Buyer Agency Agreements – An Overview

More than ever before, real estate brokers are promoting the use of buyer agency agreements — a contract stating that the broker will represent the buyer as his agent and that the broker’s job is to find a suitable property for the buyer.

Because these agreements are legally binding and give the broker specific authority, buyers should fully understand their rights and responsibilities before signing on the dotted line.

These agreements are promoted as giving buyers a stronger level of representation due to the fiduciary relationship they create. Once the agreement is signed, the broker must champion the buyer’s interest every step of the way.

Three types of buyer agency agreements are used by today’s realtors:

1.Exclusive buyer agency agreement (or exclusive right to represent)

With this completely exclusive agency agreement, the buyer is legally bound to compensate the agent at the time when the buyer purchases any property of the same type as described in the contract. Regardless of whether he or she locates the property, the broker is entitled to payment. Even if the buyer finds the property on is own, the agent is still owed payment.

2.Exclusive-agency buyer agency agreement

Similar to an exclusive buyer agency agreement, this exclusive contract is between the agent and the buyer. But with this type of agreement, a limit is placed on the broker’s right to payment; the broker is entitled to payment only if he or she actually finds the property that the buyer purchases. Therefore, the buyer is free to locate a suitable property with no obligation to pay the agent.

3.Open buyer agency agreement

This is a nonexclusive agency contract between a buyer and a broker permitting the buyer to enter into similar agreements with an unlimited number of other brokers. Only the broker who actually locates the property that the buyer eventually purchases is entitled to compensation.

Before entering into a buyer agency agreement, there are some important considerations for the broker and buyer to discuss. First of all, the broker should make the same disclosures to the buyer that he or she would make to a seller in a listing agreement. The buyer should fully understand the three types of agency available and the parties rights and responsibilities under each of them. This means that the broker should clearly explain the specific services provided to a buyer-client entering into each type of agreement.

In addition, the matter of compensation must be discussed in detail. For instance, buyer’s agents may be paid a flat fee for services, an hourly rate, or a percentage of the final purchase price. In some cases, an agent may request a retainer fee upon signing the agreement, in order to cover the initial listing and promotional expenses. This retainer fee may be applied as a credit toward any fees due at the time of closing. A buyer’s agent also may be compensated by sharing the commission that the seller pays.

Buyer agency agreements provide agents a comforting level of reassurance that their efforts will not go unrewarded, motivating them to work even harder for the buyer. Of course, for buyers they must balance provide financial guarantees to agents against the risk of limited or poor performance.

What is Limited Agency?

Most people understand that a Buyers Agent is the agent that represents a buyer through a real estate transaction and the Sellers Agent represents the Seller during the transaction. Often, buyers do not understand exactly what “Limited Agency” (sometimes referred to as Dual Agency) is and how it will impact their sale or purchase. In Utah, the exact definition of Limited Agency taken directly off a Limited Agency Consent Agreement from Utah Association of REALTORS® reads:

“A Limited Agent represents both seller and buyer in the same transaction and works to assist in negotiating a mutually acceptable transaction. A Limited Agent has fiduciary duties to both seller and buyer. However, those duties are “limited” because the agent cannot provide to both parties undivided loyalty, full confidentiality and full disclosure of all information known to the agent. For this reason, a Limited Agent must remain neutral in the representation of a seller and buyer, and may not disclose to either party information likely to weaken the bargaining position of the other; such as, the highest price the buyer will pay or the lowest price the seller will accept. A Limited Agent must, however, disclose to both parties material information known to the Limited Agent regarding a defect in the Property and/or the ability of each party to fulfill agreed upon obligations, and must disclose information given to the Limited Agent in confidence, by either party, if the failure to disclose would be a material misrepresentation regarding the Property.”

In Utah, it is legal to act as a limited agent, but is it in a buyer or sellers best interest to allow a Limited Agency? If you work exclusively with a Buyers Agent, that agent should be working to locate your home and negotiate the best deal on your behalf. They should be somewhat aware of your financial situation and how much you ultimately plan to spend for the purchase of a new home. The Sellers’ Agent is hired by a seller to market the property with the intention of producing a buyer. This agent is usually aware of the sellers’ position and how much they would be willing to take for the property.

