REAL ESTATE

Buyer Rep

As discussed in Chapter 7 of our publication When to Buy and When to Sell: Combining Easy Indicators, Charts, and Financial Astrology, and several previous Real Estate blogs, the purchase of a home may be one of the biggest decisions, and investments, to make in one’s lifetime. Over the last few years, it has never been more difficult for young buyers, with rising inflation, property prices and property taxes/insurance, and of course, higher interest rates. Commercial real estate has seen its own crisis as well, highly affecting small businesses with office vacancy and plunging values. The situation appears to be only getting worse, with an increasing number of defaults and loans coming due.

      Although it is important for an inexperienced buyer to have representation, the Buyer Agent procedures have changed significantly in the last year. In the past, some brokerages would utilize Buyer Agent agreements, and some would not. The agent service was typically “free,” unless there was an overlap in any signed agreement for a guaranteed commission amount.

      Historically, there has been three basic forms of agent representation:

      The first, and generally most popular, was the selected agent (not associated with the listing company) who would “show” a property to a prospective buyer, and represent them if they decided to pursue that specific property. This process could be repeated for as many homes as desired, without any obligation to that agent for other properties. Without any signed agency contracts, the buyer was free to use any agent, at any time, prior to presenting an offer through that agent. This service was truly “free,” as the buyer agent would be compensated by the listing agent/brokerage, via a pre-set percentage, which was disclosed on the actual listing paperwork. In some states a Mandatory Relationship form may be required to clarify, without any monetary contract, this agreement between the agent and buyer or seller.

      The second form of representation would be accompanied by a Buyer Representation Agency form, which would expand the relationship to include a mutually agreed on fee structure for the agent’s services. This agreement would include items regarding the geographical area covered, the length of the contract, and the amount owed to the agent for services provided. This form is considered an actual contract, though it could be cancelled by the agent’s broker if a legitimate complaint, and/or request to terminate, was made by the prospective buyer. This agreement would ensure payment to the agent for any sale and closing procured within the timeline of the contract. Most contracts under this structure were also based on the co-broker fee, in which the listing agent/seller agree to a pre-determined percentage of the listing agent’s commission be split with the buyer’s agent. On some occasions, the buyer agent may have their own agreed on commission percentage from the buyer, which (if exceeding the co-broke share), could cost some out-of-pocket expense to the buyer, which was usually minimal.

      The third, and now only form of representation per a new rule from the National Association of Realtors (NAR), makes the buyer more responsible for the compensation to their agent. This new rule (stemming from a lawsuit settlement) now requires the buyer to negotiate and agree to their agent’s commission, based on a pre-set flat fee, or a percentage of the sale/purchase price. Here are some extra guidelines to the new policy;

·       Legally, there are NO automatic “industry standards” to these commissions. For instance, for many years brokers/agents would charge a common rate of 6% to list/sell a home. In recent years, many have decreased their fees to 5%, or lower, as home prices have increased, to remain competitive. The truth is, there is no actual standard, and the percentage is more of a “guideline.” The practice of a universal fee can be considered a form of collusion. The same concept applies to a buyer agent using a “standard” of 2.5 – 3%.

·       Be sure that the buyer agent is transparent about all fees, and services provided to earn those fees. Some companies now identify as “discount brokers,” and do not provide all the services a buyer may expect, like showing properties, paperwork preparation, research, negotiating with sellers, and/or scheduling/attending inspections. Though there is no legal issue with charging for only some of these services, the fee should be appropriate and spelled out ahead of time, in writing.

·       When negotiating with a buyer agent, a sliding scale may be useful to incorporate into your agreement. Rather than basing fees on the purchase price of the home (many of which are very inflated), it may be wise to come to an agreement on the amount of time and/or number of times the agent is needed. For instance, if Buyer “A” is a handyman, familiar with all household systems, and has attended a closing in the past, the agent may not be needed as often as one with first-time purchaser, Buyer “B,” who has no experience or knowledge of those particulars. In that instance, it would seem appropriate for the agent to receive less compensation from Buyer A.

·       Another reason to approach the negotiation in this manner is the potential difference in time it may require to complete a purchase. If Scenario 1 required showing the buyer one property, presenting an offer, having your first offer accepted, and a trouble-free closing, does that garner the same amount of effort/time as Scenario 2, that required viewing 10 homes, presenting 6 offers, finally having one accepted, issues with inspection, additional negotiations and contingencies, and a delayed closing. Obviously, the agent would have spent significant more time during the Scenario 2, and would appear to deserve higher compensation. To further skew the formula, should the agent in Scenario 1, with a purchase price of $500,000, be compensated twice as much as the agent in the second scenario, if that home sold for $250,000?

     Additionally, sellers and their agents may still agree to compensate the buyer agent in some manner. In those instances, the buyer agent MUST disclose any such payment to their buyer, as part of the new rule. These new implementations are meant to protect the buyer, and should be transparent by agents at all times.  

      **Note – During the preparation of this blog, housing numbers are down across the board, from sales prices to mortgage applications to new home building in many areas across the country. Do your due diligence, review our prior real estate blogs, and do everything to protect yourself from scams and deception.

      Please visit the website www.augustassociatesllc.com for home values, listings, and professional assistance.