CFA Urges Buyers and Sellers to Negotiate Commissions as Dollar Amounts

Yesterday, the Consumer Federation of America (CFA) released a Consumer Alert on the new real estate broker rules and practices that will go into effect in 10 days (August 17th) as a result of the NAR settlement.

We’ve covered CFA’s criteria for evaluating homebuyer and home seller contract forms, both of which were written for real estate industry professionals. This new alert is written specifically for consumers to help them “cope” with the new rules. 

It begins by addressing two particular changes: 

• Sellers will “no longer be required to compensate buyer agents”
• Buyers will be required to sign buyer representation forms that set the amount of compensation they will owe their agents

Both of these rules require changes in agent practices that, as CFA warns, may confuse consumers because, in their words, agents “will try to preserve seller compensation of buyer agents to maintain 5-6% overall commissions.” 

The new rules provide both opportunities and risks for consumers. Knowledgeable home buyers and sellers will be able to take advantage of the opportunities and avoid the risks.

Stephen Brobeck

CFA Senior Fellow

To assist buyers and sellers in protecting themselves, the CFA shared three suggestions.

3 Suggestions for Home Sellers and Buyers

#1: Select a Competent, Trustworthy Agent

Choosing an honest and competent real estate agent is critically important, particularly for buyers. Because not every agent out there is committed to being the agent of change consumers need in the new real estate era. 

Three key factors every consumer should consider when selecting an agent: 

• Agent’s broker status (qualification) and training (skills)
• Recent property sales and client reviews/testimonials (proof) 
• Willingness to provide and explain contract forms upfront 

That last one is something every agent, including new ones, can become known for. The more comfortable your buyers and sellers feel with the contracts they’ve signed, the more likely they are to be happy with the outcome—and to talk to others about the positive experience they had working with you as their agent. 

#2: Read Contracts Carefully

CFA recommends a careful, line-by-line evaluation of buyer and seller contracts, giving special attention to any filled-in blanks. Buyers and sellers alike, if they encounter anything they do not understand, should seek independent advice before signing. 

All the more reason for Realtor boards and brokerages to create buyer and seller contracts to ensure every sentence is clear, jargon-free, and easy to understand for the average consumer. 

Any agent who has already encountered a buyer who refused to sign any form because “I’ve never had to sign anything before” or “This is difficult to understand (or “too long”) and I’m not signing it” knows the importance of having a form buyers can quickly and easily grasp. 

How you present that form to a buyer is also critically important. If you’ve watched any of Byron Lazine’s sales training videos, you’re probably familiar with the “Educate–don’t defend” approach he practices and role plays with agents on his team.

Stay out of defensive mode and you’re more likely to keep your buyer out of it, too. 

Unfair Contract Provisions to Avoid

CFA also warned buyers and sellers against specific contract provisions: 

• Pre-Commitment Compensation: Buyers and sellers alike should avoid any commitment to compensate an agent before deciding to be their client. Zillow’s new touring agreements, among others, allow agents to obtain the needed signature without compelling buyers to work with them exclusively. 
• Dual Agency: Be wary of dual agency commitments, which can compromise fiduciary representation. 
• Binding Arbitration: Avoid contracts that require approval of binding arbitration, which limits consumers’ legal recourse.
• Combined Compensation Forms: Avoid seller contract forms that combine listing and buyer agent compensation—or that require buyer agent compensation, violating the new rules put in place by the NAR settlement.

#3: Discuss & Negotiate Commissions in Dollar Amounts (not Percentages)

This one rests on a couple of assumptions worth pointing out. 

From the CFA consumer alert: 

“The basic reason that the industry has been sued by the U.S. Department of Justice and by private citizens is because for a century, Realtors have colluded to set rates which now typically are five or six percent.  The class action settlement, for the first time, effectively allows buyers to negotiate their agent’s compensation…” 

The language—specifically “Realtors have colluded”—is familiar because the plaintiffs in Sitzer/Burnett made the same allegation against the National Association of Realtors (NAR) and the real estate brokerages named as defendants. 

Also, the new requirement that buyers working with real estate agents must sign a buyer representation form before the agent can show them a property does not “for the first time” make it possible for agents to negotiate their agent’s compensation. 

Certainly, it does allow the buyer to negotiate a commission other than the amount or percentage that may be included in an exclusive buyer agency agreement. But commissions have always been negotiable. 

It’s been common practice for decades for the seller side to compensate the buyer agent—for multiple reasons. For one, most buyers are not in a position to pay their buyer agent’s commission fee on top of the home price, down payment, and closing costs. 

It’s a system that has worked—which is why it still makes sense to educate sellers on the competitive advantages of offering buyer agent compensation. 

CFA Tips for Discussing & Negotiating Commissions:

CFA offered three recommendations for consumers to help them protect themselves in negotiations with real estate agents about commissions: 

1. Negotiate Agent Compensation: Discuss and negotiate commissions in dollar amounts, rather than as a percentage. And aim for an amount equivalent to 2% or less of the home sale price. 
2. Industry Resistance: CFA warns that some Realtors may discourage sellers from negotiating commissions by pressuring them to offer compensation to the buyer agent, while others may assure buyers that sellers will be providing buyer agent compensation.  
3. Wait for Buyer Offers: Sellers are advised not to agree upfront to provide compensation to the buyer agent—and to wait for buyers to offer that compensation instead. Buyers, in turn, can include requests for agent compensation in property offers. 

In today’s Hot Sheet, Byron Lazine reviewed CFA’s consumer alert and addressed the dollar amount recommendation: 

Most sellers [and buyers] choose to keep their life continuing to operate the way it is. That’s why they have an expert guiding them through. They often make more money when they do that…

There are plenty of businesses working off a percentage. If the percentage was too high, consumers wouldn’t pay it. If 10% for a sports agent was too high, Patrick Mahomes wouldn’t pay it. But he gets value out of it.

Byron Lazine

As Byron added, “It comes down to not only knowing your value proposition but showcasing and proving it.” If consumers don’t see you as the trustworthy, skilled, and knowledgeable guide and advocate they need, no commission rate will seem low enough. 

Watch the full breakdown of CFA’s recommendations on the Hot Sheet here: