by Robert J.
Bruss
On a recent four-hour
flight from Washington, D.C., to Denver, my seatmate was especially
interesting. He has the same handicap I have. So we related very well.
We're both lawyers. But he specializes in dispute mediation.
Without revealing any confidential information, he told me
about a mediation he had a few days earlier involving home buyers who
got "cold feet" and backed out of a home purchase. The mediation
dispute involved refund of the buyer's good-faith earnest-money
deposit.
The big problem, as my new friend explained, was the
first-time home buyers had no buyer's agent to advise them. The
seller's listing agent represented only the seller and did not act as a
"dual agent" with any fiduciary duty to the buyer other than honesty.
After the seller ordered the customary local inspections,
including a pest control termite inspection, which wasn't entirely
clear, the buyers decided to cancel their purchase. The seller felt
this was an over-reaction and refused to refund the buyer's substantial
deposit. Before going to trial, the case was referred to mediation to
attempt to work out a settlement.
SHOULD HOME BUYERS HAVE
THEIR OWN AGENTS?
As the real-life example above shows, that home buyer was
alone and unrepresented by any adviser. The seller's listing agent
represented the seller only and was not in a position to advise the
buyer how best to proceed when the inspection report was unclear if
there was termite damage or not.
As my airline seatmate emphasized to me, it would have cost
those home buyers nothing extra to have their own buyer's agent looking
out for their best interests.
The reason is the listing agent customarily splits the sales
commission, paid by the home seller, with the buyer's agent. Although
the sales commission split is usually 50-50, sometimes it is unequal.
I've seen MLS (multiple listing service) listings where the
listing agent offered 60 percent to the selling agent, with the listing
agent earning 40 percent. Or, the listing agent might keep 60 percent
and the buyer's agent would earn 40 percent of the sales commission.
The commission split is disclosed on the MLS listing so the
buyer's agent doesn't have to show his/her client buyer a home if the
commission split isn't acceptable to the buyer's agent.
THE ONLY TIME THE BUYER
PAYS THE SALES COMMISSION
Virtually the only time a home buyer pays their buyer's agent
a sales commission is if that agent shows and sells a "for sale by
owner" home where the FSBO seller absolutely refuses to pay the buyer's
agent any commission.
In that rare situation, the buyer's agent rightfully looks to
his/her buyer to pay the sales commission in return for the agent
finding the FSBO home and negotiating the sale.
But most FSBO home sellers are only too happy to pay a
buyer's agent 50 percent of the customary sales commission for
producing a successful home sale.
Especially valuable for FSBO sellers is the buyer's agent
will arrange the 1,001 details of getting the sale successfully closed.
Most FSBO sellers are absolutely unqualified to negotiate the sale,
help arrange the financing, supervise the customary professional
inspections, and hold the sale together until the successful closing.
WHO REPRESENTS WHOM?
Surprisingly, many home buyers think the nice real estate
agent who listed and showed them the home for sale represents the
buyer. Usually, the buyer meets the listing agent at a weekend open
house.
However, unless there is a specific agreement for the listing
agent to also represent the home buyer (called a "dual agency") the
seller's agent legally represents only the seller's best interests.
In states allowing dual agency, the listing agent has a
fiduciary duty of honesty, truthfulness and bravery (well, maybe not
bravery) to both the home buyer and seller. When a home buyer becomes
seriously interested in buying a home, that is the time for the buyer
to discuss with the listing agent "who do you represent if I buy this
home?"
Most states now require a written agency disclosure form
prepared by the real estate agent(s) so there is no question who
represents whom.
WHO PAYS THE REALTY AGENT
DOESN'T MATTER
The real estate agency laws of most states clarify that it
doesn't matter who pays the licensed realty agent when it comes to
determining who that agent represents.
The practical reason is in 99 percent of home sales the
seller pays their listing agent and the listing agent then splits that
sales commission with the buyer's agent according to their
commission-split agreement. Of course, FSBO situations are different,
where the FSBO usually pays 50 percent of a customary commission to the
buyer's agent.
The very important net result is it costs the home buyer
nothing extra to be represented by their own buyer's agent.
PROS AND CONS OF HAVING A
BUYER'S AGENT
The advantages for home buyers of having their own real
estate agent looking out for their best interests are obvious. But the
unlikely disadvantages are less obvious.
If a prospective home buyer wants to purchase a FSBO home,
and if the FSBO seller refuses to pay any sales commission (very
unlikely), the buyer then has a choice of either pay his/her buyer's
agent a commission or don't buy that home.
A possible problem can occur when the home buyers don't have
their own agent and the seller's listing agent offers to act as a
disclosed dual agent. In that situation, the dual agent is not supposed
to disclose confidential information to the other party.
To illustrate, that means a dual agent cannot disclose to the
buyer the lowest sales price the seller has indicated is acceptable.
Nor can the dual agent disclose to the home seller the highest price
the buyer has revealed would be acceptable.
But even the most ethical dual agent who knows this
confidential information might be tempted to use those details to steer
the negotiations, especially on price, to a successful sales contract.
Overall, there is virtually no disadvantage for a home buyer
to have his/her own buyer's agent looking out for their best interests,
especially since there is no extra cost in 99 percent of home-purchase
situations.
HOW TO FIND A GOOD
BUYER'S AGENT
The best way to find a superb buyer's agent is to ask friends
and business associates for recommendations. Any licensed agent, except
the listing agent of the home you want to purchase, can be your
exclusive buyer's agent. Most buyer's agents do not require a written
agency contract.
But some real estate brokerages represent only home buyers.
Unless you have received a superb recommendation to one of these
buyer's agents, be wary of signing any exclusive buyer's agent
representation for longer than 30 days.
Some of these buyer's agencies insist on a 90-day or even a
180-day exclusive buyer's agency contract. Such contracts should be
avoided unless you have been very highly recommended to the agent by a
trusted recent home buyer who was very satisfied with that buyer's
agent.
SUMMARY
Just as most home sellers have their own listing agents
looking out for them, home buyers also need their own exclusive buyer's
agents looking out for their best interests. Home buyers should insist
on a written agency disclosure so they are very clear who represents
whom in the transaction.