Change to common real estate form could mean even more money down for CA homebuyers

California Association of Realtors President tells ABC7 News she doesn't expect the payment model to change

Julian Glover Image
Thursday, March 16, 2023
Change to real estate form could make it more expensive to buy in CA
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California homebuyers may be required to bring even more cash to the closing table thanks to a change in a commonly used real estate form.

SAN FRANCISCO (KGO) -- The California Association of Realtors routinely updates the forms used by realtors to secure common real estate transactions like buying and selling a home.

However, a change made to the form that specifies how a homebuyer's real estate agent is compensated is creating confusion among some in the real estate industry. The change has some agents unsure if the homebuyer would be on the hook to pay their agent instead of the seller -- that could mean tens of thousands more dollars to bring to the closing table.

There also concern about if that change will push Black and Latinx buyers out of the market-at a time when the gap between white and Black homeownership rate is wider than it was 50 years ago.

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In the Bay Area, home prices are declining slightly in 2023 with the average home price still $1.1 million.

If you're looking to buy a home at that value the minimum amount of money out of pocket would be 3.5% for a down payment on an FHA loan and an additional 3% for closing costs: a staggering: $71,500.

But a new change by the California Association of Realtors to a commonly used real estate form has agents concerned if buyers in the market would be required to put down even more money to the tune of an additional 3%.

"It can be devastating, in my opinion" said Rico Rivera, president of the National Hispanic Organization of Real Estate Associates (NHORA).

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Rivera is concerned about the new change to the piece of paperwork called the Seller Payment for the Buyer's Broker agreement which determines how a homebuyer's agent is compensated.

The change to the form could signal that the homebuyer could be on the hook to pay their agent - a massive change to real estate transactions in the state.

"It's going to impact lower income communities. That's what I'm really concerned about. I'm more concerned that that wealth gap is going to widen, and this is going to be part of that cause" said Rivera.

The change made to the form by the California Association of Realtors (CAR) is in response to a trio of lawsuits making waves in the real estate industry.

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The first lawsuit resulted in a 2020 settlement between the U.S. Department of Justice and the National Association of Realtors (NAR), the parent organization of the California Association of Realtors.

The DOJ sued the trade group over allegations that rules made by the NAR allowed brokers to misrepresent that the services performed by a buyers' agent are free- which isn't true.

The buyer's agent is paid through escrow from the proceeds the seller makes on the property.

The second and thirds suits are class action lawsuits out of Kansas City and Chicago that claim NAR's rule that requires all sellers to pay a buyers broker a standard, non-negotiable compensation when listing a property through the Multiple Listing Service (MLS) is unfair.

That rate is usually 2.5 to 3 %. In California this looks like the seller's agent requesting a commission of 6% which is split 50-50 with the buyer's agent upon closing.

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The California Association of Realtors tells ABC7 News the changes to its form are being made to stave off lawsuits, but real estate agents are concerned this change may flip the current model on its head.

"We know home ownership increases your wealth. So it's going to ex us out," said Anna Tutt, president of the Realtist. "That's the sad part of the puzzle, because now we're not passing on generational wealth."

The Realtist is a trade organization representing Black real estate agents dating back to the 1940s when Black agents could not hold the title of realtor due to racism.

Tutt said she's concerned this change in paperwork could create a new norm where home buyers are on the hook to pay their agent. Having to bring an additional 3% in cash to close on a property could mean fewer Black and brown homebuyers.

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"Having the buyer pay the buyers' agent commission is really going to push out not just Black buyers and Hispanic buyers-all minorities, it's going to push them out," she added.

Homebuyers from marginalized communities generally have less purchasing power due to income inequality, higher student loan debt, and lower credit scores.

Remember that average home price of $1.1 million?

If a buyer is responsible to pay their agent that would mean an additional $33,000 is needed to close the loan - raising the out of pocket costs from $71,500 to $104,500

"We're not going down the road where it's a required document at this time," said Jennifer Branchini, president of the California Association of Realtors.

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She told ABC7 News in an interview she believes the current model where the seller is responsible for paying the buyer's agent is the best option and while this new form is available, the model has not changed.

"The majority of (homes listed on a MLS) have an offer of compensation to the buyer's agents. So it's very few buyers that either make up a difference of whatever they've agreed upon with their realtor or have to compensate the agent directly," said Branchini.

ABC7 News asked her about the concerns of Black and Latinx agents worried that a changing compensation model could push perspective Black and brown buyers out of the already expensive market she said, "certainly, that is not what we want to see. Being inclusive to everyone in California having access to becoming a homeowner is front and center for all of that is at CAR."

The real estate agents we spoke to believe more education is needed.

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"It's not where it's forced yet, but it is an option. How do we make sure that we're still building generational wealth in our community?" asked Tutt.

"It is a conversation we need to have with our clients," said Rivera. "We have to say 'Look, these are the homes that are paying my commission and these are the homes that are not.' So the buyer can make that decision."

CAR shared that the trade group is working to educate its members on the change to the form and is internally tracking how often is being used.

Branchini said she does not see a future where it will be standard for the buyer to pay their agent.

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