Understanding the Iowa Real Estate Transparency Act and Administrative Rule Changes

In the wake of the NAR Settlement, law and administrative rules were changed to implement the two practice changes in Iowa. The Iowa Real Estate Transparency Act (Senate File 2291) and proposed administrative rules (ARC 7931C) together implement mandatory buyer agreements within the real estate transaction and change cooperative compensation to move it off the MLS.

Iowa Real Estate Transparency Act

The Iowa House and Senate passed the bipartisan Iowa Real Estate Transparency Act which is set to become effective July 1, 2024. Under the Act, brokers and prospective clients must both sign a buyer agreement prior to showing a property, and if no showing occurs, prior to an offer being made on the property. The substance of listing and buyer agreements is affected by the Act as well by requiring all brokerage agreements to establish the broker’s compensation for their services. Compensation must be conspicuously displayed in all listing agreements, and buyer agreements must clearly state that compensation is negotiable and not set by law.

The Act also clarifies the point in which the client relationship begins. With both buyers and sellers needing a written contract to engage with a real estate licensee, the Act states that the client relationship begins at the signing of a brokerage agreement, which is either a listing agreement or a buyer agreement. This may be a change of practice for some who believed that the agency disclosure was the document which created a client relationship. While the agency disclosure requirements are not changing and you must provide verbal agency disclosure upon specific assistance and written disclosure before making an offer or accepting an offer, the Act clarifies that the agency disclosure is only a disclosure and does not create a client relationship.

It is also worth noting that the Act alters the duties of licensed real estate salespersons and brokers. Instead of requiring a licensee to provide brokerage services to all parties honestly and in good faith, licensees will only be required to provide brokerage services to their client, but are still obligated to treat all parties to a transaction with honesty and good faith.

These changes underscore the legislature’s intent to reinforce the broker-client relationship. A brokerage agreement makes clear the terms of a broker’s services, and by requiring one before showing a property or making an offer, all parties involved are better able to protect their rights under the agreement. Moreover, the Act makes clear that licensees place the client’s interests above another party’s when carrying out their services.

Administrative Rule Changes on Cooperative Compensation

In order to implement NAR’s changes to cooperative compensation, Iowa needed to remove certain barriers in administrative rules to create flexibility for real estate licensees to receive compensation during the transaction.

The biggest change is the removal of the prohibition of broker compensation being stated in the purchase agreement. The current rule requires that commission split be a separate document outside of the purchase agreement, and a purchase agreement cannot be made contingent upon the selling broker receiving a certain percentage of the listing broker’s commission. This section is being struck. Instead, a new section is being added, allowing the Seller to authorize direct payment to the buyer’s broker in an agreement.

The change is being made in anticipation of the changing dynamics on how compensation may be paid in the future. With sellers becoming more aware of cooperative compensation, and buyers now having negotiated rates of compensation in buyer agreements, negotiating higher levels of compensation from the seller to pay buyer agent compensation or seeking buyer agent compensation when no cooperative compensation is offered may be a necessary element of transactions.

Below are additional changes in Iowa administrative rules:  

• Changes the time frame from which cooperative compensation must be agreed upon from before an offer is being made to before closing.

• Removes restrictions related to agents negotiating or seeking to alter commission rates of other agents.  

• Requires brokerage agreements to include information related to different negotiated compensation methods for brokers.

• Removes disclosure requirement for payment by multiple sources in a transaction.

• Allows for a reduction in fees or commission on the buyer side of the transaction to reflect the listing side practice.

The rule changes will not go into effect until mid-July. Until then, real estate licensees must continue to practice in the regulatory status quo and avoid implementing new changes until authorized.

The law and rules implementing the NAR Settlement will have a tremendous impact on many of the practice changes for brokerages and agents across Iowa. Dickinson Bradshaw will provide further guidance in the coming weeks on what agents should be doing with forms and practice changes to help keep them in compliance, and will provide future steps brokers and agents could take to protect their business practices in a post-settlement world.