The Buyer's Agent
Here comes the fun stuff, overcoming the negative atmosphere surrounding agents after the most recent Burnett v. NAR court case. Yes, I know, I have the same last name but it was not me that sued.
It seems there is a lot of confusion about what buyers agents are and why they get paid the way that they do. Let me first lay the ground work as to why buyer agents became a thing.
Real Estate Before Buyer Agency
Before buyer agents existed, there were only real estate agents that basically worked as a middle man between the sell and buyer. Real estate agents knew people who wanted to sell and who wanted to buy. This knowledge allowed them to set up (broker) deals in this network of people. At this point, the agent was just being paid for their knowledge and network, not necessarily anything beyond that. However, public understanding of the agent at this point was incorrect. In 1983, the Federal Trade Commission completed a study that show 71% of buyers surveyed thought that the sellers agent (the one showing them the property) was actually "their" agent. As a result of this, agency disclosure to consumers came into being. This meant that all parties must be provided a written explanation, to be signed by a prospective buyer or seller, explaining to the client the role that the broker plays in the transaction. This was meant to reduce confusion and litigation down the road. However, compliance within the real estate industry has been historically terrible on this issue.
Why does an agency disclosure matter? It protects the buyer from potentially disclosing confidential information to the seller's agent, that could then be used to the seller's advantage. Buyers agency was born out of necessity to protect consumers from predatory brokerage behavior and allow them to compete in the marketplace.
Working with a buyer’s agent, you and the buyer’s agent sign a WB-36 Exclusive Buyer Agency Agreement that includes a Disclosure of Real Estate Agency. This Disclosure lists the fair treatment duties owed by all agents to all parties and the duties owed to principals or clients, and indicate that the buyer’s agent is the agent of the buyer. You are the buyer’s agent’s principal or client, and the buyer’s agent receives a fee when he or she successfully helps you find a property and negotiate a purchase contract in accordance with your buyer agency agreement. You have the right to negotiate the fee with the buyer’s agent and determine whether the fee is paid by the listing broker, the seller by you, or by some combination of these. A buyer’s agent helps you get the best possible price, negotiates for beneficial contract terms, and generally assists you throughout the transaction. A buyer’s agent owes you the fair treatment duties owed to all parties plus the higher level of agent-client fiduciary duties.
What fiduciary duties does a buyer’s agent owe to me in addition to the fair treatment duties owed to all parties?
- Loyalty.A buyer’s agent must loyally represent you, avoid all conflicts of interest with you, and put your best interests ahead of the interests of any other party.
- Disclosure.A buyer’s agent is obligated to make a full, fair and timely disclosure to you of all known facts that are lawfully material to transaction. A material fact is one that a reasonable person might feel is important in choosing a course of action.
- Obedience.The agent must carry out the obligations stated in the WB-36 Buyer Agency Agreement and must obey all of your lawful orders which relate to agent’s duties as stated in the contract. For example, the agent must order a survey or appraisal on your behalf if you ask him or her to do so, provided this function lies within the scope of the buyer agency contract. However, an agent may not violate the law. For example, they must not refuse to show you a property owned by a member of a minority group.
One of the biggest outcomes of the Burnett V. NAR court case is that a jury found that the NAR artificially inflated home prices by coupling commissions paid to agents. The primary issue of the case focused on the NAR rule mandating the use of the offer of compensation model when the property is advertised on the MLS. The plaintiffs argued that this practice by the NAR “forces home sellers to pay a cost that, in a competitive market and were it not for defendants’ anti competitive restraint, would be paid by the buyer,”. They also claimed that the NAR requirement artificially inflates the commission of the home buyer’s agent. The jury agreed, stating that the defendants “conspired to require home sellers to pay the broker representing the buyer of their homes in violation of federal antitrust law.” The plaintiff’s counsel claims that the solution is for buyers to finance these commissions as part of their mortgage but acknowledges the steep regulatory barriers to adopting this strategy.
