Verbal Agreements with Realtors Are Out, Signed Contracts Are In

After a landmark NAR settlement, prospective homebuyers need contracts that spell out how much their agent will be paid and what services provided.

A seismic shift in the rules governing how some real estate agents get paid in Hawai’i and across the U.S. shook the industry in August, and if you’re buying or selling a home this fall, you probably have questions.

You’re not the only one.

In Hawai‘i, the Honolulu Board of Realtors and Realtors associations on the Neighbor Islands have been educating their members since a landmark settlement was reached this year by the National Association of Realtors with mainland plaintiffs who sued over the way buyers’ real estate agents are paid.

As part of the settlement, NAR agreed to scuttle the compensation model that had been in place for more than 30 years by which sellers paid real estate commissions to their listing agents, who then shared the commissions with the agents who represented the buyers. Those commissions generally cost sellers 5% to 6% of the sale price.

Under the seller-paid commission model, agents most of the time had verbal agreements to work with buyers, although in rare situations, some buyers would seek help from more than one agent. Commissions offered to buyers’ agents were also posted in a multiple listing service.

Not anymore. As of Aug. 17, compensation must be removed from any MLS in the U.S. and buyers’ agents must discuss their compensation before working with a buyer. The NAR says a prospective homebuyer must sign a written agreement spelling out terms negotiated with the agent, including the services to be provided, how much the agent will be compensated and how, before “touring a home.”

The Honolulu Board of Realtors got a few days head start and implemented the rules on Aug. 12, says Suzanne Young, the board’s executive director. She says that buyers should be fully aware of what they’re getting into when they’re working with an agent.

Doesn’t Apply to Open Houses

What if you’re just browsing at a Sunday open house and you talk to the seller’s agent? The NAR says there’s no need for a buyer’s agreement because it doesn’t fit the definition of working with an agent.

“In that scenario, an agreement is not required because the participant is performing work for the seller and not the buyer,” the NAR says in No. 61 of its list of 119 frequently asked questions.

Commissions were negotiated before the NAR settlement and they will continue to be negotiated going forward, says Chuck Garrett, who was the 2023 president of HiCentral.com, the Honolulu Board of Realtors’ MLS. Garrett is also broker in charge at statewide firm Coldwell Banker Island Properties.

A lot of the questions agents have are about the actual contract between homebuyers and their real estate agents, says Garrett. “There’s a lot of changes in our documents … and we’ll get there in understanding how to fill out the paperwork properly.”

What’s changed is the process. Now the buyer signs an agreement with their agent spelling out how the agent will be paid. Instead of a seller automatically offering compensation to the buyer’s agent and posting it in the MLS listing, several scenarios could happen:

• The buyer could pay a fixed fee commission directly to the agent.
• The listing agent or the seller could offer buyer’s agent compensation, just not in the MLS, and the specific amount of compensation must be approved by the seller in writing.
• The buyer could ask in an offer for the seller or seller’s agent to pay a portion of the listing agent’s commission to the buyer’s agent.
• The seller could offer concessions for closing costs, money the buyer could use to pay the commission.

“I think some of what we’re seeing is agents being overly cautious, this fear of not being in compliance,” says Young.

Training for Agents

Garrett says he and Cathy Matthews, the current HiCentral president, have talked to hundreds of brokerage leaders, who are now “up to speed.”

The two are also working on a mandatory training program for every member of the MLS “that Cathy and I are going to personally provide.”

Matthews says, “I’m sure agents always discuss what it is that they do and what they bring to the table when they represent a buyer, but I think this has afforded us an opportunity to really accentuate what we do and explain it more fully. And I think that’s good for everybody.”

Matthews, who is also principal broker at Callahan Realty, noted that under the prior compensation model, in which home sellers paid the commission that was split between a listing agent and a buyer’s agent, the cost to the buyer was included in the negotiated purchase price of the home, which allowed them to include that cost in their mortgage or other financing.

“I personally haven’t seen any sellers that have not understood that buyers may need to wrap their commission into financing and that they just don’t have that extra cash to pay [the commission],” she says. “I have not seen a reluctant seller” in that scenario.

Few DIY Homebuyers

There are also few buyers in Hawai‘i willing to take the risk of representing themselves when buying a home. Buyers are not required to use an agent, but those who opt to go solo account for less than 10% of transactions, Young says.

“The Hawai‘i real estate market is a savvy group that understands the asset they are working with, and asking us to help them with, is a larger portion of their income (than other markets), higher than the national median,” says Garrett.

Matthews says one of the good things to come out of the changes is that listing agents and buyers’ agents are communicating more during the course of a transaction, and Garrett says that makes for a better contract and a smoother sale.

“There are so many nuances to a real estate sale to get to the finish line that I think these changes are going to be at the front end in that initial conversation,” Young says. Then after that, “it’s not even going to be discussed. It’s just going to be letting the Realtors do the work that they do with their clients.”

Meanwhile, the NAR’s $418 million settlement reached March 15 is set to receive final approval from a court in Missouri on Nov. 26. Young also noted that consumers can file a claim to receive a share of the class-action settlement by going to realestatecommissionlitigation.com.

With the new rules, Young says consumers should be encouraged to “ask questions of their agents.”

“They should feel 100% comfortable in what they’re being charged, what services they’re getting, and if they have any questions, or if they feel that there’s anything that doesn’t seem right, they should absolutely reach out,” she says. “When you’re dealing with the largest financial transaction in your life, you don’t want people to feel like they can’t ask questions. They should be encouraged to ask and we’re here to help guide them.”