New Realtor Rules and Divorce
Amid much angst and confusion, a new set of realtor's rules took effect this month. The new rules alter the method by which a home buyer's commission is paid. This post examines how the new commission rules operate and how they may impact divorce proceedings.
The manner in which real estate agents allocated their commissions has been in place for about a Century. Basically, the seller's realtor charges a commission based on a percentage of the sale price for the house; between 5.5 and 6%. If a buyer comes along represented by a realtor, then the industry convention called for the seller's realtor to split the commission with the buyer's realtor.
A group of homeowners in Missouri did not like this convention among realtors and sued the National Association of Realtors. The law suit resulted in a $418 million settlement agreement whereby qualifying sellers may be getting some additional money from the sale of their home.
The new rule emerging from the settlement is that seller's realtors are no longer bound by the industry convention to split or share their commission with the buyer's realtor. Importantly, and perhaps confusingly, they are not prohibited from doing so.
This has raised questions within the real estate industry. It did not help that the rules differ from state to state, from broker to broker, and even from agent to agent.
As an offshoot of the new commission rule, a prospective home buyer is now expected to execute a contract with their agent before going to a showing. This, of course, does not apply to open house style showings. Therefore, buyers and their agents are realizing that the buyer may be on the hook for all or a portion of the commission for the buyer's agent.
This is not going over very well within the industry. To further complicate matters, many listing agents are agreeing to "do things the old way" and simply planning to continue splitting their commissions. Problems are arising where, if a seller does not agree to split the commission, the buyer's agent may "steer" their prospective buyer different properties, with realtors who agree to play ball under the old rules.
On the other hand, if under the new rules, a buyer executes an agreement with her agent to pay the agent's commission, there is an incentive for the agent to show the prospective buyer more expensive homes. Therefore, some industry professionals are recommending that buyer's agents charge hourly rates or flat fees.
Confusion seems to abound among realtors, many of whom profess that this so-called new rule changes nothing. This is true to the extent that such realtors remain committed to splitting their commission with a buyer's agent. If they want a steady stream of showings, it seems like the old way may prevail, despite the national settlement in the law suit.
How will these rules affect the divorce process? In many divorces, the marital home is sold during or immediately following the divorce process. Realtors are utilized to expedite this process and are instrumental to convert real estate into much needed cash.
When one spouse desires to retain the marital home, they sometimes bargain for a buy-out price that often includes basic costs of sale such as a realtor's commission. Whether this commission will continue to be calculated at the standard of 6% remains to be seen. Statistics show that homes that sold with lower buyer's agent commissions sat on the market longer and often sold for less than the asking price.
Another common divorce scenario is that a spouse leaves the marriage, and the marital home seeking a quick replacement residence. Often, that spouse is short on liquid cash to make the purchase. If they have to kick in several thousand dollars to their realtor, it will affect what they can afford. Rather than splitting the commission with their former spouse, they may now be paying 50% of the seller's commission on the marital home and 100% of the buyer's commission for their replacement residence.
If there is confusion among the realtors in the upcoming months and years about whether they can cut side-deals or go onto websites other than the MLS to make commission arrangements [surely some will try] then selling a home within a divorce proceeding could get complicated. The lawyers representing the homeowners in the now-settled law suit have warned against this practice and say it could spawn additonal litigation.
Divorce is difficult enough. If you are facing uncertainty within the divorce process, consider contacting our law firm. We can help you with some of the major decisions that go into selling the marital home.