This is where the conflict may present its self. If the Agent is representing both the buyer and the seller in the same transaction, they are bound by fiduciary duties to both clients. It would be impossible to obtain the best deal if the representing agent must remain neutral. The negotiation will only result a mutually “acceptable” deal. This may or may not be the “best deal”.

A Buyers Agent, who is representing a clients interest, will be able to share pertinent information they learn that can result in a lower offer than the client may have initially presented. Alternatively, a Sellers Agent may discover the buyer will likely accept a counter resulting in a higher net to the seller. Information learned can be shared during an exclusive agency, however when Limited Agency is a factor, this information can not be shared. In Utah, each client has the choice to decline or accept limited (or dual) agency. The Exclusive Buyer Broker Agreement has a designated section that fully explains (and requires a signature to accept) Limited Agency. Also, should the Limited Agency situation actually arise, the client will again have to sign an agreement to this. Each party (the buyer or the seller) has the right to obtain an independent agent.

Many clients often point out the fact that the Agent will be making double the commission. This should not be a consideration for either party involved in Limited Agency. You must remember this agent will make commission on their listing no matter WHO sells it, and if the Agent is already working with the buyer, then anything the buyer purchases the Agent will make commission on that as well. Essentially any deal could be a “double commission” when an agent works with both buyers and sellers independently. So it is unfair to make the Agents commission a factor or a negotiation tool, for either party.

Limited Agency… should YOU participate? I suppose it depends on how well you know your Agent. Will you get the best deal? Possibly. You may have to rely on some of your own instincts and research to determine what the best deal will be, as you will not have full disclosure and advice from your limited agency real estate professional.

Real Estate Agents and Roles of an Agency

Agency is a relationship existing between two parties called principal and agent, and in the case of property, a Jamaica real estate agent has the function to create a contractual relationship between the principal and third parties.

The Creation of Agency

The power of the Jamaica property agent to act may arise in any one of five ways:

1. Express Authority

2, Apparent Authority

3. Ratification

4. Necessity

S. Presumption of wife in the case of cohabitation.

1. Express Authority

The express authority for an agent to act on behalf of a principal (otherwise called the vendor) can be made either in writing or orally. No formality is required except where the agent is appointed to execute a deed; his authority must be by way of a deed. That is, he is to be given a Power of Attorney. While being trained Jamaica realtors are sensitized of this in a special apartment guide for Jamaica.

2. Apparent Authority

This arises where the principal represents to a third party that the agent is authorized to act on his behalf, intending that the representation be acted upon and is acted upon by the third party. The principal is bound by the agreement entered into by the agent. This is common place for most Jamaica home rentals.

3. Ratification

Where the agent has no authority to contract on behalf of the principal or exceeds such authority the contract is not binding on the principal. The principal may however afterward confirm and adopt the contract so made. This is known as ratification.

For Ratification to take place the following conditions must be present:

a) The agent must have contracted expressly as agent for a named principal.

b) The principal must have been in actual existence at the time of making the contract. He cannot there pore bind a company which was not formed at the time of making the contract,

c) The contract should be capable of ratification. Thus a void contract cannot be ratified.

d) The principal must at the time of the ratification have full knowledge of the material facts.

e) Ratification must be of the whole contract.

Ratification is retrospective in its operation, that is, the parties are put in the position they would have been in if the agent had when the contract was made, the authority he purported to have had. This is possibly the most fundamental with respect to knowledge of the Jamaica real estate market. Most investors are made aware of ratification in a guide to investing in Jamaica property.

4. Agency of Necessity

This arises by operation of law and occurs where one person is entrusted with another’s property and due to some emergency it becomes necessary to do something to preserve that property. Although the person entrusted with the property has no express authority to do the act necessary to preserve it, because of the necessity, the authority is presumed.

Before the Agency of Necessity arises three conditions must be satisfied;

a) It must be impossible to get the principals’ instructions.

b) As a necessity, commercial value must be the catalyst for the creation of the agency

c) The agent of necessity must act in the interests of all parties concerned.

5. Agency of Cohabitation

At common law where a husband and wife are living together, the wife is presumed to have her husband’s authority to pledge his credit for necessaries judged according to his style and standard of living. Though not a legal representation of the principal, this happens more often than not in the divestment of Jamaica homes for sale.

