Tuesday, October 28, 2008

Law of Agency - Buyer's Brokerage

Have you ever contacted a real estate person to help you find an apartment/house? Have you called them “my agent”? Have they corrected you or not? Why are these very good questions?

I’ll tell you why…because if you are part of the majority that speaks in the vernacular - not Real Estate lingo, and are not aware of the politically correct, or rather, lawful and binding terms under which a Real Estate professional must operate, you will really not truly understand that the agent that is showing you that apartment/house does not owe loyalty to you no matter how nice and helpful they are. And no, they are not YOUR agent.

Have you signed that form as they quickly rattled off without breathing, “Irepresenthesellerjustsignhere” and you signed it thinking yeah whatever...not knowing that you just signed away that person’s loyalty to another person? It’s not as bad as it sounds. It’s standard practice, and by law, even though you signed that form and the salesperson/broker tells you that they are working for the seller, they DO owe you honesty and courtesy and it really behooves them to be helpful in whatever way they can without being disloyal to their client, the seller, so that even if they represent the other side, that does not give them the right to lie to you or be rude or unhelpful. They have to present the apartment/house with all its imperfections noted no matter who they are loyal to. However, they do not have to disclose things to you that are not necessary.

I keep saying that it is fascinating stuff to me these days, learning everything I can about Real Estate and it is! But for some reason I am stuck on Buyer Brokerage. If you are a typical NY’er you probably don’t know about Buyer Brokerage. Why? Because it is not really practiced here in the State of New York.

Before we get to Buyer Brokerage let’s cover the main concept known as the Law of Agency. I will put it in laymen’s terms here as you can go online anywhere and find that whole ”FIDUCIARY” lingo stuff. I do like the way it is laid out here though so you can CLICK HERE and see a nice rundown of how agency works.

If you have a property to sell, and contact a brokerage firm (real estate office) and a salesperson comes to you and draws up a contract which you then sign, to list your property, this has now created what is known as an Agency Agreement. Now that brokerage firm owes you their loyalty and will try and either sell that property themselves or have another brokerage firm send their salespeople over with prospective buyers until at last your property has been sold. Throughout the process you can count on them working FOR you. Trying to get you the highest price they can as well as selling it as soon as is possible.

The customer that walks into the same real estate office comes in and says they are looking to buy a house, and it just so happens that your house meets their needs perfectly. Right away the Salesperson that talks to the buyer/customer has them sign the form that says they represent you, the seller. Then they go and show that property and before you know it they are in love and they buy it! Throughout that process, the salesperson has been helpful and working WITH the customer but if you notice they are not working FOR the customer. At the end of the day, both sides are happy and all’s well that ends well.

So why am I stuck on the other side? Why do I want to talk about the Buyer/Customer? Maybe because of my many years of customer service, maybe because I am a people’s person and it is in my blood to owe loyalty to people as a whole not just one side. But then I have never been in the business where I would be in the predicament of owing my loyalty to both sides, where both customers are my clients. This is what is meant by Dual Agency. Buyer Brokerage can easily result in a Dual Agency situation. See the 3 diagrams I put together below then read on for more real estate in my vernacular. It is really annoying how the pictures do not come out good here but click on the link below each graphic to see the full images with all my little notes. (These were inspired by Mr. J Watson, in my humble opinion, the best of the instructors at The New York Real Estate Institue.)

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In New York, Buyer Brokerage (also known as Buyer Agency Agreement) is not practiced very much. To figure out why, we have to look at some of the advantages and some of the disadvantages in this type of agency.

Advantages for the Buyer/Client:
~ The broker owes you 100% of their loyalty. (i.e. help you negotiate a deal that is in your best interest not the sellers)

Disadvantage for the Buyer/Client:
~ Owe loyalty to the broker - as with any agency agreement when you sign that form, you are now in contract with the broker. (i.e. If they in good faith help you find a house and then you turn around and go straight to the owner to negotiate the deal, you will be in breach of contract and still owe the commission to the broker.)

~ Dual Agency - if it just so happens that the house you want to buy was listed by the same broker that you have a buyers agency agreement with, in order to make that purchase you have to give up your right to 100% loyalty. Dual agency has just reared its controversial head. As the good book says, you cannot serve two masters. So, in this case, it is understandable that if the seller and buyer BOTH have an agreement with the broker that neither one can expect their due loyalty from that broker, though it is a given that the broker will try and do the best for both to make sure both sides are happy with the final negotiation.

Advantages for the Broker:
~ Buyers Loyalty - most buyers are not “loyal”. In other words they’ll go out and just shop around with as many brokers as they want and all the work you did for them does not matter if they end up buying something on their own. Under this agreement, you are working hard FOR them but now have their loyalty to boot. They will find what they are looking for with your help and you will get your commission on the sale when everything is said and done.

Disadvantages for the Broker:
~ Dual Agency - We all know that we want to avoid the big D.A.. This is the main and #1 reason brokers may not be in love with buyer agency agreements. Every broker wants to keep as much of the commission they can from any transaction. So, if they list the property, they would love to also be able to sell that property. This keeps it all in-house as it were. When a buyer is simply a customer, that is doable and perfectly alright. If a customer insists on a buyer’s brokerage contract then the broker has to try and find that buyer a property that was not listed by them so that they are not representing the seller as well. This is not the optimal situation because now the broker will automatically only get half the commission he could have gotten had he done that complete transaction in-house. And of course, if it just so happens that the buyer mentions a property they want to see and lo and behold it happens to be listed by this same broker, then the dual agency form must be filled out and both buyer and seller must agree to what that implies.

I wonder what people think - in light of all this, would you or would you not practice Buyer Brokerage? I know some people that swear by it. It’s true on the most part they are investors that really don’t have the time or will to go out and/or go online to search listings to find that perfect next property. For the typical first time home buyer, or someone looking to rent an apartment, it may not really be that option that makes sense…but for some it will really be in their best interest.

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