Buyer Agency: How Consumer Protection Laws Impacted the Formation of the Real Estate Buyer Agency

Are you planning to buy or sell real estate property in the sunny state of California? Whether you're a first-time homebuyer or a seasoned real estate investor, understanding agency and the associated duties is essential for a smooth and transparent real estate transaction. In California, the rules and regulations regarding agency disclosure are robust and designed to protect both buyers and sellers. However, this was not always the case!   

Up until the late 20^th century, most real estate agents in the United States primarily represented sellers ONLY! There was often limited or NO representation for the buyer. Even if an agent was working with a buyer, there was no duty of confidentiality owed to the buyer and no protection for the buyer, as all agents were seller's agents and had a duty only to the seller.

This conflict of interest led to the development of consumer protection laws. First, the Civil Rights Act of 1968 evolved to meet the need for increased consumer protection and transparency in the homebuying process. However, it was not until 1986, with the passage of the Real Estate Agency Law (California Civil Code Section 2079) that allowed for more explicit representation of buyers and set the stage for the growth of buyer agency in California.

Buyer agency and its specific regulations and standards of practice have continued to evolve over the years, and the establishment of buyer agency as we know it today was a gradual process. We will address the California Agency Disclosure in follow up-posts. However, today I want to discuss how consumer protection laws impacted the formation of the real estate buyer agency.

1. Fair Housing Laws: The Fair Housing Act part of the Civil Rights Act of 1968, prohibits discrimination in the sale, rental, and financing of housing based on race, color, religion, sex, or national origin. This law had a profound impact on real estate practices and emphasized the importance of equal treatment for all buyers and renters. The establishment of buyer agency representation evolved to help ensure that buyers receive fair and equal representation throughout the homebuying process.
2. Disclosure and Transparency: Consumer protection laws in the real estate industry emphasize the importance of full and fair disclosure. Real estate agents are required to disclose material facts about properties, any potential conflicts of interest, and their agency relationships. Buyer agency emerged as a way to provide buyers with dedicated representation, ensuring they receive the information and transparency they need to make informed decisions.
3. Agency Disclosure Laws: Many states now have agency disclosure laws that require real estate agents to disclose their agency relationships to clients. These laws were developed to prevent misunderstandings and conflicts of interest and to ensure that buyers and sellers know the roles and responsibilities of their agents. The introduction of buyer agency representation was, in part, a response to the need for clearer agency disclosure and a way to provide buyers with their own representation.
4. Consumer Advocacy: As consumer advocacy grew in the United States, there was a push for more consumer-centric real estate practices. The emergence of buyer agency representation was seen as a way to provide consumers (buyers) with dedicated professionals who would advocate for their best interests throughout the homebuying process.
5. Legal and Ethical Standards: The legal and ethical standards governing the real estate industry have evolved to emphasize the duty of real estate agents to protect and promote their clients' interests. Buyer agency formalizes this duty by establishing a specific relationship where the agent's primary responsibility is to the buyer.

In summary, consumer protection laws, along with the changing landscape of the real estate industry, led to the formation and recognition of real estate buyer agency. These laws and regulations were designed to safeguard the interests of homebuyers, promote transparency, and ensure that consumers are well-informed and fairly treated in real estate transactions. Buyer agency representation emerged as a way to fulfill these objectives by providing dedicated representation for buyers in the real estate market.

What buyer agency did NOT change is how agent fees were paid. Prior to buyer agency, the seller's agent would pay a portion of their agent fee to the cooperating agent who was working with the buyer. Buyer agency simply allowed the cooperating agent to become a buyer agent and protect the buyer. Buyer agency did NOT increase seller's fees or change the way fees were paid. Buyer's agent fees appear on the seller's net sheet just the same as cooperating seller agent fees always had been paid. 

Would removing buyer agent's fees from the seller's net sheet make buyer agency unattainable for those most vulnerable...that is first-time homebuyers, veterans, or anyone requiring a loan to make a purchase when lenders will not allow buyer agent fees in the buyer's loan. Cash-strapped buyers would be forced back to the 1970's, working unrepresented against seller's agents or seller's cooperating agents, forfeiting any protection provided by a buyer's agency? Perhaps other means for negotiating fees will be established? Stay tuned.

(See CRMLS Proposed Concessions in Price)