The presumption of Agency arises from cohabitation and not from marriage. It has been held to apply equally in the case of a woman living with a man as his mistress; the presumption can be rebutted if the husband proves:

a) he expressly forbade his wife to pledge his credit;

b) he expressly warned the supplier not to supply his wife with goods on credit:

c) his wife was already sufficiently supplied with goods of the kind in question;

d) his wife was supplied with a sufficient allowance or sufficient means for the purpose of buying such as goods without pledging the husbands credit,

e) The order though for necessaries, was excessive in extent or having regard to the husband’s income, extravagant.

Where the husband has been in the habit of paying his wife’s bill with a particular supplier, his wife’s agency will be presumed and he can only escape liability by expressly informing the supplier that his wife’s authority is revoked.

History of Real Estate Agency Relationships

In the beginning, real estate brokers were known as middlemen and optioneers. Back then, the customary practice was for a middleman to know about a property for sale, but to keep it secret from other middlemen. It was difficult for these middleman to collect a fee for their services so they would resort to tactics that were not always in their seller’s best interest. Optioneers, on the other hand, were usually more successful in collecting their fees because they would tie up the seller’s property on an option to purchase, sell the property to a buyer at a price over the option amount, pay the seller the option price, and then pocket the rest.

The early real estate brokerage business was loosely organized and used methods of brokering that were often dishonest, subject to fraud, and that took advantage of sellers and buyers. Eventually, a newer concept with the real estate broker being an agent of and owing a fiduciary duty to the seller and receiving payment for his services was developed. This new concept forced the seller and broker relationship to a higher level of service and duty. It also allowed brokers to list property for sale using contracts. These contracts are what we now refer to listings. The earlier forms of listings we called open listings. The open listing is a type of non exclusive listing contract authorizing a real estate broker to offer a property for sale, find a buyer and get paid for services upon the closing of that transaction.

Other brokers could also have open listings for the same property, but only the broker who actually found the buyer would receive a commission. In addition, no broker would get paid a fee if the seller sold the property. The open listing discouraged cooperation between brokers, since each broker could obtain their own open listing. To solve the open listing problem, the exclusive agency listing became popular.

The exclusive agency listing is a type of listing contract wherein the seller offers only the listing brokerage compensation if the buyer is procured through the brokerage’s efforts or the efforts of other real estate brokerages. This means that in certain situations, such as For Sale by Owner, the listing brokerage may not receive compensation when the property is sold. In the exclusive agency listing, the listing brokerage or another brokerage working with the listing brokerage must procure the buyer in order to have a claim on compensation.

The exclusive agency listing encourages competing brokers to find buyers for listing, since the listing brokerage pays the selling brokerage’s fee. However, the seller still does not pay a fee when a seller finds the buyer. The exclusive agency listing eventually gave rise to the exclusive right to sell listing.

The exclusive right-to-sell agreement, the listing brokerage is offered compensation in the event of a sale regardless of who procured the buyer. The exclusive right to sell listing guarantees that the listing broker will get paid a fee, even if a competing broker or the seller sells property. It provides the most protection for the listing broker and is considered in the best interest of the seller because the listing brokerage will put effort and resources into marketing the property, since a commission is guaranteed during the term of the agreement.

Even after the exclusive right to sell listing became popular, there was little cooperation between brokerages, since a buyer who wanted to buy a specific property would have to deal with the broker who had exclusive listings of interest. It was also quite clear to all parties in that the broker represented the seller and that the buyer had no representation.

By the 1950s there was pressure for more cooperation between brokerages. As a result, a broker working with a buyer would contact competing brokerages to to learn of their inventory and possible matches for their clients. Deals often resulted where the selling agent did not know the seller or their agent and the selling agent’s only dealings were with the buyer. Suddenly, the concept that the selling brokerage owed its fiduciary duty to only the seller was no longer a neat and logical concept. However, it would take many years before the unworkable agency concepts would be sorted out and lead to buyer representation.

