The Norris Group Real Estate Podcast

Bridging the Gap Between Policy and Practice with Paul Herrera | Part 2 #891

• The Norris Group, Craig Evans

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Paul currently serves as Government Affairs Director for several large REALTOR(R) Associations. The current group includes the Inland Valleys Association of REALTORS(R), The Inland Gateway Association of REALTORS(R), and the California Desert Association of REALTORS(R). Together, these three groups boast more than 10,000 members, including real estate professionals and representatives of affiliated businesses and industries. 

His unique experience includes an award-winning journalism career with newspapers in Florida and California where he covered real estate, small business, the aviation business and the confluence of government policy, politics and business. His coverage of real estate and growth in Florida earned him top honors from the Florida Press Club in 2002.

In 2004, he won first place for in depth business writing from the California Newspaper Publishers Association. After journalism, Paul served as communications director for the San Bernardino County Economic Development Agency, coordinating everything from press outreach to speeches and video production. In four years with the agency, he oversaw external communications, managed a communications team and helped publicly position a variety of projects and initiatives.

The combination of mass media experience, local expertise, policy and political background and understanding of real estate issues prepared him to lead IVAR’s government affairs and communications efforts through coalition building, strong messaging and technical understanding.

Paul earned his Bachelor’s of Journalism degree from the University of Missouri-Columbia.

 
In this episode:

  • Seller commissions and their impact on the real estate market
  • Impact of Low-Cost Brokerages and Hidden Fees
  • Buyer and Seller Commission Adjustments
  • NAR's ban on offers of compensation on the MLS
  • California Elections and Real Estate Concerns


The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669.  For more information on hard money lending, go www.thenorrisgroup.com and click the Hard Money tab.


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Narrator:

Welcome to The Norris Group real estate podcast, a show committed to bringing you insights from thought leaders shaping the real estate industry. In each episode, we'll dive into conversations with industry experts and local insiders, all aimed at helping you thrive in an ever-changing real estate market. continuing the legacy that Bruce Norris created, sharing valuable knowledge, and empowering you on your real estate journey. Whether you're a seasoned pro or a newcomer, this is your go-to source for insider tips, market trends and success strategies. Here's your host, Craig Evans.

Craig Evans:

Hey, thanks for joining us again. Here's part two with Paul Herrera. So as far as seller commissions, you know, sellers, you know, in this NAR agreement, and everything coming out of it, you know, so sellers maybe may pay smaller commissions, allowing them to keep more the proceeds from the sales. So I guess the question is, you know, with the market, where it's currently at right now, you know, kind of nationwide, some sellers, you know, you've got some sellers that are offering bonuses. You got others that are going in and wanting to offer discounts and saying, Hey, I only want to pay, instead of paying my 3% side, I only want to pay two or two and a half. Where do you see this starting to shake out for theagents, brokers, and really the industry as a whole?

Paul Herrera:

You know, it totally depends on what happens within the housing market itself. You know, to the if you have just forever housing shortages and fast sales, quick transactions, then those scenarios are where seller's agents have some trouble showing the value that they bring to the transaction, especially if it's uncomplicated. You don't have a lot of pieces left in there. I don't know where the where the commissions and the compensation part truly goes. You know, what becomes normal? What isn't normal? You know, when I hear stories about, well, they only pay, you know, whatever it is, 1% in Australia, or a flat fee, and some other country, well, I have no idea what the brokerage responsibility is in those places, because we have areas, even in the United States, where, yeah, you have a, you know, a broker involved transaction, but you also have lawyers that are involved in, actually with the finer points of transaction. And those are all expenses thatare, that are settled within the transaction. So it really depends on what someone is being asked to do, you know, you go back to lease cut this last decade, and you saw the rise of ultra low cost brokerages, tech field, right? And when you looked at the fine print, it wasn't that low cost, you know, it was, yes, on the basics of it, you know, just, uh, just our basic involvement in your transaction. It was low cost. But then they started to, well, you want open house, Oh, you want this kind of marketing. Oh, so everything was a line item that got added to it. Then the past was just covered, you know, it's, they were the Spirit Airlines and the realtors, you know, were Delta, you know.

Craig Evans:

Right, exactly.

