Monumental Lawsuit Could Alter Real Estate Industry

Recently, a jury in Missouri found the real estate industry guilty of artificially inflating housing prices by charging “traditional” commissions (5-6%), almost always paid by the sellers from the proceeds of the sale of their home. The practice of the sellers paying the commissions for both the buyers and sellers agent dates back to the 1800s and has generally been accepted that these commissions are “built-in” to the price of the house.

The plaintiff’s argument is that sellers were not given ample opportunity to negotiate buyers agent commissions, or whether they were willing to pay the buyers’ agents at all.

The reality is that commissions have always been negotiable. In Arizona, the commissions are clearly laid out in the listing contract signed by the sellers when they list their house. The rates for the total commissions paid and the amount to be paid to the buyer’s agent are purposely blank in the contract, as they are to be filled in upon agreement between the sellers and the seller’s agent. Additionally, the amount paid to the buyer’s agent is visible to the public in the MLS for all listings.

This case is being appealed, but others will likely follow in other states, which means the industry likely will see some changes in the next couple of years as to how real estate agents are compensated, and more importantly, by whom. One change we will most certainly see soon is the use of Buyer Broker Agreements. Like the listing contract which is a legal contract between the seller and the seller’s broker/agent to represent them in the sale of their home, the Buyer Broker Agreement will be a contract between the buyer and the buyer’s agent, spelling out among other things, how much the buyer’s agent will be compensated and by whom.

The risk of sellers not paying the buyers’ agents is that it could reduce the buying pool for their house as buyers are going to have to come up with additional cash to bring to closing to pay for their representation’s (agent’s) compensation. Additionally, if sellers decide to not compensate the buyer’s agents, are they going to lower their list price accordingly? If not, they are essentially artificially inflating house prices themselves. Ultimately, it is most likely that most sellers will continue to build full agent compensation into the price of their home because it takes two agents to sell a house – and selling is clearly the main objective of sellers.

It is estimated that it will take a couple of years before any of this is settled and both agents and consumers know what changes are required. The Kolb Team has built our business on best practices, honesty, and integrity, which is why we wanted to address this issue now. Our commitment to our clients is to remain focused on those principles and at the highest level. We appreciate your trust in allowing us to serve your real estate needs.

FIRPTA (Foreign Investment in Real Property Tax Act)

If you are from Canada, Mexico, or another country outside of the U.S.A. and own real estate in the U.S.A. – this is a must read!

FIRPTA is a complicated and technical act that applies to any non-U.S. citizen who disposes of property in the United States.

With travel and testing restrictions being imposed due to the COVID-19 pandemic, it’s important for you to be aware of FIRPTA. The tax applies to all properties sold for over $300,000. The tax is between 10-20% depending on circumstances.

Some exceptions do apply, and an attorney or accountant would be able to assist with answering questions and completing appropriate forms. For your information, IRS Form 8288-B is the application for either a reduced or waived amount of FIRPTA tax. Of course, if you plan to file, be aware that the title company must have proof of the necessary application paperwork having been sent to the IRS BEFORE close of escrow. They will need a copy of the 8288-B form AND a copy of delivery confirmation to the IRS (FedEx or UPS label). Therefore, it is essential that you do some pre-planning prior to listing your home for sale.

If a waiver is not requested, you will want a title company that works well with FIRPTA. Some title companies will offer to hold funds for 90 days - some will not. The advantage of using a title company that will hold the funds is that it gives you and your accountant time to calculate gains/losses and apply to the IRS to have the funds released to you if applicable. Otherwise, you will be filing a U.S. tax return for a refund of any monies owed to you.

Homes sold for less than $300,000 may have no withholding required under FIRPTA. If the sales price is $300,000 or less, the buyer signs an affidavit on or before closing which would state that they intend to use the property for personal purposes for at least 50% of the time the property is occupied for each of the first two 12 month periods immediately after closing. This would typically be relevant for a snowbird or investors who purchased the home as a rental.

FIRPTA can be a very confusing and complex area and you will want good counsel when making decisions. We partner with qualified accountants and attorneys, should the need arise. If you are a foreign investor in U.S. property and thinking of selling, let us know in advance and we will recommend some resources for you.