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BUYER BROKER CONTRACTS ARE RELATIVELY NEW on the real estate scene. Unlike traditional agents who sign a listing contract with the seller, the buyer’s agent signs a contract with the buyer. Some agents call this “listing the buyer.”
The real estate industry resisted the idea of buyer agency at first, but buyer’s agents are gaining widespread acceptance as consumers demand more representation and protection. Experienced buyer’s agents look out for the best interests of their clients and yet know how to cooperate with other agents, making the real estate transaction a win-win situation.
Real estate offices have traditionally focused on obtaining and promoting listings because listings attract buyers. Brokerages have always had an economic incentive to bring in their own buyers. When the office represents both buyer and seller the office gets the full commission. If an agent from another cooperating office brings in the buyer then both offices have to share the commission.
However, buyers who work with the listing agent don’t always get the best deal. In an informal 1992 survey of relocating employees conducted by U.S. Sprint, buyers using buyer’s agents paid 91 percent of the list price, while buyers using traditional agents paid 96.5 percent. Buyer agency has been endorsed by mainstream consumer advocates such as Ralph Nader, Money Magazine, Kiplinger’s Changing Times and the Consumer Federation of America.
Agency
Agency can be a confusing subject for both consumers and real estate practitioners. Basically, there are three types of agents – the seller’s agent (or listing agent), the buyer’s agent and an agent who represents both seller and buyer (called a dual agent). The agent represents the client (the principal) in transactions involving third parties. California law requires licensed real estate agents to present an agency disclosure form to all potential clients.
In a real estate office (or brokerage), the broker is the agent. The principals (clients) can be buyers, sellers or both. Brokers often have other licensed salespeople or brokers working for them under contract, called associate licensees. However, the broker is always the agent in the transaction and is responsible for the actions of any associate licensees.
Dual agency is legal in every state as long as it’s fully disclosed. The advantage of dual agency is a smoother transaction, because there is only one agent acting as a mediator between the buyer and seller. The disadvantage of dual agency is that neither the buyer or seller are fully represented, and the buyer is usually not as well represented as the seller. The agent almost always has a written contract with the seller, while buyer broker contracts are still not widely used.
The dual agent has an obvious conflict of interest, even though experienced real estate agents act in a professional manner and do their best to serve the interests and needs of both parties. The dual agent can’t disclose to the buyer that the seller is willing to sell the property for less than the listing price, without written consent. Also, the dual agent can’t disclose to the seller that the buyer is willing to pay more than the price offered, without written consent. The dual agent has confidential information about both parties which could significantly affect the ultimate price and terms of sale.
The dual agent has an incentive to serve the buyer, because they don’t get a commission if they don’t complete the sale. However, the dual agent may have a stronger incentive to serve the seller, because a higher price means a higher commission.
Enter the buyer’s agent. And to make matters even more confusing, there are three types of buyer’s agents – the exclusive buyer’s agent, the single agency buyer’s agent and the traditional buyer’s agent. An exclusive buyer’s agent works in an office which does not take any listings, and therefore will never find themselves in a potential dual agency situation. The single agency buyer’s agent works in an office that takes listings, but has agreed not to present any of those listings to the buyer. The traditional buyer’s agent works in an office that takes listings and has agreed to present all properties to the buyer, even if it puts them in a dual agency situation.
Why Should I Sign a Buyer Broker Contract?
Many real estate agents are still reluctant to ask buyers to sign contracts, fearing it will scare them away. However, an increasing number of agents have found that serious buyers will sign a contract, and that presenting a contract is an effective way of screening out unmotivated or unqualified buyers.
Real estate agents and brokers are state-licensed professionals, the same as attorneys, civil engineers and certified public accountants. Nearly every other licensed professional has a contract or service agreement with their clients. Contracts clarify the duties and obligations and limit the liability of both the licensed professional and the client.
Buyers have different needs than sellers. The buyer’s agent is consumer-oriented and service driven, acting more like a consultant than a salesperson. Signing a contract with a buyer’s agent gives you the same level of representation that the property seller has. Your property search will be more thorough and efficient and you will probably end up saving time and money. An agent working with you under contract is more motivated than one who is likely to lose a commission if you end up buying through another agent.
