The BRBC Form: Buyer Representation and Broker Compensation Agreement – What Bay Area Buyers Need to Know

The California Association of REALTORS (C.A.R.) “Buyer Representation and Broker Compensation Agreement” is a legal document that establishes the terms and conditions under which a real estate broker represents a buyer in the acquisition of property. It outlines the rights and responsibilities of both the buyer and the broker, including the scope of representation, the type and duration of the agreement, the broker’s compensation, and the conditions under which the agreement can be canceled. The agreement ensures that the broker is fairly compensated for their services while providing the buyer with professional assistance in finding and acquiring a property. It also includes provisions to protect both parties, such as dispute resolution mechanisms and the clear delineation of financial obligations, ensuring a transparent and mutually beneficial relationship throughout the property acquisition process.

Background

The Buyer Representation and Broker Compensation Agreement (BRBC) in California is a relatively recent development in real estate contracts, reflecting the evolving nature of real estate transactions and the increasing emphasis on formalizing the relationship between buyers and their agents. Here’s a brief history of the BRBC in California:

Origins and Development

Historically, real estate agents in California primarily represented sellers through listing agreements, while buyers were often “unrepresented” or assumed to be represented by the listing agent, leading to potential conflicts of interest. By the early 1970s, buyers began seeking out their own agents.  These agents would then approach the seller’s agent and ask to “co-broker” the sale, and split the commission that the seller would be paying the seller’s broker.  These “co-broke” agreements were often very informal.  As real estate transactions became more complex and buyers sought more dedicated representation, the need for formal agreements between buyers and brokers emerged.

Introduction of Buyer Agency

In response to the growing demand for professional buyer representation, the California Association of REALTORS® began promoting the concept of buyer agency in the early 1980s. This concept allowed real estate professionals to represent buyers exclusively, ensuring that buyers’ interests were adequately protected.

Creation of the BRBC

The BRBC was developed by the C.A.R. as a standardized form to formalize the relationship between buyers and brokers. It outlines the broker’s responsibilities, the buyer’s obligations, and the compensation structure. The BRBC was introduced to create clarity in the buyer-broker relationship, establish a legal framework for compensation, and reduce potential disputes over commissions.

Revisions and Updates

The BRBC has undergone several revisions since its introduction to address changes in the law, real estate practices, and market conditions. These updates ensure that the agreement remains relevant and effective in governing the relationship between buyers and their agents. As of this writing, the BRBC was most recently updated in July of 2024 to reflect the changes in real estate practice as a result of the landmark settlement of the Sitzer-Burnett vs. the National Association of REALTORS case (more on that below).

Current Use

Today, the BRBC is a widely used document in California real estate transactions, in situations where buyers seek dedicated representation. It is designed to protect both parties’ interests and provide a clear, legally binding framework for real estate transactions.

Overall, the BRBC represents a significant shift in the real estate industry towards recognizing the importance of buyer representation and ensuring that both buyers and brokers have a clear understanding of their relationship and obligations.  It also makes clear how, and how much, a buyer’s agent will be paid for their services.

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Why the BRBC is Mandatory for California REALTORs Representing Buyers

As of August 17th 2024, the use of the BRBC has become mandatory in California for REALTORs when showing properties to buyers or writing offers on their behalf. This shift to making the BRBC mandatory stems from the aforementioned historic settlement of the Sitzer-Burnett lawsuit.

Background on the Sitzer-Burnett Lawsuit:

1. Nature of the Lawsuit:
   • The Sitzer-Burnett lawsuit was a class-action case that challenged the traditional real estate commission structure in the U.S. The plaintiffs argued that home sellers were being forced to pay inflated commission fees due to anti-competitive practices fostered by the National Association of REALTORS® (NAR) and major real estate brokerages. One of the key issues was the practice of sellers paying both their own agent’s commission and the buyer’s agent’s commission, which was typically set by the seller’s agent without direct negotiation by the buyer.
2. Settlement Outcomes:
   • The settlement of the Sitzer-Burnett lawsuit led to changes in how real estate commissions are disclosed and negotiated. One of the significant outcomes was the push for greater transparency in the compensation of buyer’s agents, allowing buyers to have more control and clarity over how their agents are compensated.

