclear or not thoroughly discussed.
The compensation offered to the buyer’s agent by the seller was typically displayed on the Multiple Listing Service (MLS), which could influence the agent’s advice or actions.
This informal approach, while convenient, sometimes left room for ambiguity, which could result in conflicts or a lack of transparency between the agent and the buyer.
The New Requirements: Key Changes and Their Implications
Effective August 17, 2024, the NAR settlement introduces significant changes to ensure transparency and protect consumer interests. The settlement mandates that all MLS Participants must enter into written agreements with buyers before touring homes, whether in-person or virtually. Here’s what you need to know:
(1) Written Agreement Requirement
New Requirement: A written agreement is now mandatory before touring a home. This agreement must clearly outline the terms of service, including the agent’s compensation and the scope of services provided.
Implication: This change ensures that both parties have a clear understanding of their relationship, reducing the potential for misunderstandings.
(2) Specific Disclosure of Compensation:
New Requirement: The agreement must specify and conspicuously disclose the amount or rate of any compensation the agent will receive. This compensation must be objective and not open-ended (e.g., it cannot be based on the seller’s offer).
Implication: This provision enhances transparency by ensuring that homebuyers are fully aware of how their agent is compensated, allowing them to make informed decisions.
(3) Prohibition of Compensation Beyond Agreement:
New Requirement: Agents are prohibited from receiving compensation from any source that exceeds the amount or rate agreed upon in the written agreement with the buyer.
Implication: This ensures that the agent’s loyalty remains with the buyer, as they cannot seek additional compensation from sellers or other sources that could compromise their impartiality.
(4) Broker Fees and Commissions Are Negotiable:
New Requirement: The agreement must include a conspicuous statement that broker fees and commissions are fully negotiable and not set by law.
Implication: This empowers homebuyers to negotiate fees and seek the best deal, fostering a competitive and fair market.
(5) Impact on MLS Listings:
New Requirement: While sellers may still offer compensation to buyer agents, this offer can no longer be shared on the MLS.
Implication: This change reduces the potential for conflicts of interest, as buyer agents are not influenced by compensation offers displayed on the MLS.
Additional Considerations for Realtors
The settlement not only mandates these new requirements but also offers guidelines for creating comprehensive and effective written buyer agreements. Here are some of the suggested provisions:
Format and Clarity: Agreements should be clearly written, easy to understand, and organized with a readable font size.
Term & Termination Clauses: The agreement should outline the terms for termination, including any carryover periods where compensation may still be owed.
Compensation and Fees: In addition to the mandatory provisions above, MLS Participants and buyers may agree to a retainer fee and address whether any retainer is included in total compensation, credited against compensation and/or refundable.
Old System v The New System For Homebuyers & Realtors
Aspect | Old System | New System (Effective August 17, 2024) |
|---|---|---|
Written Agreement | Not required before touring homes. | Mandatory written agreement before touring homes (in-person or virtual). |
Compensation Disclosure | Compensation terms often unclear, sometimes based on what the seller offered via MLS. | Specific and conspicuous disclosure of the amount/rate of compensation the agent will receive. |
Compensation Flexibility | Compensation could be influenced by what the seller offered, as displayed on the MLS. | Compensation must be objective and not open-ended; cannot exceed the amount agreed upon with buyer. |
MLS Listings | Sellers could offer compensation to buyer’s agents, and this was often visible on the MLS. | Sellers can still offer compensation, but these offers cannot be shared on the MLS. |
Negotiability of Fees | Fees were often perceived as fixed, with less emphasis on negotiation. | Broker fees and commissions are fully negotiable and must be clearly stated as such in the agreement. |
Consumer Protection | Less emphasis on explicit consumer protection and clear disclosure of obligations. | Enhanced protection with clear disclosure of buyer obligations, confidentiality duties, and other risks (e.g., wire fraud, recording). |
Termination of Agreement | Less standardized; termination terms varied widely. | Clear terms for termination, including potential carryover periods where compensation may still be owed. |
Types of Representation | Often implied or informal agreements with less clear definitions of roles and services. | Encourages clear articulation of the type of representation and services provided, with flexibility for various state laws. |
Scope of Services | Scope of services provided by the agent was often not explicitly defined in writing. | Agreements must clearly define the scope of services provided, ensuring transparency and clarity. |
Conflict of Interest | Potential conflicts of interest were less explicitly addressed in agreements. | Agents are encouraged to address how conflicts of interest will be managed, including dual agency situations. |
Dispute Resolution | Dispute resolution mechanisms were less commonly included in agreements. | Optional or mandatory alternative dispute resolution mechanisms, such as mediation or arbitration, may be included. |
Moving Forward with Confidence
The new NAR settlement requirements mark a significant shift towards greater transparency and consumer protection in the homebuying process. By requiring written agreements that clearly outline the terms of service and compensation, homebuyers can now engage with realtors more confidently, knowing that their interests are protected and their relationship is clearly defined.
For realtors, these changes underscore the importance of clear communication and ethical practices. By adhering to these new guidelines, agents can ensure they provide the highest level of service to their clients, fostering trust and long-term relationships.
As you prepare for these changes, consider reviewing and updating your written buyer agreements to comply with the new requirements and best practices. This proactive approach will not only ensure compliance but also enhance the overall experience for your clients. For more details on the NAR settlement, visit NAR’s Official Resource.
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