December 12, 2024

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

Sacramento, California – The Department of Real Estate (DRE) is alerting consumers that the rules around buyer representation and agent compensation in real estate purchase transactions is changing.

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

Past Practice

Before the 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

As a result of the settlement, the sellers and their listing agents will no longer 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’s clients.

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

• The requirement that a buyer’s agent have a signed representation agreement with their buyer client.
• The agent must have 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 people 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 Governor signed Assembly Bill (AB) 2992 on September 24, 2024, which puts in effect on January 1, 2025, the requirement that all buyers’ agents in California must 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.

The timing in this 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 will also 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 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 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.

Red Flags for Consumers:

1. Lack of a Written Agreement: If an agent does not provide a clear written agreement outlining their compensation and representation, this is a major red flag. Consumers should insist on having all terms, especially regarding fees, clearly spelled out in writing.
2. Unexplained or Hidden Fees: If the compensation terms are vague or there are unexpected fees that were not previously discussed, buyers should seek clarification and consider negotiating or consulting another agent.
3. Pressure to Sign Quickly: If an agent pressures a buyer to sign an agreement without explaining the documents and giving them enough time to review or understand it fully, this could indicate an issue. Buyers should take the time to carefully read all documents and ask questions about anything unclear.
4. Claims of Standard Rates: Any agent claiming that there is a “standard” commission rate is mispresenting the law. Commissions are fully negotiable under California law, and buyers should not feel pressured to accept a certain percentage without discussion.
5. Verbal Promises Not in Writing: If an agent makes promises about fees or services that are not reflected in the written agreement, this is a red flag. All agreements and modifications must be in writing.
6. Non-Disclosure of Dual Agency (Representation): If an agent represents both the buyer and seller then that representation must be disclosed and agreeable to both parties. Real estate agents have a fiduciary duty to their clients, meaning they are legally obligated to act in their client’s best interest. An agent’s undisclosed representation could affect their ability to represent the seller and buyer fairly. Transparency is key in any real estate transaction.
7. Unlicensed Individuals: Consumers should always verify that the agent they are working with is properly licensed by checking the status of their license with the DRE at Public License Lookup - DRE (ca.gov).

Consumers are encouraged to remain attentive and engaged throughout the transaction process. If you believe that your interests were not properly represented or if there was any unfair or deceptive practice in your real estate transaction, please contact the DRE www.dre.ca.gov.

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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.