PRDS Introduces Its Broker Compensation Advisory

by David Hamerslough

This month, PRDS is introducing its Broker Compensation Advisory (“BCA”). C.A.R. is also introducing a broker compensation advisory this month. Both organizations are in the process of creating additional forms or revising existing forms to address the impact of the practice changes required by the settlement that N.A.R. reached in the class-action litigation.

Some of you may be wondering why the Broker Compensation Advisory is the first form that both organizations are releasing in response to the settlement. The answer rests, in part, on the theory underlying the class-action litigation. That theory was that the compensation structure for listing and selling residential real estate was not transparent and that the unilateral, unconditional offer of compensation through the MLS resulted in sellers and buyers paying more in compensation or a higher purchase price than necessary.

The PRDS BCA is designed to explain to buyers and sellers the various forms of broker compensation available in real estate transactions and to provide a starting point for the discussions between a seller or buyer and their broker and agent relating to compensation. The BCA should be provided at the time that a broker or agent starts working with a seller or buyer. Given the impact that agency may have on the discussion, negotiation, and ultimate agreement regarding broker compensation, the BCA recommends that the statutory advisory regarding agency relationships and the PRDS advisory and consent regarding dual agency be reviewed prior to signing the BCA. The BCA also recommends that if a seller or buyer has any questions regarding the information in the advisory, they should first consult with a qualified California real estate attorney before signing the advisory.

The BCA addresses, among others, the following issues and practice changes related to compensation that must now be taken in consideration due to the N.A.R. settlement:

  • the negotiability of real estate commissions between sellers and buyers and their respective brokers (the opening paragraph sets forth the California statutory language),
  • sellers are no longer required to offer a buyer’s broker compensation unless they have agreed to do so in a writing they have signed, such as a listing agreement or a separate compensation agreement with the buyer’s agent,
  • if a seller is going to offer compensation to a buyer’s broker, it can’t be made through the MLS but can be offered in other marketing materials such as fliers or broker websites,
  • why offering a buyer’s broker compensation may be beneficial to a seller,
  • the potential for a prospective buyer to have the seller pay all or part of the compensation that a buyer has agreed to pay their broker in a Buyer Representation And Broker Compensation Agreement (“BRBC”),
  • MLS rules now require buyers’ agents to enter into a written agreement with their buyers regarding buyer broker compensation before touring any property, and
  • under MLS rules, the maximum amount of compensation that a buyer’s broker may receive from any and all sources is the amount of compensation specified in the BRBC

While the BCA provides a starting point for a discussion regarding compensation, the amount of compensation that a seller or buyer ultimately pays will often turn on the motivations of the seller and buyer and market conditions as reflected in the following:

  • the terms of the purchase contract signed by the seller,
  • who is representing the buyer,
  • the terms of a BRBC signed by the successful buyer and broker representing that buyer,
  • the terms of any commission agreement between seller, seller’s broker, buyer’s broker, and the successful buyer, and
  • any terms and conditions set by the buyer’s lender.

It is difficult for buyers and sellers to achieve transparency regarding real estate compensation when buyers and sellers do not understand what the options are with respect to compensation. The PRDS BCA provides them with the options for compensation.

Future articles will discuss the forms that are being developed to address the procedures and mechanics for negotiating and agreeing on real estate compensation in view of the criteria set forth in the N.A.R. settlement.