In recent years, the real estate industry has undergone dramatic shifts in how buyer’s agents are compensated—changes that impact buyers, sellers, and agents alike. At the Law Office of Jack Kakoian, we want our clients and colleagues to clearly understand the new legal requirements and best practices stemming from a recent nationwide settlement and California’s Assembly Bill (AB) 2992. These developments highlight the importance of having transparent, written agreements that define compensation terms and the nature of the agent-client relationship.
The Past Practice: Seller-Set Commissions
Before the nationwide settlement, the seller and their listing agent would typically determine the total commission to be paid out from the home’s selling price. This included deciding how much of that commission would be allocated to the buyer’s agent. In other words, the buyer and the buyer’s agent were not actively involved in setting compensation terms. The entire commission structure was essentially fixed by the time a property was listed.
Post-Settlement Outcomes: Buyer-Centric Negotiations
The recent nationwide settlement has reshaped this process. Now, buyers and their agents must negotiate compensation directly, placing the buyer at the center of the conversation rather than leaving it solely to the seller and listing agent.
Key settlement terms mandate that:
The buyer’s agent must have a signed representation agreement with their buyer-client, obtained before touring a property.
The agreement must detail the compensation for the buyer’s agent, ensuring that the agreed-upon figure represents the maximum compensation the agent can receive from any source for that particular representation.
These requirements apply to most residential real estate licensees who are members of trade associations and use multiple listing services (MLS). They may not apply to individuals who are not members of such associations or do not use an MLS.
Looking Ahead: AB 2992’s Impact Starting January 2025
Beginning January 1, 2025, California’s AB 2992 will introduce additional obligations for buyer’s agents:
Mandatory Buyer-Broker Agreements:
Every buyer’s agent must have a signed buyer-broker representation agreement with their client as soon as practicable—and at the latest, by the time the buyer makes an offer to purchase real property.
Content Requirements: This agreement must specify the buyer’s agent’s compensation, the scope of services, when compensation is due, and an expiration date (not to exceed three months from the date of execution).
Note that the timing under AB 2992 differs slightly from the trade association settlement terms, which require the agreement before touring homes. Nonetheless, both standards emphasize transparent and timely written agreements.
How Compensation Negotiations May Proceed
Once the buyer and buyer’s agent agree to compensation terms and sign a buyer-broker agreement, the client knows precisely what they are paying for and under what conditions. Compensation options include:
Buyer Payment: The buyer pays their agent out-of-pocket.
Seller Concession: The buyer may request that the seller cover some or all of the buyer’s agent’s compensation as a seller concession. The seller can accept, reject, or negotiate these terms. If accepted, it can reduce the buyer’s financial burden.
Negotiating Better Terms: If the seller rejects the concession and the costs are too high, the buyer may choose to walk away and look for another property with an agent-seller combination that is more favorable.
No Representation or Dual Agency: If the buyer decides that working with an agent is not financially feasible, they may consider proceeding without representation or exploring a dual agency arrangement with the seller’s agent—if allowed by their existing buyer-broker agreement. Any changes, including ending the obligation to compensate their agent, must be clearly addressed in the agreement.
Enforcement and Compliance
While the California Department of Real Estate (DRE) does not enforce the settlement terms themselves, it will enforce the new requirements of AB 2992 and existing real estate laws. Agents and brokers must adhere to their fiduciary duties, maintain clear and honest communication, and follow all applicable rules governing representation and compensation.
Practices Licensees Should Avoid
With the new landscape comes potential pitfalls. To stay compliant and ethical, licensees should avoid the following:
Failing to Provide a Written Agreement: Any compensation arrangements must be in writing. Any modifications must be properly documented. Verbal agreements or informal email/text exchanges are not sufficient.
Not Clarifying Compensation Expectations: Agents should clearly explain how they are compensated, ensuring no misunderstandings occur. Buyers must understand they may be responsible for paying their agent directly unless otherwise negotiated.
Misrepresenting Commission Terms: There is no “standard” commission rate in California. All commissions are negotiable, and agents must be transparent about this fact.
Not Disclosing Dual Agency: If an agent represents both the buyer and the seller, this must be disclosed in writing. Agents owe a fiduciary duty to their clients and must place their clients’ interests first.
Pressuring the Buyer: Do not rush a client into signing agreements without proper explanation and time for consideration. Clients should fully understand the terms before committing.
Requesting Advance Fees Improperly: If charging advance fees for services, brokers must first obtain a letter of “no objection” from the DRE. Fees for individual services should typically be charged after the service is rendered.
Conclusion
The evolving rules around buyer representation and compensation underscore the importance of clarity, transparency, and proper documentation. As of January 2025, California’s AB 2992 will transform how buyer’s agents and buyers interact, aligning closely with the nationwide settlement’s emphasis on direct negotiation and written agreements.
At the Law Office of Jack Kakoian, we are committed to helping our clients navigate these new requirements. Whether you are a buyer, seller, or licensee, understanding your rights and responsibilities ensures a smoother, more transparent real estate transaction experience. If you have questions about how these changes may affect you, please reach out to our office for guidance and personalized advice.