Paul Herrera:

And they were, they were charging for every piece, oh, the luggage is, you know, this piece of luggage, nice piece of luggage, you want a better seat. And then eventually, everybody became spirit, to some extent, you know, everyone started charging for baggage. Everyone started charging for baggage. Everyone started charging for individual pieces, not as much as as those did. But certainly it happened. And the end result was not really a whole lot of cost savings and a part of the consumer, just a lot of fragmentation within those industries, you know. And now you see a pushback nationally, and I know in California, against a lot of what they call hidden fees, you know, which are just a lot of additional things, saying, Well, you know, we're just offering this, but if you want all these other things, we'll add that to it. So for some period of time, maybe that's the, you know, the model where you say, okay, every time you need me to write an offer that's $300 or $200 or something like that, I have, I don't know how that's going to work. You know, every counter is going to be X amount. You know you want me to show up for the home inspection? Well, that's two hours of my time, you know, you want me to, you know, be there for the walkthrough. Well, you know, I all these things that were a service that was just included within the overall cost. So these things must be compensated, or nobody's going to do them.

Craig Evans:

Right.

Paul Herrera:

So on the seller side, yeah, perhaps the seller. Is able to decide, yeah, I'm not going to pay for it. So the buyer can. Often buyers cannot. So, you know now, what is it? A certain a scenario in which we say, okay, the buyer side broker is going to receive, you know,$8,000 out of this transaction. That's what was negotiated between buyer and seller. So the seller agrees sell property for$800,000 we're going to make the$808,000 because we're also going to include that in the sales transaction and regulatory we've got the a okay from the loan backers to to do that, so long as the home appraisals, you know,that's going to be the next that's always a kicker, yeah, and so for the seller, yeah, I guess, you know, there's an extra $8,000 that's just put into it. It used to be there anyway, it was just, you know, then pushed through to the buyer's side, in the at the end of escrow. How's it work now? I mean, it, there's just a lot to adjust to.

Craig Evans:

I think at the end of the day, I I'm going to be surprised if, and I could eat my words on this, but I'll be surprised if we see a massive change in the number from a from a value perspective. I mean, is it going to go from a 6% you know, on both sides of the aisle, you know, combined to now, all of a sudden, we're at four? I would be very surprised at that, because that's forcing, at that point now we're forcing, you know, both sides are saying, Hey, I'm willing to take that steep of a commission break, right? I would be surprised at it like you say there could be, but I agree with you. I think there will be more people that will start to say on that buyer side of the transaction that, you know, well, okay, I'll do it at 2% or a point and a half, but and you're going to pay additional line item fees for every time we do this. Here's my cost at the end of the day. You typically add up with either the same, if not more, you know.

Paul Herrera:

No, that's that's very possible, especially on the buy side. You look at recent years where buyers agents were making 15, 20, 30, 40, offers on behalf of their buyers and spending, you know, hours a week over the course of months. All of that again, uncompensated.

Craig Evans:

Right.

Paul Herrera:

You know, that becomes, I mean, it really has been unsustainable the last few years. It's not something that, you know, that the buyer's agents weren't doing it because it was a great way to make a bunch of money. They were doing it because it was a great way to build your network, you know, connect with now what will be. And they never thought it would take 40 offers from a qualified buyer to get into the first house, or that they would be a year and a half in and finally give up because values have gone too far and interest rates have gone too far. They never thought that was going to be the case, right? But they're willing to treat it somewhat as a loss leader, loss leader in terms of quality of life, not necessarily money. In order to build a network builder, connections. Now you have a buyer who comes to seller, you know, eight years down the line and all these other things that were part of the investment in your career. Now, the investment of career. You know, when you're breaking it down in front end, I guess the buyer is going to be investing in the career. I'm not sure you hear me with a lot of almost every statement I make ends with a question mark, because I'm

Craig Evans:

Well, and that's like we talked about earlier. I mean, listen, I don't think everybody's got every answer right now. It's, but it's the conversation, and it's part of, again, we want our listeners to be aware these are the things that's happening today, right? Yeah, so let me ask you this, you know, the one of the other things, or let's talk about it. You know, NAR is now prohibiting offers of compensation to be listed on the MLS. Do you think that is a big do you have any ideas on that? Do you think it's a big, impactful change? What's your thoughts?

Paul Herrera:

It is an impactful change? I mean, I don't think there's any way to deny that the cooperating compensation aspect of the MLS has been, by any measure, one of the driving values of the MLS, the fact that it was a binding contract in which, once you entered into the sales agreement, that's what compensation was going to be.

Craig Evans:

Do you think that's an impactful change?

