Watch Out for These Red Flags in a Realtor Contract

Buying or selling a house has always been a little crazy. The moment you stroll into a Realtor’s office to inquire about a house or contact a local agent to sell your home, you embark on a roller-coaster ride of emotional and financial pressures. Checks are written. Houses are cleaned. Cookies are baked.

But traditionally you’ve been able to engage an agent to sell your house without a contract, and if you were buying a house you were spared having to come up with your real estate agent’s commission—that has almost always been paid by the seller, who coughed up about 6% of the sale price to their agent, who then (usually) split it with the buyer’s agent. Sure, in a sense the buyer paid that commission because the seller probably padded their home’s price to compensate for the cost, but the illusion was there.

That all changed recently. In March, the National Association of Realtors (NAR) settled some lawsuits, and as part of that settlement agreed to blow up the whole system. As a result there are two big changes hitting the real estate market starting this month: Buyers will have to start paying their agents directly, and everyone is going to have to sign a contract—even if you just want to look at a house. And until things settle down and become standardized, those contracts are a bit of the Wild West—just about anything can be in them. Here’s what you should look out for if you’re buying or selling a house soon.

Keeping the splits

The biggest change hitting the market is in how agent commissions are handled. Instead of the seller paying the whole commission and their agent splitting it with the buyer’s agent, both agents have to be paid directly by their clients—and the seller’s agent is now prohibited from advertising the split on the Multiple Listing Service (MLS) (known as an “offer of compensation”), which was a common practice to attract buyer’s agents.

The idea here is to lower overall costs—as a seller, you no longer have to build a 6% hit into your calculations. If commissions stay at the traditional level, you’d only need to come up with 3%, which could save you a lot of money. And if you negotiate a lower commission (which you absolutely can), you could save even more.

That is, unless the contract you sign with your agent keeps the old system in place by calling it something else. Some draft contracts that agents have circulated maintain the 6% commission split with the buyer’s agent by calling the commission a “bonus.” The mechanism of the seller paying a commission that is then split with the buyer’s agent remains, just in different language. That’s fine if that’s what you want—but don’t just blindly agree to pay more than you need to.

Penalties

A big thing to look for in any contract a real estate agent hands you is penalties, especially for withdrawing from a sale. Some draft contracts in the wake of this settlement have built in heavy penalties if a buyer backs out of a sale after making an offer—something you’re traditionally able to do, within reason. Sometimes these penalties are worded to award the buyer’s agent the full commission they would have earned, which could be a substantial sum you have to pay even though you’re not actually buying a house. You should never agree to that.

You should also watch for penalties attached to terminating your agreement with your real estate agent. If you’ve worked with an agent for a while and they’ve failed to find houses for you, or deals have fallen apart and you’re unhappy with their work, you should be free to terminate the agreement at any time, without paying any sort of financial penalty.

Fee clarity

Part of the settlement the NAR agreed to involves making it very clear a) what your real estate agent will do (what services are provided) and b) what you will pay for these services. This should be clear and transparent in the contract, whether they’re working for an overall commission as a percentage of the sale price or if they’re charging you an hourly or flat fee for specific services.

There should also be language that specifies any costs not listed in the contract will come out of the agent’s commission and not be an add-on fee that you have to pay.

Exclusivity

As a home buyer, you retain the right to work with multiple agents if you want—unless you sign an exclusive agreement. Exclusivity clauses have advantages—the process is more streamlined, and the agent may be more focused and dedicated since they know you won’t suddenly announce you’ve found a home with someone else. But it should be a conscious choice based on your needs, so make sure there is no exclusivity language you’re unaware of before you sign.

The new rules also require that you sign a Touring Agreement even if all you want to do is view a home. This is a formal agreement with the agent, but it’s limited to that one property as opposed to hiring the agent to find a property. You should review it carefully to make sure you’re not committing to anything more than that, and that there’s no exclusivity that locks you in with that agent after you’ve made a decision on that particular house.

Arbitration

Finally, like any contractual agreement, be aware of any clauses that dictate how disagreements are handled. Binding arbitration clauses can prevent you from filing a lawsuit, and may even lock you into using a specific arbitration service instead of allowing you some choice in the matter. Arbitration isn’t necessarily a terrible decision, but don’t agree to it unless you’ve decided that the lower costs and faster results are worth some of the disadvantages, including the possibility that your case could be decided by a low-quality arbitrator, and the fact that you often have zero recourse if the decision goes against you. This concern isn't specific to the real estate world, of course, but it’s always worth keeping an eye on.

The new real estate rules are still being figured out, and things are a bit crazy out there. Read those contracts carefully, and be ready to insist on changes if you don’t like what you see. One real estate rule hasn’t changed: Everything is negotiable.