What do you pay your professionals? There’s the price, certainly. Value is the trade for what you get versus the amount it costs to get it. Time, money, results, trust — all these things blend together when we consider what we’ll fork over. And does that amount change when you consider how you will pay it? Financed, deducted, or a direct check — does the method impact the terms? We look at any professional we deal with in the refractions above: dentist, mechanic, financial advisor, esthetician, attorney, lender, and, most currently in the spotlight, real estate agent.
It is a fact that an agent’s commission has been negotiable for years. It is also a fact that most buyers didn’t pay much attention to their agent’s commission, as it generally was taken from the seller’s proceeds. Out of sight, out of mind. Yet this year’s rulings in class-action lawsuits around antitrust laws have brought how a buyer pays their agent’s commission to be at the front of the home-buying conversation. While every state has their own forms, rules and regulations, individual jurisdictions, and multiple listing services, things have changed in the 805.
The California Association of Realtors (CAR Buyer Representation Agreements) has issued forms that are both required and seek to give guidance on buyers’ rights, requirements, around this topic of representation. Now, timeframes, percentages, exclusivity, and even location are lined out and addressed with a buyer before an agent can be paid a dime for their time. The “Disclosure Regarding Real Estate Agency Relationship” has 13 pages of detailed specifics that outline what and how representation should be handled.
First, let it be clear that I am not a Realtor, real estate agent, or broker that can represent property. Speaking to a licensed individual is key to best understand what this agreement means for you. That said, my day-to-day job helps buyers purchase homes, and it is our responsibility to understand how this can impact our clients. I am writing this in hopes that it helps folks see how these changes can impact home financing. It must be noted that any and all commissions and concessions should be done directly through closing (escrow), as handling these outside of the disclosed transaction is considered a “kickback,” and is illegal.
There remain three basic ways to have commission paid to a buyer’s agent. The first is that the seller pays it directly to the agent via escrow. In this structure, the sales price of the home is the vehicle generating the funds to pay the agent. This is how it has traditionally been done for ages.
The second is that the seller gives a credit to the buyer, who then channels some, or all, of those funds to their agent. This structure also uses the sales price of the house to generate the funds to cover the commission. However, this structure directly impacts lending decisions, as not every type of loan (VA, for example) allows the buyer to pay commission. Additionally, most loans have limits on the amount of credit(s) a buyer can receive from a seller — no matter what they do with it.
The final way to handle a buyer’s agent’s commission is for the buyer to fund it directly. Whether from their own accounts, a gift from family, or even perhaps adjusting their mortgage structure to facilitate paying the bill, this last method also has restrictions from a lending perspective. Again, not all loans allow for the buyer to pay commission to an agent, and not all funds are considered equal in lending guidelines and programs. Some programs require reserves — a k a money on hand after closing — and paying a higher closing cost could impact how one qualifies.
As you look to purchase property, it is super important that you review this with your lender and agent. Make sure that everyone is on the same page for how best to serve your financial needs. Make sure that you are prepared to adjust your sales price or mortgage structure, or bring out the checkbook to make it happen. And really, this part hasn’t changed. Knowing what is expected from you financially is one of the key things to take into consideration when buying a home — it’s the conversation that has changed, not the importance of consideration.
All in all, it remains the same that commissions are negotiable. What is different is when, and how, this conversation must be had as a buyer. Options remain for your specific situation, and how this will play out is yet to be fully seen. Are we seeing some clients decide to write the check versus roll into their sales price? Yup. Yet, thus far, it seems to be the traditional, first method of commission structure that remains dominant, and we expect that to continue. Good professionals are invaluable and will continue to be so no matter how they’re paid.
Austin Lampson is a licensed mortgage professional and branch manager of Homeowners Financial Group. She has spent the last quarter-century helping her clients balance math and emotion to achieve their financial goals. Reach Austin at (805) 869-7100, alampson@homeownersfg.com, or visit austinlampson.com.
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