Here is Part 2, explaining the broker client relationship, the change in the state law, and what brought it about.
Part 2: Changes to state agency law about broker-client relationship
The concept of a buyer’s broker is fairly new. Up until the 1990s, all brokers represented the seller, whether they were the listing broker or not. So, if a broker was showing you around, they were able to share whatever information you told them about yourselves, with the sellers. The thought was that the seller was paying the commission, so the sellers were the only ones getting representation.
That all changed in the 1990s, with buyer brokers and buyer agency agreements. The commission was still paid according to whatever the seller and listing broker agreed to, in the listing agreement. But the compensation was specified for the listing broker, or the buyer’s broker, and the buyer’s broker represented the buyer only.
Buyer’s brokers have made use of buyer agency agreements, in order to spell out their duty to their buyers, and the buyer’s duty to the buyer’s broker. That’s really important, since some folks mistakenly believe that they can “work” with multiple buyer brokers and that somehow they will all get paid (magical thinking).
Real estate brokers, whether buyer’s brokers or listing agents, do not get paid a salary, but are self-employed and work on commission. That means the broker won’t receive any compensation for their work until they find you a home that you love, they write an offer that gets accepted, they successfully negotiate the inspection and appraisal stages, work tirelessly to hold the transaction together no matter what comes up (and usually something does come up), and you make it to the closing table and the home officially becomes yours. At that point, the buyer’s broker will be compensated.
This real estate agency concept has continued to evolve, and now both the listing agreements, and buyer’s agency agreements, have extra sections that specify how each broker is paid, and even accounts for varying circumstances and how the pay will be adjusted accordingly. In October 2022, the Northwest Multiple Listing Service, which encompasses more than 83 percent of the state’s population over 26 counties, adopted new forms for listing and buyer’s brokers to use.
Then the state Legislature passed changes to the real estate agency law (SB 5191 amends Chapter 18.86 RCW) that will, among other things, require that a buyer broker has a signed agency agreement with their buyers, rather than having it be optional, in order to be paid for their work. It goes into effect in January 2024.
By signing the buyer’s agency agreement, consumers are better informed and committed to working with their buyer broker. This is a good thing.
You’ve probably heard that sellers pay the buyer’s broker compensation and in almost all instances, that is the case. The buyer’s agency agreement states that you agree to compensate the buyer’s broker for their work and it also states that the seller’s offer of compensation in the listing will fulfill that obligation. In addition, if the seller has not offered enough compensation, the buyers can include in their offer, a request that the seller pay the balance. If there happens to be a seller who does not want to offer any buyer’s broker compensation (usually comes up in a for sale by owner situation), then at that point the buyer and buyer’s broker will discuss what the buyer wants to do. For instance, they could offer above list price and then ask the seller to pay the buyer’s broker compensation, which would still net the seller the amount they want, and it would end up being paid for as part of the buyer’s loan costs. This, really, is what was already happening when you buy a home where the sellers have factored in the buyer’s broker compensation into their sales cost – the cost of the home is financed and it includes the commission in it.
If a home that doesn’t offer buyer’s broker compensation isn’t worth it to you, after the compensation is added to the list price, then the buyer can decide to move on and keep looking. Most sellers know how important it is to offer buyer’s broker compensation so it’s unlikely you’ll encounter this.
What brought about these agency law changes?
The Northwest Multiple Listing Service was aware of lawsuits pending in other parts of the United States, in which the real estate industry was accused of not being transparent, or hiding how real estate brokers are paid. Instead of waiting for a lawsuit in Washington state to force changes, the NWMLS decided to look at making the process more transparent, now. Those issues include making sure the public understands how the buyer’s broker is paid, and giving the buyer and seller more control over the process.
The first changes around compensation transparency came a few years ago, when the commission that was being offered to buyer’s brokers was first published on the public facing listings. Until then, the commission was determined by the listing agreement between the listing broker and the seller – they decided together what compensation would be offered to the listing broker and to the buyer broker, and it was published only to other real estate brokers. This first change caused a bit of an uproar, with brokers worried about what the public would think when they saw the commission being offered. Another worry was that sellers would decide to only compensate listing brokers, and offer “zero commission” to buyer’s brokers. While some sellers did that, it was very, very few. Most sellers understand that they open up the number of potential buyers by offering compensation for buyer’s brokers.
Then, in October 2022, the NWMLS made some more changes. The listing agreements were changed to separate out the compensation that sellers were offering to listing brokers, and what they were offering to buyer’s brokers.
Changes to the buyer’s agency forms were also made, which allowed for the buyer to decide how much their broker should be paid. This allows for buyers to pay their broker’s commission directly, for instance, if they want to pursue a property that is not listed (for sale by owner), or in the case of a seller not offering compensation. But since most sellers are offering compensation to buyer’s brokers, the changes more often give control to the buyer. For instance, if the seller is offering less compensation than the buyer agreed to in their buyer agency agreement, this document allows the difference to become part of the negotiation for the property. The opposite is also in play – if the seller is offering more than the buyer and buyer’s agent agreed to, that extra amount can also be used as part of the negotiation.
It also allows the buyer to decide if they want to see properties that don’t offer compensation to their broker. This takes the onus off the buyer’s broker, who wants to show their buyers all the properties that could meet their needs, but who also wants to be paid for their work.
This takes the previously murky process of “how does the buyer’s broker get paid,” and brings it fully into the light, with the buyer and seller fully participating. It also, hopefully, makes it clear to consumers that there is no magical source of income for brokers – everything in real estate must be in writing, including broker compensation.
With the buyer agency agreements available through the NWMLS now, and the state law that will require brokers to use them just a few months away, buyers should be prepared to make the commitment to their buyer’s broker with an agency agreement. It solidifies the relationship, is a great opportunity to discuss how the process works, and makes clear what the expectations are for all parties. That sounds like the beginning of a successful partnership, to me!
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And as always, I look forward to working with you.