Paul Herrera:

In terms of procedure, absolutely, in terms of compensation and what the ultimate result is, I'm not sure, because what will govern that now will be what the buyer and agreed to compensate their broker, right? And so the agreement won't be through the MLS. It'll be through what they agreed to, and then that goes into the transaction, right? So to some extent, the seller doesn't exactly know what that number is, and that'll become part of the negotiations as to, okay, I agreed to pay my agent 2% and now we're going to talk about who's going to pay that bill.

Craig Evans:

The reality is now that we're saying, hey, there's no offers. Nothing can be listed like you say that definitely, because the seller side of it would always go to that agent, but the buyer side can oftentimes be viewed as an enticement to show my house above someone else's we're willing to pay another half a point to the buyer side, right? So now that's really off the table. I guess my question is, you know, as I'm looking through that process, is it a change, or is it just like you say, is it a procedural change, but at the end of the day, the buyer side will now be back to the negotiated price they've negotiated with their client.

Paul Herrera:

Yeah. I mean, there will not be, I can't think of a way in which that there will be a financial incentive to bump your listing, you know, to the top of the pile, you know, right in the eyes of the agent. So that does potentially go away. I guess you can make offers to Yeah, I so here's a question, and I know the answer to this, as to many of these things, but you can't offer compensation, right? But can you say seller has agreed to cover the buyer side Commission, as you've negotiated with your buyer, so at least you know it's covered. You know you're not fighting that fight later on. You know is that a thing that you know, becomes the item that makes a difference.

Craig Evans:

I have not thought about that question, you know, could you list that, you know, hey, we'll agree to pay buyer side up to x. That's an interesting point that I hadn't thought about.

Paul Herrera:

Up to X might be where we get in trouble there.

Craig Evans:

Right, right.

Paul Herrera:

You know seller will, you know, Will has agreed to to pay buyer side Commission, which would not be binding, by the way, with MLS, it just be a hey, by the way, you know, seller has said so, right. But if you come to me with 10% then...

Craig Evans:

That's the thing where you'd have to look at and say, but so do you see the new rules from NAR, do you see it? Is it a good thing for buyers and sellers? Do you see that these rules, and again, it may be a Craig, I just don't know yet. But do you see that there that one side of the party wins out from these rules?

Paul Herrera:

I'm not sure that there's a winner other than the attorneys getting there, you know, 33% or whatever it is they picked up on their side of settlement. There is clearly a loser, and that's the buyer. The buyer absolutely loses. And there is no way to see this any other way, because they were receiving all of this, these services essentially for free. Whether the seller makes out for this, I'm not entirely sure, you know, and I want to caveat essentially for free in that they didn't write a check out of their pocket, you know, especially if you had a long time frame in which the buyer was being represented and, you know, the buyer's commission wasn't being, you know, would take a year before it actually transmitted to anybody, or never happened at all, right? So, you know, and eventually they did pay the, you know, the broker was compensated. So there's clearly damage done to buyers in real estate, we just don't know the extent of it, and we don't know what replaces it.

Craig Evans:

How do you see these rules? Well, let me, let me ask that a different way. Do you think these rules are good for realtors?

Paul Herrera:

It's a disruption in the way Realtors function on a day to day basis. Disruptions are never comfortable.

Craig Evans:

Yeah.

Paul Herrera:

And they have to update training. They have to update procedure. There's been, especially in California, and I can't speak to Florida here, but in California, there's been a long term encouragement to have buyer broker agreements to talk these things through, to, you know, to list out what the compensation expectation was. Now, when the compensation was listed in the MLS, then, you know, that was what ruled the compensation. But to this, definitely to have agency agreements and not let this be an informal practice. Yeah. And that concept should not be new to a lot of people in California, if the agents were following, you know, that guidance, you know, to protect themselves in the case of concerns later about agency relationship, the fact that it gets formalized now, if they were doing it before, it should ease that transition by formalizing what was highly, highly recommended but not required by law or by practice or by us. So if that clarity means that the shadow of litigation and other types of liability clears up in many of these cases. Then there's a benefit to realtors if it doesn't clear up that shadow of liability and creates a number of new shadows of liability that lurk over the transaction, then there's a lot of issues there. But in the meantime, you know, there's a lot of adjustments to happen. Adjustments are not, you know, usually something that people willingly walk into, especially when the end result doesn't mean I'm going to get a big raise. It's I'm trying to hold on to the revenue that I was receiving before or something near it.

Craig Evans:

Well, I think that goes right back to looking at what we're talking about earlier. Where do they set the guardrails, right? Yeah. So, well, listen, let's do this. Let's jump back into some of this, the normal craziness of California elections, right? There's enough drama that happens in in California elections. So for our listeners, you know whether they're realtors, whether they're investors, whether they're in the real estate industry, from a business professional side, is there anything in this year's ballot that realtors and real estate investors should be worried about?

