The NAR Settlement and Using a VA Loan to Buy a Home

The recent settlement by the National Association of Realtors (NAR) has introduced significant changes to the real estate industry, particularly concerning mandatory Buyer Broker Representation & Compensation Contracts and Buyer Broker commissions. This settlement has implications for all homebuyers, including veterans using VA Loan benefits. Here's a breakdown of these changes and their impact:

1. Buyer Broker Compensation Agreements

The recent National Association of Realtors (NAR) requirement mandating Buyer Representation Contracts for Buyers who use real estate agents (“Buyer Brokers”) aims to enhance transparency and clarity in real estate transactions, ensuring that both Buyers and Buyer Brokers have a clear understanding of their relationship and the terms of service. Buyer Representation Contracts formalize the agreement between a Buyer and their Buyer Broker, outlining the agent's duties, compensation, and the duration of the agreement. This shift not only protects the interests of both parties but also fosters a more professional and accountable real estate environment.

For Buyers, these contracts provide a clear framework of what to expect from their Broker, including the scope of services and any associated costs. It empowers Buyers to make informed decisions and ensures that their Broker is fully committed to representing their best interests. On the Broker's side, these contracts offer assurance of compensation for their efforts, as the compensation terms are explicitly agreed upon up-front. This requirement is particularly beneficial in a market where Buyer Broker commissions are becoming more transparent, as it sets clear expectations and reduces potential conflicts. Overall, the introduction of Buyer Representation Contracts as a result of the NAR settlement marks a significant step towards a more transparent and equitable real estate process. READ MORE FROM NAR HERE: “WHY AM I BEING ASKED TO SIGN A WRITTEN BUYER AGREEMENT?”

2. Paying Buyer Broker Commissions

In addition to requiring the Buyer Representation Contract, the NAR settlement has also made clear that there are multiple ways that Buyer Brokers can be compensated. The four basic ways are as follows:

Seller-Paid Commissions. Sellers may choose to offer compensation to Buyer Brokers. This is typically set forth in the Listing Agreement with the Listing Broker. In this situation, the Buyer Broker commissions are wrapped into any loan used for purchase, as part of the total purchase price.

Listing-Brokerage Paid Commissions. In some cases, the Seller will pay the Listing Broker a total commission out of which both the Listing Broker and Buyer Broker will be paid. This was the past practice, prior to the NAR Settlement, and this also, allowed commissions to be part of the Buyer’s loan. This also would be part of the Listing Agreement between the Seller and the Listing Broker.

Negotiated Commissions. The Sellers do not specify any Buyer Broker commission in the listing agreement, but may be open to negotiation of this commission, in conjunction with the Purchase Contract for the sale of the property. In this case, the Buyer would propose the amount of Buyer Broker commission to be paid by the Seller in the offer submitted and this would be negotiated along with the purchase price for the property.

Buyer-Paid Commissions. Buyers now agree to pay their Buyer Brokers, as specified in the Buyer Representation Agreement. The amount set forth therein will be reduced or eliminated by any compensation offered by the Seller or the Listing Brokerage, or negotiated as part of the Purchase Contract. Buyers may or may not have out of pocket closing costs for Buyer Broker commission added to their settlement statement, depending upon the amount, if any, offered by the Seller/Listing Broker. If Buyer Broker compensation is added to the Buyer settlement statement, it may not be included in the loan balance and the Buyer would have to bring in the cash to pay this amount.

3. Impact on Veteran Buyers Using VA Loans

Historically, the VA did not allow veterans to pay any Buyer Broker commission, categorizing this as a non-allowable cost. This restriction posed challenges for veterans, in light of the NAR Settlement, as they would be precluded from purchasing any properties where the Sellers or the Listing Broker did not offer the full Buyer Broker compensation.

4. VA's Response: Circular 26-24-14

In response to the NAR settlement and the problem created for veterans wishing to use their VA Loan benefit, the VA issued Circular 26-24-14, temporarily allowing veterans to pay Buyer Broker fees directly. This change provides veterans with more flexibility in handling real estate transactions as they could pay out-of-pocket this formerly “non-allowable” cost of purchasing a home. READ MORE FROM NAR HERE: “WHAT VETERANS NEED TO KNOW ABOUT BUYING A HOME.”

5. Remaining Challenges for VA Buyers

Despite the VA's policy adjustment, challenges remain for veterans in situations where Sellers do not offer Buyer Broker commission. The VA loan benefit, traditionally offering a zero down payment option, becomes less meaningful and out of reach to many, if veterans must now have to bring in extra cash to cover the Buyer Broker commission.

At this time, Buyer Broker commission may not be added to the loan balance of any type of loan (including VA loans). The result is that if veterans lack the cash to pay their Buyer Broker, their purchasing options may be limited to homes where Sellers provide such compensation. This is particularly hard in a market, like the current one, with a lack of inventory. In other situations, Buyers may opt to go unrepresented, exposing them to many potential risks and pitfalls in the home-buying process. We believe Buyers deserve to be represented in their purchase by knowledgable and experienced real estate professionals, such as the military realtors in the Compass Military Division, who know the ins and outs of the Purchase Contract, as well as pros and cons of neighborhoods, and many other details critical to purchasing a home. Historically, this is how the past practice of Listing Broker paid Buyer Broker commissions evolved. It resulted from many Buyers having very bad, very costly experiences purchasing real estate with no representation.

Conclusion

The NAR settlement and VA Circular 26-24-14 have reshaped the landscape for veteran homebuyers. While these changes offer more flexibility and transparency, they also introduce new challenges, particularly for those military service members or veterans without the cash to cover broker fees. Veterans should carefully consider their options and work with knowledgeable real estate professionals, such as members of the Compass Military Division, to navigate these complexities effectively.