The New Real Estate Law: What You Need to Know From The Expert Witness Perspective

Introduction

On August 17, 2024, a significant new real estate law came into effect, aimed at transforming the housing market landscape. This legislation introduces several key changes intended to address issues such as affordability, tenant rights, and the responsibilities of property owners. Here, we delve into the details of the law, its implications for various stakeholders, and how it might reshape the real estate environment.

The Necessity for Real Estate Professional Expert Witnesses

With these changes, the role of expert witnesses in real estate litigation and disputes has become more crucial than ever. Expert witnesses with a background in real estate—such as seasoned agents, brokers, and other industry stakeholders—provide invaluable insights into the nuances of real estate transactions, standards of practice, and the intent and implications of the new law.

Experts with extensive experience in real estate can:

• Offer Detailed Analyses: They can provide detailed analyses of transaction practices, property values, and agent conduct, which are critical in legal disputes.
• Interpret Regulations: Their deep understanding of both old and new regulations allows them to interpret how the changes impact specific cases.
• Establish Standard Practices: They can attest to standard industry practices, helping courts determine if parties involved in transactions have acted ethically and within legal bounds.

The Growing Demand for Real Estate Expertise

Law firms and real estate professionals are increasingly recognizing the need to collaborate with expert witnesses who can navigate the complexities introduced by the new law. These experts not only help in resolving disputes but also play a preventive role by educating agents and brokers on compliance to avoid legal pitfalls.

Key Provisions of the Law

The new law encompasses a wide range of provisions that touch upon nearly every aspect of the real estate sector:

• Increased Protection for Tenants: One of the cornerstone features of the law is its strengthened tenant protections, which include extended eviction notice periods and caps on annual rent increases, ensuring more stability for renters.
• Incentives for Affordable Housing Development: To tackle the affordable housing crisis, the law provides tax incentives and grants for developers committed to building or renovating properties as affordable housing units.
• Streamlined Permitting Process: The law aims to cut through bureaucratic red tape by streamlining the permitting process for new construction, making it faster and less costly to bring new homes to the market.
• Enhanced Transparency in Real Estate Transactions: New requirements for disclosure ensure that buyers are fully informed about the properties they are purchasing, including any potential liabilities or required renovations.
• Environmental Impact Assessments: Reflecting growing environmental concerns, the law mandates comprehensive environmental impact assessments for large real estate projects to promote sustainable development.

How will affect Home Buyers, Tennants & Others

For Home Buyers

• Prospective home buyers can expect a more transparent buying process, with additional safeguards against undisclosed property issues. The streamlined processes may also lead to a greater inventory of homes, potentially easing the price pressures in some markets.

For Tenants

• Tenants will benefit from greater security and affordability, thanks to the new protections against sudden rent increases and evictions. These changes aim to provide a more stable living situation for renters, particularly in high-demand areas.

For Developers

• While developers might face more stringent requirements, particularly related to environmental impact assessments, the incentives for affordable housing development and faster permitting could offset these challenges, leading to potentially higher profitability and opportunities for expansion.

For Landlords

• Existing property owners and landlords will need to adjust to the new regulations, particularly regarding tenant relations and rent settings. The changes may require some upfront adjustments, but they are also likely to lead to a more stable and predictable rental market.

The new real estate law that took effect on August 17, 2024, introduces significant changes to the commission structure within the real estate industry, particularly affecting real estate agents and brokers. These changes are part of a settlement agreement resulting from litigation involving the National Association of Realtors (NAR) and aim to increase transparency and alter the traditional commission payment practices.

How will affect Real Estate Agents, Brokers & Stakeholders

Impact on Real Estate Agents and Brokers:

Escrow Agents & Brokers

• Escrow agents play a pivotal role in the closing process of real estate transactions, ensuring that the exchange of property is fair and secure. The new law introduces stricter regulations regarding escrow accounts, mandating more detailed records and longer retention periods. Escrow agents must now adhere to enhanced verification processes to prevent fraud, which may increase the duration and complexity of the closing process. These changes aim to enhance transparency and protect consumer interests but also require escrow agents to upgrade their systems and perhaps undergo additional training.
• Change in Commission Communication: One of the most significant changes is that sellers can no longer offer or communicate buyer’s agent commissions through the Multiple Listing Service (MLS). This change aims to prevent the practice of steering, where agents might be incentivized to favor listings that offer higher commissions. Now, any compensation from the seller to the buyer’s agent must be negotiated directly, without being advertised on MLS platforms.
• Mandatory Written Agreements: Agents working with buyers are now required to secure a written agreement specifying the agent’s compensation before showing any properties. This agreement must clearly outline the services provided and the compensation expected, promoting a clearer understanding between agents and their clients. This rule is intended to ensure that all financial agreements regarding real estate services are fully transparent from the outset.
• Elimination of Compensation Fields in MLS: The MLS will no longer have fields that specify broker compensation, which means that all compensation terms need to be discussed and agreed upon outside of the MLS information sheets. This measure is designed to prevent indirect incentives and biases in property listings and to encourage fair competition among listings irrespective of the commission offered (www.nar.realtor).
• Negotiation of Commissions: With the removal of commission details from MLS, commissions become fully negotiable between the buyer and the agent. This could lead to a more competitive landscape where agents may need to justify their commission rates by the quality and breadth of their services rather than standard industry percentages.