Paul Herrera:

There's a couple things, real estate investors. Let me start there. We have get the prop number on this just they finally assign proposition numbers. Proposition 33 in California. It would repeal law that we helped to create about almost 30 years ago now, called Costa Hawkins. And what Costa Hawkins accomplished in California is it sets guardrails around what local governments can do when it comes to rent control. So in California, local jurisdictions can enact rent control, but there's certain things they can't do with it. Number one, they cannot attach it to brand new construction. So there's it used to be anything from 1997 on, now it's anything last 15 years. So any property that's less than 15 years old cannot be run controlled unless it is permanent, subsidized and other restrictions on there. Number two, it doesn't allow rent control on single family one to four from local jurisdictions. Number three, it doesn't allow what's called vacancy control, which is New York style, rent control, where the unit is rent controlled, not the contract, the contractual agreement between the tenant landlord. So if the previous tenant was paying below market rates, the next tenant gets the same rate, plus whatever you know bump is allowed under rent control ordinance, then there's a few other details, but those are the main things that Costa Hawkins keeps from happening. So cities and counties can't go nuts when it comes to rent control doesn't stop them all time, but the gardeners exist. So Prop 33 aims to fully repeal those provisions, and communities like, you know, some barrier communities, Los Angeles, which has very good support control, Santa Monica and other areas, could now do those things and essentially forever encumber, you know, a piece of property through vacancy controls. And significantly impact the marketplace, especially for single family and smaller property owners. That becomes possible. Will it happen? I don't know, but it comes possible. So that's a big deal.

Craig Evans:

Yeah, Prop 33 then would be a big deal for investors.

Paul Herrera:

Yeah, you know, they've tried this before. It's not the first time, and the voters have rejected it on couple occasions now, including by almost 20 points. When it was Prop 10, I think, or Prop 5, back in 2020, so we're very hopeful that the voters will reject it again. They generally have. But you know, you never know.

Craig Evans:

Right.

Paul Herrera:

The other one there actually, there were actually several things directing the ballot, but a couple got knocked down. The other one that we have major concern about is a workaround on Prop 13 to make it easier to raise taxes. So right now, under Prop 13 if you want to propose a new bond that you can't afford as local government, so you have to make an assessment on property taxes, you need two thirds of voters to approve that new bond. That's a Prop 13 requirement that was followed up with Prop 218 but all wrapped up in the same set of protections. Prop 3 would now allow that threshold to be 55% instead of 66 and two thirds percent, making it much easier to raise raise those taxes. There are certain restrictions around that. But you know, plot user get 55% than it is to get two thirds, and those assessments act the same way as a property tax increase, and raise our level of concern when it comes to what happens later on. We did. Our state association did negotiate changes to that limit its effectiveness, limit its impact, okay, and they're moving to, you know, to potentially being neutral on it at the local level, we've looked at it, and we're not ready to to change our position on it. We remain, at this point, opposed.

Craig Evans:

Okay, all right, so did IVAR have any effect in getting to any of that at all, or...

Paul Herrera:

Through our state associations, one negotiated those items.

Craig Evans:

Okay, okay.

Paul Herrera:

All right. You know, we provide feedback on where that goes we but we do have concerns that the protections don't go quite far Enough

Craig Evans:

As we're starting to wind down. I've got a couple of things I want to ask real quick, but I'm always amazed to watch some of the stuff that comes out of California from a from a policy perspective, right? So you've been there a while. What is the craziest potential law that you've seen proposedand could be proposed again, whether California, Florida, I would imagine probably California, but what's the craziest thing you've seen?

Paul Herrera:

I'll give you two. One was a couple years ago, California, introduced a bill that would create a new capital gains tax on proceeds of any property sold within five years of it being purchased. So you would have, I think he was proposing 20% estate taxes. So if you, if you bought a home in 2019 and sold in 2013 you probably had three or $400,000 in increased value, and you'd be facing a bill for, you know, some 60 to $80,000 and this did not exclude in primary residences or anything else. That was Wow. And the idea was, well, these are speculators, like a lot of people, you know, for whatever reason, you know, for whatever reason. You know, they get married to get divorced, against other home. But more than anything, we already have capital gains involved. We already have taxes. This is in addition to.

Craig Evans:

Yeah, that's crazy.

