California Shakes Up Real Estate: Gov. Newsom Caps Buyer-Broker Contracts at 90 Days

Governor Newsom Signs Law Limiting Homebuyer-Broker Contracts to 90 Days in California

Governor Gavin Newsom has signed Assembly Bill 2992, a new law that limits the duration of contracts between homebuyers and their brokers to a maximum of 90 days in California. Introduced by Assemblywoman Stephanie Nguyen (D-Elk Grove), the legislation received unanimous support in the state Legislature and is set to take effect on January 1, 2025.

The law specifically addresses buyer-agent contracts that became mandatory following a legal settlement involving the National Association of Realtors (NAR). This settlement was part of efforts to rectify antitrust violations related to inflated real estate commissions. As a result, California joins 28 other states with similar mandatory buyer-broker agreement laws, including neighboring states like Washington and Oregon.

Under the new law, homebuyers are required to sign a written buyer-broker representation agreement with their agents as soon as practicable, but no later than when they submit an offer to purchase property. These agreements cannot automatically renew and must be renewed in writing every three months with the consent of both the buyer and the agent.

Key Takeaways

Mandatory Agreements: Homebuyers must now enter into a formal, written agreement with their real estate agents, outlining services and compensation.
90-Day Limit: Contracts between buyers and brokers are capped at a maximum of 90 days, promoting flexibility and regular reassessment of the relationship.
Renewal Requirements: Any extension of the buyer-agent relationship requires written consent from both parties every three months.
Consumer Protection: The law aims to enhance transparency in real estate transactions, ensuring buyers are fully informed about their rights and responsibilities.
Impact on Commissions: Buyers may now be responsible for paying their agents directly unless sellers agree to cover these costs, potentially affecting overall affordability.

Deep Analysis

Impact on Homebuyers

The enactment of Assembly Bill 2992 significantly changes the landscape for homebuyers in California:

Increased Costs: Buyers may need to factor in additional expenses if they are required to pay their agent's commission, especially if sellers opt not to cover these fees. This could pose challenges for first-time buyers or those with limited budgets.
Enhanced Clarity: The mandatory written agreements ensure that buyers have a clear understanding of the services provided by their agents and the associated costs, reducing the likelihood of misunderstandings or disputes.
Flexibility: The 90-day limit allows buyers to reassess their relationship with their agent regularly, providing an opportunity to make changes if their needs are not being met.

Impact on Real Estate Agents

For agents, the new law introduces several operational changes:

Formalized Relationships: Agents must secure a signed agreement before providing services, which may require adjustments in how they engage with potential clients.
Transparent Compensation: Agents need to clearly outline their compensation structure, possibly leading to more negotiations and competitive commission rates.
Market Adaptation: The requirement for upfront agreements could influence how agents attract and retain clients, necessitating new marketing strategies and service offerings.

Long-Term Market Effects

The legislation, alongside the NAR settlement, may have broader implications for the real estate market:

Commission Structures: There may be downward pressure on commission rates as buyers become more cost-conscious and negotiate fees directly with agents.
Market Transparency: Increased clarity in buyer-agent relationships could lead to a more equitable marketplace, reducing practices like "steering" based on commission incentives.
Affordability Challenges: Additional costs for buyers might impact overall demand, particularly in a market already characterized by high property prices and interest rates.

Did You Know?

NAR Legal Settlement: The National Association of Realtors agreed to significant rule changes after a $1.8 billion verdict in a federal class-action lawsuit in Missouri, where they were found guilty of conspiring to inflate commissions.
Widespread Adoption: Before California's adoption of Assembly Bill 2992, 27 other states already required buyer-broker agreements, reflecting a national trend toward formalizing buyer-agent relationships.
Shift in Payment Responsibility: Traditionally, sellers covered both buyer and seller agent commissions. The NAR settlement now shifts this responsibility to buyers, altering long-standing industry practices.
Economic Factors: The changes come at a time when the real estate market is experiencing fluctuations due to high mortgage rates and economic uncertainty, potentially amplifying the law's impact on buyers and agents alike.
Consumer Advocacy: The California Association of Realtors sponsored the bill, emphasizing the importance of clear roles and responsibilities to protect consumers in real estate transactions.