As the 1950s and 1960s progressed, a more formalized cooperative brokerage system, known as the Multiple Listing Service (MLS), was developed. Through the MLS, the concept of subagency evolved. Simply stated, this meant the listing broker was the agent of and represented only the seller. The listing brokerage would hire sales associates who were considered subagents of the seller. The listing MLS brokerage was required to make the listing available to all cooperating brokerage within their MLS. These cooperating brokerages were also deemed subagents of the listing brokerage, who were agents of the seller. If the cooperating brokerage had sales associates, they were subagents of the cooperating brokerage, who were subagents of the listing brokerage, who was the agent of the seller. During this period, an agency relationship with a buyer was not possible, since the agency relationship was always with the seller. The only duty a licensee owed to a buyer was to not lie when asked questions about a property. The concept of “buyer beware” was truly the reality of how the brokerage business operated and buyers were always unrepresented.

The rise of consumerism, as manifested in numerous court decisions, put pressure on the brokerage business to be more concerned with the interests of the buyer. Because of that, licensees working with buyers had an affirmative duty to disclose known matters affecting a property. For example, if the broker knew that a roof leaked, he would have to disclose this fact. This disclosure concept was later expanded by the courts to include conditions about the property that the brokers should or could have known.

By the 1980s, a government study found that nearly three-quarters of all buyers thought the brokerage they were working with was representing them as a client. The same study concluded that nearly three-quarters of all sellers also thought that the cooperating brokerage represented the buyer’s interests. It soon became obvious the concepts of agency law that the industry and governmental regulators had attempted to impose in order to simplify and clarify the agency relationships had not worked. Continued pressure from consumer groups and the courts finally led to the buyer representation movement of the 1990s.

In 1991, the National Association of REALTORS® formed an advisory group to study agency representation issues. Testimony was received from real estate practitioners, industry experts, the public, and state regulatory authorities. The advisory group’s report made the following recommendations:

  • The NAR’s multiple listing policy should be modified to make subagency offers optional. If subagency was not accepted by a cooperating brokerage, then the listing brokerage was to offer compensation to the brokerage representing the buyer.
  • The NAR would encourage state associations to promote changes in real estate law and regulations in order to promote disclosure of agency options. These options would include seller agency, buyer agency, and disclosed dual agency. The purpose of this recommendation was to assist consumers in making informed decisions regarding representation.
  • The NAR should encourage real estate brokerages to adopt written company policies addressing the handling of agency relationships with its clients and customers.
  • The NAR would encourage education of all members on the topic of agency representation. State regulatory agencies would also be encouraged to include agency as a mandatory topic in continuing education requirements for all licensees.

As of 1992, the National Association of REALTORS® adopted the following policy:

“The National Association of REALTORS® recognizes seller agency, buyer agency and disclosed dual agency with informed consent as appropriate forms of consumer representation in real estate transactions. The association respects the need for all REALTORS® to be able to make individual business decisions about their companies’ agency practices. Furthermore, NAR endorses freedom of choice and informed consent for consumers or real estate services when creating agency relationships with real estate licensee.”

These NAR changes to representation policy modified the way the industry practices. Exclusive Right to Represent buyer agreements now allow a buyer to contract with a brokerage to find, and negotiate, the purchase of real property. Generally, these agreements are for a specified period and require the buyer to pay a commission upon the closing of the real property transaction. As an agent of the buyer, the buyer’s brokerage owes all of the fiduciary duties (care, loyalty, disclosure, obedience, and accounting) to his principal, the buyer.

Sole, Joint or Multiple Agency?

Many clients I meet at valuations know they can use one or several estate agents. They also know using more than one agent could cost them more on the fees. What they might not have considered is the small print of each type of agreement or the relative merits of using one, two or many agents. Here’s our brief guide to each;

Sole Agency

Contracts of this type should read as follows –

‘You will be liable to pay remuneration to us, in addition to any other costs or charges agreed, if at any time, unconditional contracts for the sale of the property are exchanged:

•with a purchaser introduced by us during the period of our sole agency or

•with whom we had negotiations about the property during that period, or

•with a purchaser introduced by another agent during that period.’

The agent gets paid if they “introduce” a buyer during their contract period, or if you let another agent “introduce” a buyer within the original agent’s contract period. The definition of “introduced” is a wide ranging one. It may well cover negotiations with a buyer, viewings, sending details, discussing on the phone as well as all these scenarios:

•A buyer who knocks on your door as a result of seeing a “for sale” board.

•A buyer that views through one agent but later makes an offer through another agent.

•A buyer that is given details of your property by an agent and then realises that they know you.

