Part I of this article discussed the significant legal verdict against the National Association of Realtors (NAR) and two other defendants, highlighting the $1.78 billion damages, and explored the ongoing changes in the real estate industry’s commission structure, emphasizing the decoupling of commissions, the impact on relocation management companies (RMCs), and the evolving compensation landscape for buyers and sellers. We pick up where that article left off, discussing the compensation structure for buyer commissions.
With guaranteed buyout (GBO) or buyer value option (BVO) transactions, that means the RMCs and transferee sellers must determine if they will offer a cooperative buyer commission at the time of the transferee listing. This must be consistent in the subsequent listing agreement between the RMC and broker. In the scenario where cooperative commission is offered and the transaction is managed by the RMC, then the transaction will continue to be tax protected as it is today.
Here are just some of the questions and issues that warrant corporate/RMC consideration:
When a transferee lists a property for sale in a relocation transaction, will the benefits cover the costs of offering a cooperative commission to pay the buyer agent’s commission as they do today?
In the new world, listing agreements will likely not require x-percent commission to be paid to the cooperating agent. Instead, the seller may opt to pay nothing to buyer agents, or anything north of that, which is also their right if they seek enhanced property exposure and a faster sale.
Corporate clients and RMCs should consider the potential impact of not paying a buyer’s cooperative commission, which include:
- Extended days to market and potential delays in the successful sale of the property.
- Limited buyer pool – buyers may elect to avoid certain properties because they will be responsible for their agent’s commission.
- When an offer is made on a property, the new-world purchase contract will likely include a clause defining who is paying both agents. Commission may become a point of negotiation for sellers who have previously said they would pay either no or a reduced buyer agent fee.
If buyer compensation is a reimbursable expense, will the buy-side commission be considered an allowable closing cost expense by the employer, and will it be grossed up?
These tax and legal questions must be considered when deciding how future relocation policies are developed or how existing policies may be modified.
Realistically, if seller agents know the buyer is a transferee, they will probably advise the seller not to pay the buyer’s fee. Either way, corporations will need to decide whether to reimburse the buyer agent’s fee if it is not paid by the seller. If they don’t, and their transferee-buyer pays out of pocket, would there still be a referral fee charged and, if so, would it be paid to the buyer, the RMC, or the employer?
Will the buyer agent commission be financeable by the mortgage companies, or will buyers need more cash to close?
Currently, the commission is not financeable unless buyer commission is offered by the seller and included in the list price of the home. As it stands now, if the listed property price does not include a cooperative commission but is later negotiated as part of the transaction, the commission will be treated as seller contribution by the lender and may exceed maximum allowable contributions, especially if other contributions like employer paid closing costs are applicable.
WERC has worked through the years, sometimes in tandem with NAR, to affect tax policy concerning relocation transactions. If all buyers are now faced with paying additional cash at close to fund their buyer agent commission (which was previously covered in the purchase price and thus, financeable), will NAR lobby Fannie Mae and Freddie Mac to add buyer agent commissions paid by the purchaser part to the mortgage? If so, will that lower the mortgage amount for which the buyer qualifies at a time when affordability is already a huge problem? In any case, the house will still need to appraise for the sale price as it does today.
In terms of comparable properties shown in listing appraisals or BMAs, how will appraisers and agents treat previous closings in which the purchase price may have included the buyer agent commission? Will adjustments be made that reduce the actual sales price of comps and, thus, the estimated fair market value of subject properties when listed?
This adds even more confusion to the mix. Would real estate brokerages or appraisers need to make adjustments as they consider comparable properties? This would likely reduce the value of about 70% of all properties when considered as comps to either estimate fair market value or to evaluate value for mortgage purposes.
How will these decisions impact expenses and revenues to corporations for relocation transactions?
It really depends.
- If corporations agree to continue paying the (example only) 6% listing commission to include the buyer’s agent commission, the result is status quo in terms of expenses and referrals fee for seller transferees. Corporations can estimate their financial obligation based on the listing price of the property.
- If corporations agree to only pay the (example only) 3% listing commission for their transferred sellers, corporations will save the buy-side (example only) 3%, and their RMC will still earn a referral fee on the listing side, as they do today. Not offering to include the buyer’s commission may reduce the likelihood of a quick sale and/or put their seller in a position of having to pay some or all the buy-side commission out of pocket.
- If corporations agree to reimburse their buyer transferee (example only) 3% buyer agent commission, that is 3% they have not been paying thus far (if/when they offer a buyer commission on the transferee listing).
- The new buyer side commission will NOT be tax-protected as it is in the current GBO or BVO transaction. Will it be grossed up?
- It will be based on the unknown purchase price of the new home, which is traditionally higher than the home they sell.
- Referral fees would still be payable to the RMC managing the file based on the buy side real estate commission paid by the buyer when a buy-side commission is paid to the broker.
- In the case of buyers, agents will have to explain upfront to buyer transferees the potential that they will have to pay the buy-side commission if the seller is not covering it. Terms must be established upfront in the buyer brokerage agreement, as required by many states. Transferee buyers have options to limit showings to only properties that offer a cooperative buyer commission (eliminating zero buyer commission properties) or they may request that the agent try to negotiate the seller paying commission on behalf of buyer in any purchase offers. Such negotiations would mean the seller’s contribution may be subject to the maximum allowable contributions established by the loan terms.
- If the relocation policy covers the buy-side commission by offering a cooperative commission in the listing price (example 6%), there is no guarantee that the transferee buyer will select a property in the new location that is offering to pay their buyer commission, which could add additional costs (example 3%) to the corporation or may be an out-of-pocket expense to the transferee.
There are no easy answers to these questions, but corporations and their RMC need to be exploring solutions now, as brokers are already adapting to the evolving and required changes to the real estate compensation model. There is no consistency from state to state or brokerage company to brokerage company. These changes are not “appeal years away” for many companies; it’s happening now.
Pamela O’Connor is a real estate and relocation adviser and the former president and CEO of Leading Real Estate Companies of the World. She is also a member of the WERC Hall of Leaders.