These changes are expected to foster a more transparent and equitable environment in real estate transactions, emphasizing fair practices and direct communication between all parties involved. Real estate professionals will need to adapt to these new rules by enhancing their service offerings and negotiating skills to align with the new requirements for transparency and fairness in compensation practices.

Impact on Various Stakeholders in the Industry

Lenders

• For lenders, the new law affects both loan processing and the criteria for loan approvals. One of the major changes is the tightening of lending criteria, particularly for real estate investments, to avoid over-leveraging buyers in an inflated market. Lenders must conduct more thorough background checks and property evaluations, which could lengthen the loan approval process. Additionally, there are increased penalties for non-compliance with fair lending practices, pushing lenders to be more diligent in their operations.

Appraisers

• Appraisers are directly impacted by changes in property valuation processes under the new law. There is now a greater emphasis on achieving accuracy in appraisals to prevent market distortions. This includes new guidelines for evaluating properties in areas susceptible to environmental risks, such as flooding or wildfires. Appraisers will need to incorporate more comprehensive risk assessments into their evaluations, which could affect property values and influence market dynamics.

Title Companies

• Title companies ensure that a property title is legitimate and that the buyer is legally entitled to the title. With the introduction of the new law, title companies are required to enhance their research methodologies and ensure that all potential liens or discrepancies are fully resolved before a sale is concluded. This might lead to more extensive searches and longer processing times, but ultimately it increases the security of property transactions.

Home Inspectors

• Home inspectors, though not always directly involved in the transaction process, are affected indirectly by the new law. The legislation demands more detailed inspection reports with an emphasis on certain structural and environmental aspects of a property. Home inspectors will need to adapt by possibly obtaining new certifications or training, especially in regions prone to specific issues like radon, mold, or seismic activities.

Real Estate Developers

• Developers, while primarily concerned with construction and development, must adjust to new zoning and environmental regulations that can affect project timelines and costs. The law introduces stricter requirements for environmental impact assessments and community integration plans, aiming to foster sustainable development practices.

Paperwork Changes

Key changes include:

• Elimination of Compensation Requirements: The law prohibits any requirement for offers of compensation among MLS participants, which means that listing brokers or sellers cannot make compensation offers to buyer brokers through the MLS. This change aims to decrease the reliance on MLS for negotiating compensation and pushes towards more direct negotiations between the involved parties.
• Prohibition on Certain MLS Practices: The MLS is now required to remove all fields and information related to broker compensation. Furthermore, MLSs cannot facilitate or support any external mechanisms for making offers of compensation, which includes blocking the use of MLS data for creating platforms that would handle such offers.
• Changes to Cooperation Standards: The definition of cooperation within the MLS has been updated. MLS participants are required to share property information and make properties available for showing, enhancing the transparency and openness of property listings.
• Written Agreements Before Property Tours: One of the more notable procedural changes is the requirement for MLS participants working with buyers to enter into a written agreement with the buyer before touring any properties. This formalizes the buyer-broker relationship earlier in the property viewing process.
• Disclosure Requirements: There are new mandates for disclosing compensation details to sellers, prospective sellers, and buyers, aiming to provide all parties with clear and upfront information about potential costs and compensations involved in a transaction.

Looking Ahead

These changes are designed to streamline the real estate transaction process, promote fairness, and reduce potential conflicts of interest. They reflect a shift towards greater transparency and client-centered practices in real estate transactions.  It also introduces comprehensive changes that go beyond the realm of real estate agents and brokers. By examining the broader impact on escrow agents, lenders, appraisers, title companies, home inspectors, and developers, it is clear that this law aims to enhance the integrity, transparency, and fairness of the real estate market. While these changes may introduce some challenges, they are a pivotal step towards a more secure and equitable industry.  Finally, as the real estate industry continues to adapt to the new law, the demand for expert testimony is expected to rise. Real estate professionals currently practicing or retired, who are considering expanding their roles, may find opportunities in becoming expert witnesses. This role not only enhances their professional value but also contributes significantly to upholding standards and practices in the industry.