•A buyer who views through an agent but suggests that you do a private deal

Contracts must have a set period of time (the average is 12 – 14 weeks). Please note that a contract almost always has a notice period at the end – add this to your stated contract length to work out the real amount of time you’ll be locked in to your chosen agent. This type of agreement does allow you to find a buyer for your home yourself without paying the estate agent (a private sale). A “sole selling rights” agreement (best avoided) would mean the agent would get paid even if you did find a private buyer.

Sole agencies are the most common of the agreements – most agents want an exclusive shot at selling your house. If the estate agent is any good, you shouldn’t need another agent to help in selling. However, you might want to check how comprehensive an agent’s marketing is before you agree to a sole agency – if they don’t cover all the bases (or have over valued your house to get the business), you don’t want to be locked into a contract lasting months and months.

Joint Agency

If you appoint two estate agents to act together for you in selling the property, this is known as ‘joint agency’ or ‘joint sole agency’. A joint sole agency contract is where the estate agents involved share the commission when the property is sold. In practice, the agent that actually finds the buyer usually gets a higher split of the commission but this percentage share would need to be agreed at the start of the contract between owner and both agents.

Joint agency is often a useful way to get out of a sole agency before the end of the contract – if you tell your estate agent that you’re not happy and are considering terminating their contract at the earliest opportunity, then give them the option of being retained on a joint agency basis, they might be smart enough to see the merits of a slice of a fee rather than none at all. This type of agency is also useful when you want to use two agents that offer different services (for example a city agent and a country agent if you live on the border of a city). Do bear in mind the majority of the public have a negative perception about properties on with more than one agent (“I’ve seen that before – there must be something wrong with it”). If you’re thinking about joint agency, try to choose two agents that can communicate/work together happily.

Multiple Agency

More than one agent is appointed and there is no fixed contract period. You can add as many agents as you like, remove one at any time and so forth. However, only the agent that actually finds the buyer gets paid.

Often used when a property fails to sell with a sole agent, this is an extreme measure to take as the total fees will be considerably higher plus the property may become over-exposed very quickly. Confusion and disputes can also arise if agents argue over who introduced a particular buyer – make sure you keep a track of each agent’s activity.

Fees in General

Estate agents fees are due on completion and should have been invoiced at exchange of contracts. The invoice is sent to the solicitor acting for the owner, but the owner should also receive a copy to check. Most agreements are based on “no sale, no fee” so you shouldn’t pay anything if your house doesn’t sell (however, see below re extra fees).

Fees must be clearly stated on the contract – if the fee is a percentage of the sale price, a maximum amount in pounds and pence should also be displayed.

Although estate agents fees are often expressed as a straight percentage of the sale price, do remember they are also subject to VAT at the prevailing rate (currently 20%).

Some estate agents charge extra fees over and above the sale fee – we have recently seen these expressed as “advertising fees” or “withdrawal fees” ( a charge if your property doesn’t sell or you take it away from an agent). Costs up front for production of brochures and professional photography are also relatively common with upper market agents – it would always be worth making sure you know the total of ALL fees you may be liable for before signing a contract.

Watch out if you agree to a fixed fee from an estate agent – the fee is usually agreed based on the asking price so, if your property sells for less, you’re likely to be overpaying the agent compared to a normal percentage fee (which is charged on the final sale price)

If you want to give your agent extra motivation to achieve a top price, consider negotiating a tiered fee (eg 1% if they get under £240,000, 1.2% if they achieve between £240,000 and £250,000, 1.5% if they get over £250,000). Set the levels carefully to reward superb service and penalise an average result.

Extra Hints

If you change estate agents, make sure the previous agent gives you a list of names of the people they have “introduced” to your property. If one of those names goes on to buy the house (in practical terms within 6 months from the date of termination of the agent’s contract), the old agent is entitled to their fee. Make sure you don’t get into a scenario where you owe fees to both agents because you didn’t do your homework.

Always ask estate agents to confirm their contract terms in writing (you would think this is standard practice but you might be surprised!) and, if you do end a contract with an agent, make sure they confirm that as well.

You can go from one sole agent to another, from a sole agent to joint agents or any other permutation.

Don’t go backwards in marketing terms – if you leave an agent because they aren’t marketing your home effectively, take a breather and make sure the next one you choose can do better BEFORE you appoint them.