Are California homebuyers really going to pay Realtor commissions?

By Jeff Lazerson | jlazerson@mortgagegrader.com | MortgageGrader.com | August 5, 2024

Article originally posted in Orange County Register on August 2, 2024.

Come Aug. 17, California home shoppers will be asked to sign a five-page Buyer Representation and Broker Compensation Agreement or BRBCA if they want to engage with a particular Realtor to find and buy a home.

Oy vey!

The agreement outlines responsibilities — exactly what the agent is going to do to assist the buyer in finding a home. There is also a compensation component.

These changes are, in part, the result of a proposed settlement agreement between the National Association of Realtors and two separate plaintiffs in separate lawsuits alleging antitrust violations. The outcome is supposed to make buyers’ broker compensation more transparent and not the sole responsibility of the seller.

Most buyers’ agents in Southern California earn 2% to 2.5% of the sales price for compensation. On a $1 million home, 2.5% is $25,000. To be clear, agents can earn more than 2.5% or less than 2%. So, on any particular property, you as the buyer will have to pay the buyers’ broker commission out-of-pocket if the seller or the listing broker won’t cover it.

It’s important for buyers to understand the BRBCA is for a maximum of 90 days, or any time less than that. You can sign up with one agent exclusively or sign up with more than one agent (non-exclusive).

For example, maybe you are looking for a home in Los Angeles as well as Anaheim. You might want to sign non-exclusively with a local LA expert and likewise an Anaheim expert. You would delineate the areas for each of them to search for you. That way, you won’t get yourself in a potential pickle, owing commission to two people or beholden to just one person in an exclusive arrangement.

Let’s say you are looking in Riverside. You know a very sharp buyers’ agent. The upside of an exclusive relationship is that the agent might work harder for you, knowing that you are committed to him or her.

Or, you don’t have to sign up with anybody if you don’t want to. You can visit open houses and search on your own. You could represent yourself and perhaps save the seller some commission, which might translate to a lower sales price. In this case, I’d suggest you hire a real estate attorney to review the contract and be your consultant.

Or you can always ask the listing agent to also represent you, aka dual agency.

Keep in mind, a dual agent is always conflicted. It’s impossible to do your best for the buyer and the seller at the same time. That said, I think a lot of transactions will go dual agency because buyers might think this tactic is easier and more likely to get the property when the deal is being double-ended.

The big question mark is over how much the seller will offer to cover the 2.5% the buyer agreed to with their agent. Say the seller offers the buyer’s agent a 1.5% commission on a $1 million home, or $15,000. The buyer would be on the hook for the $10,000 difference. The buyers’ agent could reduce the commission to 1.5%, if a contract has not been signed stating otherwise, or they could split the difference. For the buyer, again, the funds would have to come out of their pocket, as commissions cannot be financed.

“The agent can’t get more than what you’ve agreed to,” said John Schantz, broker associate, Harcourts. “They could be paid less.”

So, what if the seller offered bigger concessions to cover a buyer who needs money to pay their agent? Do real estate commissions count as buyer concessions? As far as that concerns lenders, no.

That said, expect Realtors to start calling commissions concessions, says Bob DePew, a broker associate at Laguna Premier Realty. This will likely confuse consumers even more.

Concessions (also called interested party contributions in industry-speak) are costs that are normally the responsibility of the buyer but are typically paid for with credit from the seller to the buyer. For example, a seller credits a buyer $8,000 for closing costs. That is a concession.

There are concession limits, however.

FHA limits concessions to 6% of the sales price or $45,000 on a $750,000 home.

The Veteran Affairs Administration caps them at 4% of the sales price.

Fannie-Freddie caps range from 2% on all investment properties. For owner-occupied properties, it’s 3%, assuming a down payment that is less than 10% of the sales price, or 6% when the down payment is 10% up to 25%. There’s a maximum concessions cap of 9% of the sales price when putting 25% or more down.

Let’s say the seller will only pay 1.25% to the buyer’s broker, but the agreement signed by the buyer is 2.5%. That buyer can ask the seller for concessions to help offset the 1.25% owed to the buyers’ brokerage. Whether it’s commission or concessions, it’s still coming from the seller.

VA allows borrowers with VA benefits to pay a commission. But the commission cannot be financed into the VA loan, according to Marion Pierce, public affairs specialist, U.S. Department of Veterans Affairs.

Previously, VA forbid buyers from paying commissions to home sales agents. The administration recently modified its rule in lieu of these industry changes. The commissions must be out-of-pocket money.

Here’s what I think is coming for Southern California homes sales.

The buyer’s agent/broker is going to ask for the commission from the seller as part of the purchase offer.

Buyers are not going to start paying commissions out of pocket. Buyers agents are not going to walk away from a deal for, say, one-half point. Will there be a few exceptions? Yes.

Will there be a lot of confusion? You can count on it.

Freddie Mac rate news: The 30-year fixed rate averaged 6.73%, 5 basis points lower than last week. The 15-year fixed rate averaged 5.99%, 8 basis points lower than last week.

The Mortgage Bankers Association reported a 3.9% mortgage application decrease compared with one week ago.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $766,550 loan, last year’s payment was $86 more than this week’s payment of $4,962.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.49%, a 15-year conventional at 5.25%, a 30-year conventional at 5.99%, a 15-year conventional high balance at 5.875% ($766,551 to $1,149,825 in LA and OC and $766,551 to $1,006,250 in San Diego), a 30-year high-balance conventional at 6.375%, and a jumbo 30-year fixed at 6.625%.

Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $766,550 in LA, San Diego, and Orange counties.

Eye-catcher loan program of the week: A 30-year fully amortized jumbo, fixed for the first five years at 5.875% with 30% down at 1 point cost.

Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

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* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.