Impact on the BRBC and Its Mandate:

1. Increased Transparency in Buyer-Broker Relationships:
   • The lawsuit highlighted the need for transparency in how real estate agents are compensated, particularly in relation to buyers. The BRBC form clearly outlines the compensation agreement between the buyer and the broker, making it explicit who is responsible for paying the broker and under what conditions. This transparency aligns with the settlement’s goals of giving buyers more visibility into and control over real estate transactions.
2. Direct Negotiation of Commissions:
   • One of the key issues in the lawsuit was the lack of direct negotiation between buyers and their agents over commissions. The BRBC mandates that buyers and their agents explicitly agree on compensation terms, which can include the possibility of the buyer paying the broker directly if the seller does not cover the commission. By making the BRBC mandatory, California ensures that these negotiations are formalized and documented, thereby protecting both parties and reducing the likelihood of disputes.
3. Alignment with Legal and Regulatory Changes:
   • In response to the lawsuit and the broader scrutiny it brought to real estate practices, regulatory bodies, including the California Department of Real Estate (DRE), likely saw the need to formalize and enforce practices that would prevent similar legal challenges in the future. Mandating the BRBC is a proactive measure to ensure compliance with these new legal standards and to protect the industry from further litigation.

The Sitzer-Burnett lawsuit settlement underscored the need for greater transparency, fairness, and consumer protection in real estate transactions, particularly concerning how buyer’s agents are compensated. By making the BRBC mandatory, California addressed these concerns by ensuring that every buyer-agent relationship is clearly defined and that compensation terms are transparent and negotiated directly between the buyer and the broker. This mandatory use of the BRBC helps prevent the kinds of anti-competitive practices that were at the heart of the Sitzer-Burnett lawsuit and aligns the state’s real estate practices with the new legal and ethical standards set by the settlement.

Key Provisions of the BRBC

Here is a summary of the key provisions in the “Buyer Representation and Broker Compensation Agreement” that are of benefit to the buyer

Provisions Benefiting the Buyer

1. Non-Exclusive Representation Option (Paragraph 1, 2A(2)):
   • The buyer can choose non-exclusive representation, allowing them to work with multiple brokers and potentially find the best deal without being tied to a single broker.  By default, this agreement is non-exclusive.
2. Compensation from Seller or Others (Paragraph 2E(2)):
   • If the broker receives compensation from the seller or another party, this amount is credited against the buyer’s obligation to pay the broker, potentially reducing the buyer’s costs.  In practice, most sellers do end up paying most of or all of the compensation due the buyer’s broker per the BRBC.  However, this is negotiable so buyers must understand the terms of any offer to and counter offer from the seller.
3. Cancellation Rights (Paragraph 5):
   • The buyer can cancel the agreement by giving written notice, making it easier to terminate the relationship if they are not satisfied with the broker’s services.
4. Broker Obligations (Paragraph 8):
   • The broker is required to exercise reasonable effort and due diligence in assisting the buyer, including locating properties, presenting offers, and assisting with negotiations, which ensures the buyer receives active and professional support

Hey Buyers, It’s Rough out There!

How Buyer’s Brokers Can Get Paid

Even with the increased emphasis on transparency and direct negotiation of buyer’s agent commissions following the Sitzer-Burnett lawsuit and the mandatory use of the Buyer Representation and Broker Compensation Agreement (BRBC) in California, it is still possible (and indeed, most common) for the buyer’s agent’s commission to be paid by the seller. Here’s how this can be done:

Negotiating Seller-Paid Commission in the Offer

• Inclusion in the Purchase Offer:
  • When a buyer submits an offer to purchase a property, they can (and will, in most cases) include a provision in the offer requesting that the seller pay the buyer’s agent’s commission. This is often negotiated as part of the overall terms of the sale. For instance, the buyer’s agent can specify in the purchase agreement that a certain percentage of the sale price or a specific dollar amount is to be paid by the seller to cover the buyer’s agent’s commission.  This is achieved through the use of the C.A.R. form SPBB (Seller Payment to Buyer’s Broker).
• Customary Practice:
  • In many markets, it is still customary for the seller to pay the commission for both the listing agent and the buyer’s agent. While the standard California Residential Listing Agreement (RLA) no longer specifies how much will be paid to a buyer’s broker, brokerages have come up with their own addenda that specifies how much the seller is willing to offer the buyer’s broker (if anything).  It should be noted that whatever the seller agrees to pay a buyer broker at the time the property is listed, this can be renegotiated with any purchase offer.

