The Brave New World of Real Estate in California…

As of August 17, 2024, there is a new practice for the sale of Real Estate in California.  This sounds more ominous than it really is.  As the result of the settlement of a class action lawsuit against the National Association of Realtors (NAR) and its subsidiaries comes a change in the way real estate agents are compensated. The new practice separates the listing agent’s commission from the buyer agent’s commission.  Previously  the listing agent negotiated the commission that will be paid to both sides of the transaction up front, before the property went to market. Now the buyer’s agent commission will be negotiated with each agent even before a home is shown; it will be the buyer and their agent that are most impacted. 

Previously the listing agent posted the amount that could be earned by the buyer’s agent in the Multiple Listing Service (MLS), now it’s removed from the MLS so a property with a lower buyer’s agent commission will not be purposefully overlooked.  On the other side of this is a requirement that to show a home to a prospective buyer(s)  you need to have a written agreement in place that gives a clear understanding of the expectation of compensation for showing either specific home(s) or a formal defined search criteria and whether the agreement is exclusive or not.  This is very different but all in all a good thing.  Even those buyers who have previously taken a casual approach to looking for homes are impacted as there will be a requirement to sign documents to establish what kind of expectation the buyer and agent holding the open house have of each other with regards to that home and any compensation that could be earned from a successful purchase of the home.  

With the new rules comes the extra steps needed to try to get the necessary information to assist the buyer in writing a solid, competitive offer. This may be troublesome because as you know some listing agents are not always Johnny-on-the-spot to return calls for information.  What is going to happen in the short term is, while the adjustment to the new practice is made, there will be lots of information not readily available.  Offers will be written without enough information and some buyers may miss an opportunity to purchase.  That is the unfortunate part.  The good part is that the buyer will know, before they start their home search, the cost of the services of the agent they chose to work with, at the home price they want to spend.   Sad that the expense is now on the buyer’s side but good that they can negotiate that cost.  They are in control and can decide if the home they like is still  right for them if the seller is not willing to assist with the buyer’s agent obligation via a concession that is similar to getting a credit for repairs.  

In a perfect world all sellers would disclose the level of concession they are comfortable with upfront but the problem that we face now is the lack of advertised concessions, and how to get the information.  The MLS was great because it functioned as a guarantee of cooperation to a successful offer and close via the MLS subscriber rules.  Now we are in a Wild West situation  where there is no guarantee until an offer is submitted and accepted with the concessions stipulated in the contract and all negotiations have been completed.  Another issue resulting from the change is buyers whose funds are exhausted after paying the traditional closing costs and can’t afford to pay their obligation to their agent.  If the seller does not agree to any concession, the buyer will not be able to buy the home or will be forced to make drastic changes to their loan product and down payment to attempt to bridge the gap.  

Personally, I expect this to slow down transactions because there are a lot of processes that begin once the contract is accepted.  Inspections and requests for repairs along with appraisals and appraisal gaps often require secondary negotiations beyond the original contract.  These secondary negotiations affect the bottom line for both buyer and seller and may impact the buyer’s agent concessions previously agreed to.  There is no simple way to get from point A to point B without everyone chipping in and that includes the listing agents and the lenders.  

Time will tell if the new practices will help or hurt the consumer but, like all changes, we are in the infancy. The process may need even more changes when the new practice is tested and the Wild West needs to be tamed again.  For now consumers should rely on their Real Estate professionals to be professionals to look out for them in these uncharted waters.  It is more important now than ever to work with a Realtor because the NAR Code of Ethics will assist in times where the law does not go far enough.  Time will tell if the new practices will help or hurt the consumer but, like all changes, we are in the infancy. The process may need even more changes when the new practice is tested and the Wild West needs to be tamed again.  For now consumers should rely on their Real Estate professionals to be professionals to look out for them in these uncharted waters.  It is more important now than ever to work with a Realtor because the NAR Code of Ethics will assist in times where the law does not go far enough.