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Buyer representation agreements will become more common following the multibillion-dollar verdict in the Antitrust Commission case known as “Sitzer |” BURNETT — But examples of such contracts are rife with “unfair terms” that favor agents and brokers, according to a scathing report released Tuesday.
Steve Brobeck
Report from the Consumer Federation of America—”Required Buyer’s Agency Contract: Impact on Home Buyers” — reviewed 43 such contracts from 37 states, most of which were issued by state or local associations of REALTORS®. The regulator found “unfair practices” in contracts, advised homebuyers to take precautions before signing and invited the regulator to review the language in contracts.
“Buyer agent contracts have the potential to protect homebuyers, but most contracts are written in a way that only protects the agent and his or her broker,” Stephen Brobeck, CFA senior fellow and author of the report, said in a statement express.
“If a buyer’s agent refuses to improve unfair contract terms, the buyer should consider hiring an attorney and working directly with the listing agent.”
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According to a press release from the Court of Final Appeal, these “unfair” terms include:
- Charging “unreasonable” fees, many of which are levied on top of commissions rather than in addition to commissions and are sometimes referred to as management fees, transaction fees or regulatory compliance fees
- Requesting dual agency (where the agent represents both the buyer and the seller and owes no fiduciary duty to the buyer or either party) or transaction brokerage (where the agent has no fiduciary duty to either party),
- No explanation of how conflicts of interest involving other buyer clients (for example, if they are interested in the same property) are resolved,
- Limiting the remedies available to complaining buyers, including prohibiting proceedings or trials before a judge or jury, switching to mediation or arbitration, and limiting damages to the amount of the agent’s compensation, which the CFA considered may not prevent “egregious Behavior”
- Pre-fill in the blanks for terms such as commission rates and contract length, which may hinder negotiation of these terms
- Allow buyer’s agents to charge commissions to buyer clients and home sellers
Last year, a National Association of Realtors survey showed that 41% of homebuyers said they had signed a buyer’s agency agreement – and the CFA said that comes as lawsuits over how agents are paid and commissioned increase. This number is likely to rise in the future. More and more states require contracts. The nonprofit found that at least 13 states currently require them.
“An important point is that most states require only one contract but do not specify what the agreement must contain,” the report said.
“Additionally, the industry has a lot of leeway in writing contracts, which is often done by REALTORS associations and then gives agents and brokers the ability to amend the contract. So while the contract must comply with state laws, such as those regarding agents and Confidentiality laws, but these agreements are written for the benefit of agencies and brokers.”
“Events arising from class action lawsuits can be very beneficial to homebuyers,” Brobeck added. “However, if buyer contracts are not rigorously scrutinized and improved, these benefits may be severely limited.”
The report says provisions that allow buyer’s agents to continue contacting listing agents and require sellers to receive additional compensation outside of negotiations with buyers would harm consumers by maintaining current commission structures and rate levels. As a result, courts should ban the practice in any class action settlement, the report said.
“Buyers’ agents can continue to direct clients to properties offering these prices and their listing agents,” the report said.
“Most listing agents represent both buyers and sellers, and they can continue to convince their clients that the current 2.5% or 3.0% commission is normal and will incentivize buyer’s agents to sell their properties. Therefore, despite the buyer’s efforts to negotiate Buyer agent commissions, but agent commissions are still really set by the industry.”
The report states that Section 7 of the Realtors Code of Ethics discourages accepting compensation from multiple parties but still allows agents to do so with informed consent.
“If in fact the buyer knew that this clause was in their contract, it would be very easy for the buyer’s agent to get the buyer to agree to pay the seller an additional fee,” Brobeck said.
If the seller offers a buyer’s agent commission that is higher than the commission negotiated between the buyer and the buyer’s agent, most current buyer’s agent agreements allow the buyer’s agent to keep the difference, the report says.
“For example, if a buyer negotiates a 2% commission with the buyer’s agent and the seller agrees to offer 3%, then the buyer’s agent can pocket the 1% difference rather than having the buyer use the 1% to help. Pay selling expenses. Costs,” the report said.
“This provision may increase costs for either the seller or the buyer. Sellers will either have to pay the one percent themselves or have it added to the sales price, thereby increasing the buyer’s costs.”
The report recommends that buyers interview the agent and request a buyer’s agency contract before the interview so that they have time to read, evaluate and negotiate the terms of the contract regarding agent compensation, exclusivity, contract length and potential conflicts of interest, and possibly seek legal advice .
“Buyers should be prepared to walk away from unfair contracts or inflexible agents,” the report said.
“As buy-side contracts become more frequently used, buyers are likely to place more demands on these contracts, and more agents and their brokers may be more flexible in agreeing to client requests.
“Should a buyer work with a buyer’s agent without a contract? It may be wiser to work directly with a dual agent or the listing agent with a trading broker, but also hire an attorney to protect your interests.”
If working with a listing agent, the report recommends insisting that the agent act as a facilitator who cannot legally favor the seller.
Regarding conflicts of interest, the report says, “Buyers should only agree to lose true representation if they have appraised multiple properties and concluded that the property listed by the buyer’s agent or their broker is the property they want.”
Regarding compensation, buyers should try to negotiate a reduction in the buyer’s agent commission from the 2.5% typically charged in their area to 3%, question any additional fees, and ask if the buyer’s agent will seek compensation from the listing agent and/or the seller as reported , the committee agreed with the buyer.
“This additional compensation may tempt buyers’ agents to steer buyers toward listings using this compensation,” the report states. “Buyers should also make sure they know what offers the seller can offer before submitting an offer on a property.”
The report recommends buyers consider paying a retainer fee to their agent.
“This fee will provide the buyer’s agent with some compensation if they show a property that many buyers decide not to purchase,” the report said.
“Buyers should ensure fees are reasonable and ask for them to be credited to the commission at the time of sale.”
The CFA also advises buyers to refuse to sign any contract that prevents them from seeking court remedies to resolve complaints.
“The class action lawsuit has convinced industry leaders that buyer agency contracts are needed to protect the industry from future litigation,” Brobaker said.
“Regulators, including state attorneys general, should review these contracts to ensure consumers, as well as agents and brokers, are protected by these contracts.”
Send an email to Andrea V. Brambila.
