December 12, 2024

What Licensees Need to Know
Changes to Buyer Representation and Compensation
-Amended Advisory-

Sacramento, California – The California Department of Real Estate (DRE) reminds licensees that the landscape involving buyer representation and compensation in real estate purchase transactions is changing.

These changes are the result of a nationwide settlement of numerous class-action lawsuits alleging antitrust violations against industry associations, multiple listing services and large national brokerages. The plaintiffs in these lawsuits alleged that the defendants engaged in anti-competitive practices designed to artificially inflate homes prices and commissions.

Past Practice

Prior to the nationwide settlement, the seller and their listing agent typically would set the commission for both the seller's agent and the buyer's agent without involving the buyer or the buyer's agent when the listing agreement was signed. They would discuss what percentage of the sales price should be set aside to compensate the agents for the buyer and seller and how much of that percentage should be allocated to compensate the buyer's agent.

Post Settlement Outcomes

Following the nationwide settlement, the sellers and their listing agents no longer will determine compensation for the buyers' agent. The settlement places the buyer at the heart of the discussions. Buyers' agents will need to negotiate their compensation directly with their buyer clients.

The settlement terms are extensive, but for this consumer alert, key terms include:

• The requirement that a buyer's agent obtain a signed representation agreement with their buyer client.
• The agent must obtain the signed representation agreement prior to touring a property and the agreement must address compensation for the buyer's agent.
• Whatever compensation the buyer's agent and buyer agree upon shall serve as the maximum amount that the agent may receive for brokerage services from any source with respect to that representation.

The settlement covers the majority of the residential real estate license population but does not cover persons who are not members of associations and who do not use a multiple listing service to make an offer for their buyer client.

Coming January 2025

In addition to the nationwide settlement, the California Legislature recently passed Assembly Bill (AB) 2992, which was signed by the Governor on September 24, 2024. Effective January 1, 2025, all buyers' agents in California will be required to sign a buyer-broker representation agreement with their buyer clients as soon as practicable, but no later than the execution of the buyer's offer to purchase real property.

[Note that the timing in this legal requirement is different from the trade association practice, which requires a buyer-broker representation agreement before an agent tours a home with a buyer.] AB 2992 also will require the agreement to include the buyer's agent's compensation, the services to be rendered, when compensation is due, and the date when the agreement shall expire, provided that the expiration date shall not exceed three months from the date it was executed.

Once the buyer and buyer's agent agree to compensation terms and sign the buyer-broker representation agreement, the buyer's agent will know what services to provide and the buyer will know how much they need to pay for those services. Proceeding under a signed agreement, , the buyer has several options available to them.

• The buyer may compensate their agent out-of-pocket.
• The buyer also may request the seller to pay some or all of the compensation owed to the buyer's agent as a seller's concession of the purchase price, which the seller may accept or reject.
  • If the seller accepts, then the buyer may be relieved of some or all of their financial obligation to the extent covered by the seller's concession.
  • If the seller rejects, then the buyer remains financially responsible for paying their agent if they proceed with the acquisition.
• If the out-of-pocket costs to pay their agent remain too great and the seller and buyer have not yet reached an agreement on the sales price and/or terms, the buyer may walk away from the subject property and work with their agent to purchase another property (presumably with a seller who is willing to cover some or all of the buyer's agent's compensation as a concession). The buyer also may proceed with the purchase of the subject property without representation or approach the seller's agent about possible dual agency representation provided the buyer-broker representation agreement permits the buyer to do either of these activities without being financially obligated to pay their agent. In other words, the buyer will remain financially responsible for compensating their agent unless the signed buyer-broker representation agreement contains an “exit” clause or the buyer's broker relieves the buyer of their obligation to pay.

While DRE is not charged with enforcing the terms of the class action lawsuit settlement, DRE will enforce compliance with the requirements added by AB 2992 and the Real Estate Law related to conduct, such as performance of fiduciary duties and appropriate representations.

Practices Licensees Should Avoid

Given the new landscape in buyer representation and compensation, licensees should avoid the following practices in their representation of buyers and sellers:

• Failing to Provide a Written Agreement: Licensees must ensure that any agreements regarding compensation are in writing. Any modifications to the compensation agreement must be in writing and agreed upon by both parties. Licensees must avoid making verbal changes or allowing terms to be altered informally through emails or texts.
• Not Clarifying Compensation Expectations: If the buyer's agent fails to clearly explain how they will be compensated, this could lead to misunderstandings or legal disputes. Clear communication is critical. Licensees should clarify that buyers are now more likely responsible for negotiating and paying their agent's commission directly, unless other terms are negotiated by the seller and buyer.
• Misrepresenting Commission Terms: Licensees should not claim that there is a “standard” rate. Commissions are fully negotiable under California law, and it is the licensee's duty to clearly explain this to the buyer, ensuring transparency in negotiations.
• Not Disclosing Dual Agency: If licensees are representing both the seller and buyer, they must disclose this relationship to both parties in writing. A licensee has a fiduciary duty to their clients, meaning they are legally obligated to act in their client's best interest.
• Pressuring the Buyer: Licensees should avoid pressuring buyers into signing contracts or agreements without explaining the practice application of the documents and giving them adequate time to review and understand the terms.
• Requesting Advance Fees: If a licensee chooses to piecemeal real estate services (i.e., driving and showing a property, writing an offer, ordering inspections, reviewing disclosures, etc.) and charge for those services individually, these fees may be acceptable if the fee is collected after the service has been rendered. However, if the licensee's affiliated broker wishes to collect advance fees for services, the broker will need to submit an advance fee agreement to DRE for review and receive a letter of “no objection” before demanding or receiving any advance fees. For more information about advance fee agreements, see following link: adv fees essential elements (ca.gov) .

Licensees are encouraged to thoroughly vet new practices with their affiliated brokers and legal counsel for compliance with applicable laws.

xxx

The Department of Real Estate is the regulatory agency that enforces the Real Estate Law, Subdivided Lands Act, and Vacation Ownership and Timeshare Act. DRE oversees the licensure of approximately 434,000 licensees. The Department's mission is to safeguard and promote the public interests in real estate matters through licensure, regulation, education, and enforcement. Consumer protection is its highest priority. For more information, visit: www.dre.ca.gov.