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NEW BUYER BROKER COMPENSATION AGREEMENTS CREATE TRAPS FOR THE UNWARY

Settlement Agent Best Practices to Avoid Commission Blunders

The recent National Association of Realtors® settlement (NAR Settlement, August 2024) resulted in significant changes to the way buyer brokers’ commissions are documented and paid at closing. All title agents should consider the following information to ensure buyer broker commission payments are handled correctly. 

Look for Two Statements in Every Transaction Each buy-sell transaction should now include two (2) commission statements (one from the listing broker and one from the buyer’s broker) in the documents submitted to the title company prior to closing when submitting figures. 

Understand the Documentation There are multiple new documents that articulate how commissions are paid. An attorney should obtain copies of all agreements at the start of the process to confirm that the parties are in full agreement on all terms regarding the payment of buyer broker commissions. These are the new documents:

• Buyer Compensation Agreement: This form is signed by the buyer and buyer’s broker when the buyer hires the broker. The agreement acknowledges the amount the buyer will pay the buyer’s broker in the event a seller is not offering to pay the buyer’s broker all or part of the commission.   
• Closing Cost Credit Clauses in the Contract: Many sellers are offering a closing cost credit during contract negotiations to cover the buyer’s broker commission. The credit is given to the buyer at closing and the buyer’s broker’s commission is a buy-side closing cost. 
• Commission Addendum Attached to the Contract: Most Realtor® boards and a few brokerages have drafted their own contract addenda that spell out the agreement between parties and brokers on how the commission will be paid. Most indicate that the seller is paying the buyer’s broker’s commission, however the Buyer Compensation Agreement signed by the buyer and their broker should be cross-referenced to confirm whether the buyer is expected to pay out-of-pocket for any shortfall between the amount the buyer agreed to pay pursuant to the Buyer Compensation Agreement and the amount seller is paying pursuant to the Commission Addendum. When these agreements are used, all or most of the buyer’s broker’s commission is a seller-side closing cost.  
• Commission Statements: Prior to the NAR settlement, only one commission statement was historically provided to the title company at closing. Post-NAR settlement, all closings should include two commission statements, one from each broker.  

Careful Lawyering Will Prevent These Trending Issues from Getting in the Way of a Smooth Transaction: Obtain two commission statements to prevent the following issues:

• Lender Approval: If a buyer is paying any part of the buyer’s broker commission and the buyer is obtaining financing, the lender must be made aware of the buyer-paid commission amount as it impacts the lender’s figures, which could pose problems if the underwriter is not provided documentation of the commission agreements. To avoid potential issues when figures are submitted for closing, check with the lender at the start of the transaction to confirm what commission documentation they may need to provide their underwriter. This is particularly important when buyers are paying all or part of their broker’s commission as an out-of-pocket closing cost, as lenders need to include buyer-paid commission when verifying that buyers have the minimum cash reserves for loan approval.  
• Conflicting Expectations of Brokers: There is an emerging trend of brokers neglecting to include the $495 MLS fee in the commission agreements. Check with both brokers in advance of closing to confirm that the agreements fully address the fees paid to and by brokers to avoid commission statements that may conflict with the actual commission agreement. 
• Closing Costs Credits – What They Cover: Often times the parties agree to a closing cost credit that is intended to cover the buyer’s actual closing costs, rather than commissions specifically. Do not assume a closing cost credit is intended to cover a buyer’s broker commission. Instead, obtain the commission payment agreement to confirm whether the credit is intended to cover the commission payments. 
• Closing Cost Credits that Do Not Cover the Entire Amount of Commission Stipulated in the Buyer Broker Compensation Agreement: If a closing cost credit is being given by the seller to the buyer to cover the buyer’s broker commission as a buy-side closing cost, please confirm that the credit covers all the commission due the buyer’s broker pursuant to the Buyer Compensation Agreement.
• For example: If the closing cost credit provided by the seller is 2.5% of the purchase price and the Buyer Compensation Agreement signed between the buyers and their broker states the buyers’ broker is to be paid 3%, you must clarify whether the additional .5% is coming out of the buyer’s pocket at closing or being waived by the broker. 

While the new structure was meant to promote transparency in the payment of commissions, it has created considerable confusion in the early days of its implementation. Careful lawyering will prevent these issues from getting in the way of a smooth transaction. 

We welcome your questions and feedback. Contact us or reply to this email. As always, we appreciate your business and ongoing support.

Kelli A. Fogarty
SVP - Counsel to the President

[Last update: 12-3-2024]