Paul Herrera:

Yeah, they walked away from it fairly quickly after, after the problem started raining down the other one we actually just mostly defeated this year. It's a pets and housing bill. Did you hear about this pets and rental housing? No, so lawmaker proposed a bill that would make it illegal for rental property owners to deny a tenant the ability to bring a pet into their unit. In fact, they would not even build to they would not be allowed to ask whether the tenant was planning to bring a pet when they were negotiating a lease. They also would not be allowed to charge any kind of additional deposit or pet rents. And the definition of what was allowed was what's in the California definitions, which essentially, I read what the code says is anything, any animal that is commonly considered to be a household pet. That's a definition. So that's as specific as it got, right? So if you're a property owner, when you have insurance issues, potentially, you clearly have maintenance issues to address. I'm a pet owner, you know, I've got a dog. Love My Dog, my dogs, you know, still, I've got to fix stuff. Yeah, he likes to, you know, be let out and rub his nose against the door. And I've got a, you know, brown spot, you know, from his dirty nose rubbing against the door, so I got to go and clean that up. But it would, there were just no limits to this thing. And they we negotiated, and finally got knocked down so that it only applies to one pad. They. Can still charge a pet deposit. They can still charge a small pet rent. And more importantly, for us, it only applies to residential projects where there is a requirement for on site property management, which is 16 units or more in one property. So single family, one to four, even if you've got a 15 unit building, you would not have to be required to accept whatever pets the tenant is bringing.

Craig Evans:

And has that, been approved already, or is that coming up on the ballot?

Paul Herrera:

No, that's in the state legislature. So that moved on from the first house. I believe it's still legislation's been on vacation since early July. They come back next...

Craig Evans:

Right. Oh, it's always fun hearing the different ideas that our lawmakers come up, that they actually, that they actually spend time trying to validate their reasoning. Why it makes sense, you know? But listen...

Paul Herrera:

Yeah, you know that gets complicated. Is that, if you want, I don't know if you've ever met with lawmakers in Sacramento, but yeah, if you walk around, you meet lawmakers, and you walk into these offices, it's a lot of, you know, 22 to 25 year olds, and it's kind of entry level job. You know that you get some voters, you staff, a lot of young staff up there. And my guess is that the homeownership rate in capital offices is somewhere in the 20s, right? Many of them have not signed a lease in their own name, much less purchased a home. And so the reality of what happens like they understand it from the consumer side. They don't really have the experience to understand what they're getting involved in.

Craig Evans:

How can people, as they're coming out, you know, how can people connect with with IVAR and the different associations that are out there? How can they connect and see and stay in tune with what's going on and what you guys are doing on local levels?

Paul Herrera:

They you know, each Association sends out communications. If you're a member of our association, we're probably sending you information right that you're scrolling past, you know. But I encourage you, especially as we get into election season and things you want to know more about, to take a look at those. They're pretty quick, you know, read the information coming out. Come out to our membership meetings, get involved. We encourage people to be a part of that reach out to me directly. I get surprisingly few phone calls from members that I'm always happy to talk to members. That's how we find out things that are going wrong, and we start to try to change things, you know, we get all here, but complaints have been going on for a couple years, and why didn't you call me? We could have done something about that, you know, right? I encourage members give me a call. You know, my cell phones on the website, 951-500-1222, that's my cell phone or ring right here. And I love talking to members about, you know, what they're dealing with. You know, stay engaged in the issues we're working on, because some of them might be affecting your clients today, some of them might be information that your clients need to know, because, you know, laws often change on January 1, and what happens between now and January 1 might impact materially your client. So know what's coming, you know. So read the stuff. There's a lot of sorts of information provide. The State Association provides information that they can sign up to receive. And if people ever have a question about any of it, give me a call. Tune into the podcast like yours here. Invite me out to your offices. Invite me out to speak to your groups, and I'll take any questions.

Craig Evans:

Again, Paul, I appreciate you taking the time to be with us today and giving our listeners information. So guys, this is going to be it with Paul for today. Thanks so much. Have a great day, everybody.

Paul Herrera:

Thank you, Craig. Appreciate it. Enjoyed it very much.

Narrator:

For more information on hard money loans, trust deed investing, and upcoming events with The Norris group. Check out thenorrisgroup.com. For more information on passive investing through the DBL Capital Real Estate Investment Fund, please visit dblapital.com.

Joey Romero:

The Norris group originates and services loans in California and Florida under California DRE license 01219911. Florida mortgage lender license 1577 and NMLS license 1623669. For more information on hard money lending go to thenorrisgroup.com and click the hard money tab.