UConn professor explains what Connecticut buyers, sellers need to know
If you're in the process or buying or selling a home, or think that will be part of your near-future plans, then the recent National Association of Realtors (NAR) settlement has likely caught your attention.
As part of a class-action lawsuit settlement, the NAR agreed to some changes impacting compensation and representation beginning Aug. 17. The sale or purchase of a home is considered one of life's biggest stressors. Understanding the new opportunities and requirements of the settlement can put real estate clients at ease.
UConn Today interviewed School of Business professor Kristen Haseney, an attorney with extensive experience in the industry. Below she answers questions about what's new and what to expect.
Q: How does this settlement impact home sellers?
A: The settlement agreement prohibits a seller's broker from advertising compensation to a buyer's broker on a Realtor®-owned MLS. This does not prevent or prohibit a seller or a seller's broker from compensating the buyer's broker; this only prohibits advertising the compensation on the MLS. Some sellers may decide they do not want their broker to offer compensation to a buyer's broker at all, and therefore negotiate to pay a lower commission to their own broker.
However, some sellers might still want their broker to offer compensation to the buyer's broker and therefore be willing to account for that when negotiating their own broker's compensation.
These choices aren't different than they were before; sellers always had these options. But now, with the settlement bringing more awareness to this situation, some sellers may decide to negotiate the amount of their broker's commission differently.
Q: How does the settlement impact buyers?
A: The settlement requires a Realtor® and buyer sign a representation agreement prior to a Realtor® being permitted to give a showing (tour) of a home listed for sale or rent on the MLS. This representation agreement between a Realtor® and a buyer does not need to be for a minimum time frame or a certain geographical location, unless state law requires it. This means the buyer can sign an agreement that applies just for the one day when the Realtor® will be giving the showing, or it can be an agreement that applies only to the one house the Realtor® is showing to the buyer. The buyer is still free to enter into an agreement with a Realtor® that includes a longer representation time frame, for example one week, or a wider geographic scope, such as all residential properties located in Hartford County.
Q: Can a seller's broker still offer to compensate a buyer's broker as part of a property transaction?
A: Yes, the settlement only changes where the compensation to a buyer's broker may be advertised. A buyer broker's compensation cannot be included on a listing with an MLS participating in the settlement. The settlement agreement prohibits Realtor® members from advertising the compensation on a Realtor®-owned MLS (and any non- Realtor® owned MLS that opts in to the settlement agreement) an offer to compensate a buyer's broker. However, this settlement does not prohibit the seller's broker or the seller from compensating the buyer's broker involved in the transaction.
Q: Do buyers have to start paying for the services of their Realtor® now as a result of this settlement?
A: In some states, the practice of a buyer paying their buyer's broker out of pocket, or as part of their closing costs, may be a new practice, if the most common practice was for a seller or seller's broker to completely cover the cost of the buyer broker's compensation. However, some states, such as Connecticut, already have many different business models for broker compensation, including the buyer paying some or all of the buyer broker's compensation.
To say buyers now have to start paying for the services of their buyer's broker is a misconception; it is likely the seller and the seller's broker have already accounted for that cost in determining an acceptable sale price for the subject property, and therefore the buyer was already paying the cost of their buyer's broker compensation through a slightly higher sales price. Now with the NAR settlement changes, it's more accurate to say the buyer's broker compensation may not be advertised on the MLS, since it doesn't eliminate commission sharing between brokers.
Q: If my buyer's broker can't be paid by the offer of compensation on the MLS, is there still a way the buyer's broker can be paid by the seller or the seller's broker?
A: Yes. The settlement agreement doesn't dictate who must pay the buyer's broker compensation; that is still negotiable among the parties involved. A seller's broker or seller may still compensate some or all of the buyer's broker compensation, or a buyer may compensate the buyer's broker as outlined in the agency representation agreement between the buyer and their buyer's broker. This is not a new concept or practice for states like Connecticut, which already require buyer agency agreements.
Q: Will this mean the sale price of a house will be lower if the seller is now unwilling to pay the buyer's broker compensation out of the proceeds of the sale?