Seller Concessions

• Incentives and Credits:
  • Sellers can offer to pay the buyer’s agent’s commission as part of seller concessions, where the seller agrees to cover certain closing costs, including the buyer’s agent’s commission, to make the deal more attractive to buyers. This can be particularly useful in market segments where buyers are typically low on cash, or when the seller is motivated to make sure that buyer’s agents are well-incentivized to bring them a workable offer.

Financing Commission into the Loan

• Loan Structuring:
  • In some cases, buyers can have the commission financed into their mortgage. While this means the buyer is technically paying the commission, it can be structured so that the seller covers this amount as part of the sales price. Essentially, the commission is built into the final purchase price, and the seller pays it out of the proceeds from the sale. For all practical purposes, this is how the commissions were paid prior adoption of the new industry practices stemming from the Sitzer-Burnett settlement.

While the BRBC brings transparency to the negotiation of buyer’s agent commissions, there are still several pathways for the buyer’s agent’s commission to be paid by the seller. These methods involve strategic negotiation, inclusion of specific terms in the purchase offer, and collaboration between the buyer’s agent and the listing agent. By navigating these options, buyers can still effectively have their agent’s commission covered by the seller, minimizing out-of-pocket expenses for the buyer.

What if a Seller Doesn’t Pay Any/All of the Buyer Broker Commission specified in the BRBC?

Using the aforementioned SPBB form submitted along with an offer, the buyer can specify that the seller is to pay the buyer broker’s compensation.  But what happens if the seller does not agree, or does not agree to pay the amount in full? Under the terms of the BRBC, there is a way that a buyer can state that they will not be responsible for paying the buyer broker’s compensation. 

Check Either Box in Paragraph 2G(2)

Paragraph 2G(2) is on the first page of the BRBC, and has two checkboxes:

• Buyer does not have sufficient funds to pay Broker
• Buyer intends to purchase with the following loan product which does not allow Buyer to pay compensation to Broker

It may seem like neither of these boxes adequately describes the buyer’s position.  However, for purposes of this purchase transaction, Buyer can state that they do not have sufficient funds to pay the Broker.  This will create a contingency for the purchase as detailed in Paragraph 9B(2).

By checking either box in Paragraph 2G(2), the buyer is stating that they will not be responsible for paying the Buyer Broker commission, come what may.  This can of course be renegotiated later, if need be.

Contingency for Seller Payment (Paragraph 9B(2)(B))

If the buyer’s offer includes the SPBB form requesting the seller to pay the broker’s fee, and the seller does not agree to this, the BRBC allows for the agreement to be contingent upon the seller’s or others’ willingness to pay the full amount of the broker’s fee.

Broker’s Right to Cancel (Paragraph 9B(2)(B))

If the seller refuses to pay all the fee stipulated in the BRBC, and the buyer cannot then find he funds to pay their broker, the buyer’s broker has the option to cancel the agreement related to representation for that specific property. The broker must inform the buyer, seller, and listing agent that the buyer is proceeding without representation and must complete a new Agency Confirmation that removes the broker as representing the buyer. The buyer may then elect to purchase the property without representation, or seek out another agent to represent them on the purchase of that specific property.

Effect on Changing Agents

If the broker cancels the agreement due to the seller’s refusal to pay the fee, the buyer would technically be free to work with another agent for that specific transaction. However, if the buyer is still within the original BRBC’s representation period and chooses to acquire the property through another agent, issues could arise regarding the original broker’s right to compensation, especially if there was any broker involvement with the property.  This would primarily be a concern if the BRBC is an exclusive agreement; if the agreement is non-exclusive and a buyer and their broker both sign an agreement that the broker no longer represents the buyer for that specific purchase, the likelihood of legal entanglements should be greatly reduced.

In summary, the buyer can potentially change agents under these circumstances, but this action is closely tied to the broker’s decision to cancel the agreement due to the seller’s refusal to pay the fee. The buyer should proceed with caution and ensure that the original agreement is properly canceled or that the specific property is excluded from the agreement to avoid any legal or financial complications.

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