The California Association of Realtors has developed three standard buyer broker contracts. The most binding of these is the Exclusive Authorization to Acquire Real Property – Buyer Broker Compensation Contract (Form AAP-11). This contract gives the buyer broker exclusive authorization to acquire property over a given period of time with compensation. When the buyer purchases a property listed on the local multiple listing service, a buyer’s agent from a cooperating office is entitled to the commission offered by the seller. In the vast majority of property transactions the buyer will not owe the buyer’s agent a commission.
However, the buyer broker contract can authorize the agent to seek out any property that matches the needs of the client, including for-sale-by-owner properties (FSBOs), out-of-area properties and even properties that are not listed for sale. If the buyer purchases a property from a private seller or through an office outside the local MLS, the buyer owes their agent the agreed-upon commission or fee. Of course, in their purchase offer the buyer can ask the seller to pay all or part of the agent’s commission or fee, but the seller is under no obligation to do so.
Selecting and Working With a Buyer’s Agent
Any licensed real estate agent or broker can represent you as a buyer’s agent. The first step is to select an agent who is experienced with the area where you’re conducting your property search. The agent must have a thorough knowledge and understanding of all the local nuances which affect the value of real estate. The agent should also be a good listener and understand your needs. It’s important to establish a relationship built on mutual respect and trust.
Most important, your buyer’s agent must be a seasoned professional, respected by their peers and able to negotiate on your behalf in a pleasant and cooperative manner with other agents. Traditional agents complain that some buyer’s agents create an unnecessary atmosphere of adversity within the negotiation process. Buyer’s agents complain that some traditional agents conceal their listings and give preference to in-house buyers. A good buyer’s agent must be able to rise above these natural conflicts and negotiate the sale.
If the agent works in an office that has a lot of listings, and you make an offer on one of these listings, your buyer’s agent could be put into a dual agency role. Make sure you would feel well-represented by your buyer’s agent in a dual agency situation.
The buyer broker contract obligates both the agent and the buyer. So if you’re not a serious buyer you probably shouldn’t sign one of these agreements. The contract will require that you provide relevant personal and financial information to assure your ability to acquire property. The agent will probably require a pre-approval letter from a lender or other evidence that you are financially qualified. If your purchase will be contingent on the sale of your existing home, a good agent will check to see if you have your home reasonably priced, how long it’s been on the market and whether it’s likely to sell.
Most buyer’s agents work on a commission. Others work by the hour or charge a flat rate. Some charge an up-front retainer fee. All fees are negotiable. In rural areas a 6-month contract is reasonable, although this is also negotiable. The contract can be written so that either party may cancel at any time. A thorough buyer’s agent will ask you if you’ve been represented by any other agents and if you’re currently bound by any other contracts or protection clauses that would affect your purchase of real estate.
Like a listing agent’s contract, the buyer broker contract has a “protection clause.” After the termination of the agreement, the broker is entitled to compensation for any properties they introduced to the buyer, and which the buyer subsequently buys within a given time period. This provision is designed discourage the buyer from using the agent to find properties, canceling the contract and then buying one of the properties at a later date without paying the agent a commission.
Once you sign the buyer broker contract, the agent may give you an information packet to familiarize you with the local real estate market. The agent will then conduct a search for all properties that meet your specifications. Sometimes the agent encourages you to drive by these properties on your own, selecting the ones you want the agent to show you later. After looking at a number of properties, you may want to redefine your search. Experienced agents know that most buyers end up buying something different than they were originally looking for.
When you’re ready to make an offer, the buyer’s agent helps you present the offer and assists you with the negotiations. They help you arrange for financing and facilitate the escrow process. Like the seller’s agent, the buyer’s agent must conduct a competent and diligent on-site inspection of the property and disclose to the buyer all material facts affecting value and desirability. The buyer’s agent can’t give expert advice, but they can provide guidance in obtaining appropriate inspections and expert reports.
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Chet Boddy, Real Estate Appraisal, Sales and Consulting
43300 LR Airport Road, #59, Little River, CA 95456
707-937-4011, office
707-937-4818, fax
chet@chetboddy.com
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Copyright © 2002 Chet Boddy, All Rights Reserved
Chet Boddy is a Certified General Real Estate Appraiser, Realtor and real estate consultant who has lived on the Mendocino Coast since 1976. Look for this and other real estate columns on Chet’s web site at www.chetboddy.com
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