Lew Sichelman

The term caveat emptor, or “buyer beware,” has perhaps never been more important in the housing market than it is now. That’s because more and more buyers are being asked to sign contracts linking them to the real estate agents helping them find a house.

Most of these contracts are so one-sided and onerous, said the Consumer Federation of America, that buyers might be better off hiring a real estate attorney and working directly with the listing agent.

Earlier this year, the CFA examined 43 so-called buyer-broker contracts from 37 states, most of which were written by state Realtor associations, and found them wholly lacking in consumer protections. In fact, most were written to protect the agent, not the client.

One of the worst contracts was the draft from the California Association of Realtors, one of the largest and most influential groups in the country.

Law professor Tanya Monestier of the University of Buffalo Faculty of Law evaluated the document at the CFA’s request, and found that the CAR draft contract was “virtually unreadable. No layperson will be able to understand and appreciate the terms they are agreeing to.”

She concluded that the contract “disguises the obligation of the buyer to pay his agent” and that it “telegraphs how Realtors plan to circumvent the NAR settlement” – referring to the class action lawsuit resolution signed by the National Association of Realtors in March.

eXp Contract Exemplary

Under that settlement, starting Aug. 17, multiple listing services will require buy-side agents to obtain clients’ signatures on representation contracts. Until now, such contracts were rarely required.

Among other issues, Monestier said the CAR contract contained “problematic provisions related to dispute resolution, dual agency, commissions owed and buyer cancellation.” Her recommendation: CAR should dump the whole contract and start over.

For its part, CAR said Monestier’s evaluation “was based on an outdated version” of its draft contract, and that the latest incarnation addresses many of the concerns the professor raised.

Not every buyer-broker contract is worth trashing, though. The CFA holds out one from eXp Realty as exemplary, saying it could serve as a model for other groups’ contracts.

“The contrast between the CAR and eXp contracts could not be sharper,” said Stephen Brobeck, a CFA senior fellow. “The eXp contract is written with the buyer in mind. The CAR contract is written with the interests of the Realtor in mind.”

Unfortunately, most of the other contracts the CFA reviewed left something to be desired.

“Buyer agency contracts have the potential to protect homebuyers, but the way most are written, [they] protect only agents and their brokers,” said Brobeck. If unfair provisions are not removed, he said, buyers should jettison their agents and consider hiring an attorney and working directly with the listing agent.

Problematic Provisions

The unjust practices discovered by the CFA include:

• Charging unreasonable fees, which are often not counted as commissions.
• Limiting remedies for buyers who are dissatisfied, “including prohibiting litigation and limiting awards to the amount of the agent’s compensation.”
• Protecting agents and their brokers from uncoupled commissions, which was the basis for most of the class action lawsuits in the first place.

Brobeck described that last proviso as “the most troubling.”

The term “coupled commissions” refers to the common practice of buyer-agents collecting commissions from both their clients and from sellers. The real estate industry fears that if commissions are uncoupled, consumers will be able to negotiate lower rates.

Contract provisions that protect agents from “uncoupling” essentially allow them to sidestep the new regulations and seek additional compensation from listing agents. In short, said Brobeck, “Agents and their brokers will be able to continue colluding to maintain existing commission rate levels.”

If an agent asks a potential client to sign a buyer-broker agreement, they should be ready to give their buyer time to read it over carefully, evaluate the provisions and negotiate the terms.

For starters, buyers should ask for a 60-day contract, not one that obligates them to work with the agent for 90 days or longer. They should also want to strip the agreement of any penalty clauses for early termination.

“Most contracts allow agents to unilaterally withdraw from the agreement, and buyers should have the same opportunity,” said a CFA report.

And buyers should find out if their erstwhile agent will be seeking additional compensation from the seller, which may tempt them to steer you to certain listings.

But most of all, no agent should be allowed to abandon their fiduciary responsibilities to their buyer by, for instance, promoting properties that their firm has listed in order to retain the entire commission.

Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at lsichelman@aol.com.