A: It is highly unlikely the purchase price will decrease as a result of this settlement. It's possible a seller, out of the goodness of their heart, voluntarily lowers the price because they are no longer willing to compensate a buyer's broker. However, the more likely scenario is sellers will look at this as a way to realize just a little more profit from the sale of their property – most people would naturally want to keep that extra money.
Q: Does the settlement change the amount a seller or buyer pays their real estate broker?
A: Not necessarily. Buyers and sellers enter into a representation agreement (a contract) with their broker to engage their professional services, and like any other contract for services, both parties to the transaction have the ability to negotiate what that compensation will be. Consumers are free to negotiate and agree to pay what they think is reasonable for the professional services of a broker; but on the other side of it, brokers, like other business people, are free to determine for themselves how much money they will charge for their time and services, including factoring in any costs that may be incurred to provide these services.
The most likely outcome is the settlement will have little or no impact on the amount a broker is willing to receive as compensation when they are providing the same services; no working person wants to take a pay cut to do the same work. The more likely scenario is some brokers might offer a wider variety of service options that consumers can select from at different price points, while consumers take on more of the services themselves and rely less on some of the services a broker would have provided in the past. In those situations, a consumer might pay a lower broker compensation amount, but are likely to have to take on some of the tasks a broker would otherwise have done on their behalf, such as searching online for properties listed for sale and emailing them to the buyer, or negotiating the price of a selected property within the buyer's parameter.
Q: The settlement takes effect August 17, 2024. If I enter into a contract before the settlement takes effect, is my contract with my Realtor® still valid after that date?
A: Yes. The settlement effective date does not cancel agency representation agreements that were in effect prior to that date. If, however, the buyer broker contract expressly stipulated the buyer's broker would be compensated only through the MLS offer of compensation, this would need to be amended to account for the change, and updated to reflect the parties' intentions regarding buyer broker compensation.
Q: Does this mean buyer broker representation is going away and there will only be seller's brokers now?
A: Not at all. In many states, including Connecticut, buyer broker representation was in practice before the lawsuit and will continue to be utilized after the settlement effective date of Aug. 17. This is due in part because consumers value representation, professional services, and guidance in a real estate transaction that a buyer's broker can provide. In states where buyer broker representation was not practiced before the effective date (this does not include Connecticut), buyers in those states may now be in a better position since representation agreements will list the scope of services the Realtor® will provide and both buyer and their broker will know their obligations under the agreement, including compensation to the broker, right from the start.
Q: Is this new policy beneficial to the real estate industry?
A: Yes. By removing the offer of compensation field, it remains between the Realtor® and their client to determine up front what fair compensation for the Realtor's® time and services they provide, both for buyer's brokers and for seller's brokers. The settlement does not prohibit commission sharing between brokers outside of the MLS, so that is still an option, but this settlement provides more certainty from the time of contract signing what the client will be paying their broker for the broker's services.
Q: Do you have any advice for those pursuing a residential sale or purchase in the coming year?
A: Interview multiple Realtors® before selecting the one to work with, asking questions about the services they are offering as well as what your role as the client will be in the process. If you want a professional who will provide specific services, such as tour you through homes and help you with paperwork, or host an open house, or you want to be able to communicate with your Realtor® at certain times or through certain methods (such as after 9pm on weeknights by phone call). Make sure to confirm those are services they are providing and are written into the representation agreement you sign with them.
Also, you are free to enter into a real estate transaction without broker representation but don't assume the other side's Realtor® can help you if you choose not to hire a broker to assist you. If there is a broker representing the other side of the transaction, that broker may be limited, or prohibited, by state law from assisting you with certain aspects of the transaction (such as inspections, determining the right price to offer or accept, or filling our contracts) since you are not their client.
If you want a professional to guide you through the real estate process or to discuss personal goals or strategies, it may be valuable to hire a real estate broker to represent you who you can talk with and who will keep your discussions confidential.
Kristen Haseney, Esq. is an Assistant Extension Professor in the School of Business' Center for Real Estate and Urban Economics. She is faculty adviser for the student-run UConn Real Estate Society and formerly worked as a Senior Associate Counsel at the Connecticut Realtors®.
