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McCauley served as real estate commissioner under Gov. Gavin Newsom. He is the former chief deputy director of the California Department of Housing and Community Development and is a member of the UCLA Ziman Center for Real Estate’s advisory board.
In December, I stepped down as California’s 24th real estate commissioner. As I rounded out my 24-year consumer protection career and returned to the private sector, it’s very clear to me that the current real estate market is far from consumer friendly.
Most of us know a real estate agent. It may be the one that helped you buy your first home, a friend or neighbor, or the one that advertises prominently on benches at bus stops. Sure, they tend to have nice cars, an impressive wardrobe and flexible schedules, but how they are compensated will be changing dramatically.
A recent court decision, Bennett v. National Association of Realtors, et al., has the potential to radically change how agents are paid: commissions. The verdict from a jury in a Kansas City, Missouri, federal court calls into question the customary practice of both the buyer’s and seller’s agents being compensated from the proceeds of a transaction. This model means that the seller pays both the seller’s agent and the buyer’s agent.
The Bennett verdict was in a class-action case wherein the plaintiffs alleged that the National Association of Realtors and several large brokerages engaged in anti-competitive practices by essentially requiring that sellers pay the commission of the buyer’s agent. While well intended, this case may have impactful consequences for buyers, as it will either force them to find additional funds to pay their agent or deny them representation in the transaction.
The proverbial jury is still out as to the net effect of the litigation, which is being appealed. But if buyers are forced to pay their agent’s commission, one of two things will happen: the buyer will negotiate a lower commission with their agent, or the buyer will look to another model for representation. It is the latter that represents the significant threat to buyers.
Most buyers, especially first-time buyers, struggle to save enough for a down payment. A study by the Urban Institute found that 68 percent of borrowers reported that saving for a down payment was a barrier to buying a home. When over $150,000 is needed to make a 20 percent down payment on an average priced home in California, buyers would be hard pressed to come up with additional funds to also pay for their agent’s commission.
Buyers who do not have those additional funds to pay an agent will be forced to look to other alternatives for representation and they have several options:
Buyers will go directly to the listing (seller’s) agent and be represented by that agent via a model known as “dual agency” where the seller’s agent also agrees to simultaneously represent the buyer. While this practice can result in reduced commissions, it is fraught with peril and has been the subject of extensive litigation. Dual agency is a risky venture for agents and many of these transactions end up in court.Buyers will go to fee-for-service brokerages and pay a relatively modest fee for preparation of offers, and perhaps negotiation, etc. Make no mistake, Bennett will bring disruption to the market. (Have you spoken to a travel agent recently?) There are a number of companies providing iterations of virtual, discounted services. But if such brokerages make a profit through volume and maintaining low costs (less hours spent per client), are homebuyers receiving the best counsel to make good decisions on the largest investment they will make in their life?Buyers will try to purchase a home with no agent. This is a major risk that can cause the buyer to lose tens of thousands of dollars.
The financial uncertainty of Bennett’s commission chaos can lock some first-time buyers out of the market, denying them the wealth-building opportunity of home ownership. Or it wlll reduce purchase power such that buyers’ choices will be limited. But the potentially significant financial losses due to ineffective representation are a major red flag that warrants immediate intervention.
The California Legislature needs to step in and provide some crucial guardrails to ensure homebuyers are protected from these impactful risk points. There will likely be legislation to require “broker-buyer agreements,” which would spell out the services buyers will receive and the compensation they will pay their agent. This would provide an invaluable measure of transparency. But there is also a critical need for the Legislature to revisit dual agency, as the very concept of agents providing effective representation to two parties defies basic logic.
Solving California’s housing crisis requires a robust portfolio of solutions, and the Bennett ruling’s commission issue is a major new item on the Legislature’s “to do” list.
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This article was originally published by a www.sandiegouniontribune.com . Read the Original article here. .