The Biggest Shift in Real Estate Compensation Since the 1970s
Want to watch instead of read? Check out my quick video breakdown: [HERE]
The California real estate market has just undergone one of its most significant structural changes in nearly five decades. If you're planning to buy or sell property in 2025, understanding these changes isn't just helpful—it's essential.
Let me walk you through what's changing, why it matters, and how it might affect your next real estate transaction.
How Real Estate Commissions Worked Until Now
For many decades, the commission structure in real estate transactions followed a predictable pattern:
-
When selling your home, you would hire a listing agent and agree to pay a certain percentage of the sale price as commission.
-
Within your listing agreement, there was a predetermined portion of that commission that would be offered to a buyer's agent who brought a qualified purchaser.
-
This "cooperative compensation" was published in the MLS (Multiple Listing Service), essentially advertising to all buyer's agents exactly what they would earn by bringing a buyer to your property.
-
The seller technically paid both the listing agent and the buyer's agent from the proceeds of the sale.
This system had been so ingrained in real estate that most consumers never questioned it—it was simply "how things worked."
The New Reality: Decoupling Buyer and Seller Representation
Under California's new laws taking effect in 2025, this long-standing structure has been fundamentally altered:
-
The listing agreement no longer includes any predetermined offer of compensation to a buyer's agent.
-
There is no longer any mention in the MLS of what a buyer's agent might earn by bringing a buyer to a particular property.
-
The contractual expectation is now that sellers pay their agent, and buyers pay their own agent separately.
This represents a complete decoupling of the two sides of the transaction, at least on paper.
What This Means in Practice: The Credit Caveat
While the law suggests a clean separation of compensation (seller pays seller's agent, buyer pays buyer's agent), there's an important caveat that may become common in transactions:
Buyers can write offers that include a request for the seller to credit them the cost of their agent's compensation.
In other words, while the buyer formally engages and agrees to pay their agent, they can ask the seller to effectively cover this cost through a credit at closing.
Important note: Sellers are under absolutely no obligation to agree to these credits. Sellers maintain complete freedom to reject any request for compensation toward a buyer's agent commission. This is a significant change from the previous system and puts more negotiating power in sellers' hands.
How This Will Likely Play Out in Real Transactions
Despite the legislative changes, the practical reality may evolve in several possible ways:
-
Negotiable Compensation: Instead of predetermined buyer agent commissions published in the MLS, each transaction will involve a negotiation over whether and how much the seller will credit toward the buyer's agent compensation, if anything at all.
-
Increased Transparency: Buyers will now explicitly agree to their agent's compensation and be more aware of exactly what services they're paying for.
-
More Complex Offers: Purchase offers will now include an additional element of negotiation around agent compensation credits.
-
Seller Discretion: Sellers have complete discretion to decline any requests for credits toward buyer agent compensation without affecting the rest of the transaction terms.
-
Potential Cash Advantage: Cash buyers who don't need mortgage approval may have more flexibility in how they structure these credits, potentially giving them yet another advantage in competitive situations.
What This Means for You
If You're Planning to Sell:
- You'll still pay your listing agent according to your agreement with them.
- You should be prepared to consider requests for buyer agent compensation credits in offers, but remember that you have absolutely no obligation to agree to these requests.
- You can decline these credit requests entirely or negotiate them as part of the overall transaction terms.
- Your net proceeds calculation may look different under this new system.
- Working with an agent who understands these nuances will be crucial for proper pricing strategy and negotiation.
If You're Planning to Buy:
- You'll now explicitly engage a buyer's agent and agree to their compensation through a written agreement that must be signed before making an offer.
- This agreement in California will be limited to 90 days and cannot automatically renew.
- Your offer may include a request for the seller to credit you the cost of your agent's compensation.
- Understand that sellers are under no obligation to agree to these credits and may decline them outright.
- You should be prepared for the possibility of covering your agent's compensation yourself, either partially or entirely.
- You need a skilled agent who knows how to navigate these negotiations effectively on your behalf while understanding that sellers may refuse these requests.
The Bottom Line: Expertise Matters More Than Ever
These changes underscore the increasing importance of working with knowledgeable, professional real estate advisors who understand the nuances of this new system.
For buyers especially, partnering with an agent who can effectively negotiate compensation credits will be essential. The days of simply assuming the seller will pay your agent are over—now it's an explicit part of the negotiation.
At Baker Estates, we've prepared extensively for these changes. We understand not just the technical aspects of the new laws, but the strategic implications for both buyers and sellers. Our approach has always been to provide advisory-level service that goes beyond the transaction, and these changes only reinforce the value of that approach.
If you're planning to navigate the real estate market under these new rules, I'd be happy to discuss your specific situation and how we can help you achieve your real estate goals while effectively managing these new compensation structures.
The rules have changed, but our commitment to your success remains the same.
Sources:
