Lew Sichelman
Would you pay a 9 percent commission to buy a house? It’s conceivable, if you’re not careful.
If you sign a contract with an agent to represent you as the buyer – a so-called buyer-broker or buy-side agent – you are committing to pay them a commission when the deal is done. Let’s say that’s 3 percent of the sale price – half the rate that the listing agent collects.
The listing agent, who is supposed to speak for the seller, might split their 6 percent fee with your agent, which may – or may not – get you off the hook. But if they decide not to share, you’ll owe your agent 3 percent.
Yes, the listing agent’s fee is paid by the seller, at least technically. But in many, if not most, instances, sellers jack up their asking prices to cover at least some of the commission. So, while the seller pays the commission, they do so with your money.
Consequently, you could be paying a total of 9 percent – or even more, according to a new report from the Consumer Federation of America.
Buy-Side Contracts Increasingly Used
Admittedly, this scenario is a long shot; reputable agents on both sides of the transaction won’t let it happen. But there are a lot of not-so-good agents out there. One buyer-broker contract I’ve seen includes a provision that allows the agent to place a lien and foreclose on any property the buyer purchases if the buyer doesn’t pay the agent’s commission.
Clauses like this are what caused the CFA to issue a “buyer beware” warning about unfair provisions in buyer-agency contracts, which an increasing number of buyers are being asked to sign.
“The way most buyer-agency contracts are written protects only agents and their brokers,” said CFA Senior Fellow Stephen Brobeck.
Before writing the report, Brobeck examined 43 contracts from 37 states, almost all of which were issued by state affiliates of the National Association of Realtors.
Buyer-broker contracts have come to the fore recently as a result of class-action litigation against NAR and many brokerages, challenging how buyer’s agents are compensated.
No one knows what the outcome of those cases will be. But to get in front of the likely fallout – and to protect agents and brokers from future lawsuits – many state Realtor associations are telling their members to have buyers sign contracts obligating them to pay their agents directly.
Unfair Provisos
Brobeck’s research revealed several unfair provisos in these contracts. Some charge additional fees that are not credited to commissions, while others fail to detail how conflicts of interest with other buyer-clients are to be resolved. Some even block buyers from suing their agents if they believe they’ve been harmed.
But the most worrisome provisions protect agents from uncoupled commissions – those in which the seller pays commissions for both agents – which are the subjects of most of the class-action cases. The offending language permits the buyer’s agent to take additional compensation from the listing agent, over and above what the buyer agreed to pay.
Brobeck’s report noted that a 2009 Massachusetts Association of Realtors-issued buyer agency contract was among those analyzed as part of the research, but did not say which of the examined contracts contained problematic elements.
If these provisions stand, Brobeck fears that consumers could be harmed in several ways. For instance, your agent could steer you to properties listed by agents willing to split fees, enabling them to double-dip.
“It would be fairly easy for buyer-agents to obtain consent from buyers for an additional seller payment, if in fact buyers are even aware that this provision is in their contracts,” Brobeck warns.
Even if the listing agent only charged half the going rate, knowing your agent will get the other half directly from you, that still preserves existing rate levels. And that defeats the purpose of the class-action complaints, which seek to lower costs. So far, most cases have either been settled out of court or gone against NAR and big brokerages.
‘Right-to-Retain’ Clause Raises Concerns
Since most real estate contracts are written to protect agents/brokers first and consumers second, any buyer asked to sign a buyer-broker agreement would do well to read it carefully. For example, in many contracts, the buy-side agent could keep anything they’re paid by the listing agent rather than rebate it to you.
This “right-to-retain” clause is framed several ways: Some say buyer-agents can keep additional compensation; others, that the buyer is not entitled to it. Still others permit buy-side agents to take money from more than one source.
Clauses about charging retainer, administrative or transaction fees are also suspect, at least in Brobeck’s eyes. Retainer fees are justifiable, considering your agent may not be paid if there is no sale, no matter how much work they do. But the amount should be reasonable – and credited to the commission, if there is a sale.
Administrative and transaction fees are common in listing contracts, and supposedly cover the listing agent’s costs. But on the buy-side, Brobeck sees them as junk fees since a buyer’s agent incurs no marketing costs like hiring a photographer or staging a house.
Another onerous provision: allowing an agent to shift their allegiance from buyer to seller, vice versa, or from either party to the transaction itself. Such a clause can be part of the contract, Brobeck says, but the interests of buyers and sellers usually differ, and conflicts of interest are all but inevitable. As such, buyers should have the right to reject this switch if a conflict emerges.
Brobeck suggests interviewing several agents and requesting copies of their contracts before deciding. If a contract seems unfair or the agent seems inflexible, move on. Above all, be ready to negotiate – the commission, the length of the contract, the fees and any shift in fiduciary responsibility.
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.
