The real estate market in California is undergoing a significant transformation, primarily due to a 2024 lawsuit that has altered the way commissions are handled. In March, the National Association of Realtors changed its rules about real estate commissions, taking effect in August of this year.
Previously, the overall listing commission included both listing agent compensation as well as buyer agent compensation and the amount paid to buyer agents was transparent and available for the general public to see online. However, critics believed that this reduced competition and increased home prices. The new rules say that listings can’t specify how much buyers’ agents are paid, and buyers’ agents need written agreements with clients outlining services and costs.
In our view, this change now leads to a more complex and less transparent market environment with unintended yet inevitable consequences. We thought you would want to hear our perspective on what this means for you and your real estate portfolio.
The Traditional Commission Model
In truth, real estate commissions in California have always been negotiable. Sellers typically negotiate with the listing agent to determine the total commission, which is then divided between the listing agent and the buyer’s agent. The standard commission rate has been 5%, with 2.5% going to each agent. There have been instances where a 6% commission was offered as an incentive to attract buyers, although this practice has become less common in recent years in Silicon valley due to our higher sales prices.
The Lawsuit and Its Implications
The recent lawsuit alleged price fixing in the real estate industry. It argued that publicizing buyer agent commissions created an environment where agents felt compelled to adhere to a standard rate, thereby limiting competition. As a result, starting on August 17th, real estate agents in California will no longer be allowed to publicize buyer agent commissions. While appearing small, this change has significant implications for both buyers and sellers.
Impact on Buyers
Buyer agents will now need to inquire about buyer agent commissions directly with the listing agent individually; which could vary from agent to agent. This lack of transparency could lead to confusion and potentially create opportunities for manipulation. For instance, a listing agent might offer different commission rates to different buyer agents, depending on personal preferences or relationships.
Buyers will also be required to sign a buyer broker agreement with an agent before making an offer on a property. The agreement will specify the minimum commission rate the buyer is obligated to pay the agent, regardless of the commission offered by the seller (which could be higher or lower). This could create confusion and conflict for buyers when evaluating value comparisons if sellers are offering different amounts of compensation.
Impact on Sellers
Sellers might initially perceive the changes as beneficial, as they could potentially negotiate lower commission rates with listing agents. However, this lack of transparency could also lead to a less efficient market. With buyer agent commissions no longer publicized, it might be more difficult for sellers to attract potential buyers, as buyer agents might be less motivated to show properties with lower commission rates.
Additionally, the changes could make it more challenging for sellers to accurately assess the value of their property. Traditionally, property valuations have been based on sales data from the Multiple Listing Service (MLS), which included information about buyer agent commissions. With this information no longer available, it might be harder to determine comparable sales data, leading to uncertainty in fair market value.
The Role of a Competent Realtor
The changes to the real estate commission model in California represent a significant shift in the industry. While the long-term effects of these changes remain to be seen, it is clear that the market is becoming more complex and less transparent.
In this evolving landscape, the role of a competent and trusted Realtor becomes increasingly crucial. An experienced Realtor can help buyers and sellers navigate the complexities of the new commission rules, ensuring transparency and fairness in transactions. And choosing an agent who you’ve worked with before, or was referred to you by someone who has worked with them, can help ensure that you are hiring someone you can trust to advocate for your best interests.
Of course, we hope RealSmart is that agent to you, and that you feel comfortable passing our name along to any friends and family in need of a referral. If you have any questions about these changes and how they may affect your future real estate endeavors, don’t hesitate to call or text.
Bryan Jacobs
Principal Partner, RealSmart Properties
DRE#01129660
650-642-8915