Now I whole hardheartedly agree that the problem of listing compensation on the MLS was a bad practice because it incentivized agents who acted against their client's best interest. These agents would steer their clients to homes that had a hire commission listed on the MLS. This practice not only violated any ethical code about doing what is best for one's client, but it hurt the public's trust in real estate agents immensely. I personally never used compensation to guide any of my clients to make their purchases. I listened to their wants and needs and found homes for sale that their expectations. That is the most important part of being a buyer's agent. Getting paid is nice but at the same time, making sure that you laid out all the options on the table so that they could make the best decision for them, is paramount to the relationship. I would hate it if someone gave me misleading information on one of the biggest purchases of my life. I would never want anyone to feel that way.
Another outcome is making sure that before a buyer's agent does any work, that the buyer has read and signed a Buyer's Agency Agreement. While this has always been the law, poor practices within the real estate industry prevented this from happening every time. Buyers' agents got so used to this customary system in which the seller would pay the commission of the buyer's broker, that they just automatically assumed they would get paid when they found their client a house. 6% became this automatic standard to charge. 3% to each broker and then that is split between their broker and whatever percentage the real estate agent gets to keep. While it's always been negotiable, it just because the norm to charge. I will admit that many seller's agents probably did a bad job communicating that this rate was negotiable for both the buyer and seller's agent. No want likes to talk about money and charging a flat fee keeps it simple and fast. But I must say that it has never been law or policy of real estate agents to charge that percentage. It has always been negotiable.
One of the biggest complaints in the court case was that all these commissions drove the cost of the home upwards. In some ways this could be true since when pricing a home, agent commission could have played a factor in the initial asking price for that amount. However, this isn't always the case since the value of a home isn't actualized until a sale is final. Someone actually has to agree to pay at that price and when the buyer has an experienced agent, they could negotiate a lower asking price. In theory, it seems possible that having the buyer pay for their agent would decrease the price of a home but in reality, sellers are trying to maximize the amount of profit they make. So, in practice, this could mean that sellers will continue to price their home at the same levels and just pocket the difference. If this happens then it's really a disservice to the buyer because it may increase the amount of money they pay at closing vs money being financed through the sale of the home on the seller's side. VA loans don't allow the buyer to finance their buyers commission, so it would hurt VA home loan users that don't have a lot of capital to begin with.
Well, the seller shouldn't pay for the buyer's agent...
On its face, this seems like a logical conclusion. The seller should have to pay someone that doesn't bring them any value in the transaction. But there lies the problem, believing the buyer's agent brings no value to the seller. Let me ask you this, would it change your mind if a finder fee was paid instead of a commission? If a finder's fee is defined as: (also known as "referral income" or "referral fee") is a commission paid to an intermediary or the facilitator of a transaction. The finder's fee is rewarded because the intermediary discovered the deal and brought it to the attention of interested parties. The presumption is that without the intermediary, the parties never would have found the deal, and the facilitator thus warrants compensation. Would it not be the case that the seller is just paying the buyer's agent for bringing them a client? Not to mention the amount of time saved through negotiations and getting everything ready to close for parties involved in a timely manner, should that not also increase the value of dealing with a buyer's agent?
In short, paying for the buyer's agent is incredibly beneficial to the seller. It incentivizes agents to present all options, without giving preference. It could be that dishonest real estate agents would sway their clients from dealing with any seller who isn't offering to pay. So, the seller would lose out on a possible purchase. Or the extra cost burden to the buyer would lead them to personally decide against dealing with any seller who would not pay those fees. So, this could be an incentive offered by sellers to attract better offers. However, it could mean those not offering to pay for buyer agents would get lower offers to make up for the money the buyer has to pay upfront to their agent. There is a huge grey area at how this will play out in the real world now.
In all honesty, the buyer's agent still does a huge amount of work for the seller. They bring the seller potential clients. And since in the state of Texas, they are all required to be fingerprinted, they would have peace of mind allowing strangers into their home to view it. It also saves the seller's agent time by not having to show the house constantly and having a middleman to present the home, keeping the information being shared for both parties neutral. A buyer's agent also saves on time spent waiting on paperwork and prevents a lot of potential legal problems that may arise from an inexperienced buyer. So, to say that a buyer's agent brings no value to the seller would be dishonest at the least.
