Understanding real estate agency

With house and condo buyers now out of their winter hibernation, and with fears of mortgage interest rate increases causing buyer panic in some areas, we’re now in the traditional spring peak home-buying season. But it’s not easy being a smart buyer this year, especially if you are buying your first home.

In communities with more qualified buyers than there are home sellers, it’s known as a “seller’s market.” But in areas with more homes for sale than there are qualified buyers, it’s called a “buyer’s market.”

Purchase Bob Bruss reports online.

Whether you plan to buy a home in a seller’s or buyer’s market, before starting the purchase quest, this is a good time to ask yourself, “Who really represents me in the home purchase?”

WHAT IS A BUYER’S AGENT?

Just as home sellers hire listing agents to market their homes to the largest number of potential buyers, such as through the local multiple listing service and on the Internet at www.realtor.com, home buyers also need somebody looking out for their best interests.

That person is known as a “buyer’s agent,” sometimes called a “buyer’s broker.”

A true buyer’s agent represents only the home buyer in the purchase transaction. The job of a buyer’s agent is to look out for the buyer’s best interests, including emphasis of drawbacks of a prospective home purchase.

Any licensed real estate agent can be your buyer’s agent. However, some buyer’s agents work for realty brokerages that represent just home buyers. These firms never accept listings of homes for sale.

But most buyer’s agents work for firms which represent both buyers and sellers so the situation often becomes very confusing for home buyers.

WHO REPRESENTS WHOM?

Confusion over who represents whom in a home sale became so complicated and misunderstood that a few years ago most states enacted agency disclosure laws.

There are three basic agency possibilities, with variations in some states: (1) agent represents the home seller only (called the listing agent), (2) agent represents the home buyer only (called the buyer’s agent), and (3) one agent represents both buyer and seller (called a dual agent). If a dual agency is disclosed to both buyer and seller, it is legal.

To cover the situation where one agent in a brokerage office is the listing agent, but another agent in the same office locates a buyer for the listed home, some state laws now allow “transaction agents” or “facilitators” where both agents work for the same brokerage. This avoids the potential “dual agency” legal conflict of interest where in one office an agent represents both the seller and buyer.

WHO PAYS THE REALTY AGENT IS IRRELEVANT

The real estate agency laws of most states now specify that who pays the sales commission to an agent does not determine who that agent represents.

There is a very practical reason for this legal result. When a home sale closes, the seller winds up with the cash and is in the best position to pay the sales commission to the listing agent. If a buyer’s agent produced the successful buyer, the custom is for 50 percent of the sales commission to then be paid by the listing broker to the buyer’s broker.

The net result is that working with a buyer’s agent usually costs a home buyer nothing extra.

However, there is one rare situation where the buyer might have to pay his or her own buyer’s agent. That occurs when the buyer’s agent shows the buyer an unlisted home, usually called a “for sale by owner” or “fizzbo” where the seller refuses to pay the buyer’s agent any sales commission.

In that circumstance, the home buyer is expected to pay their buyer’s agent 50 percent of a customary sales commission, typically 3 percent of the sales price. However, that situation rarely occurs because most do-it-yourself home sellers are so thrilled to find a buyer they will gladly pay the buyer’s agent half of a typical sales commission.

PROS AND CONS OF BUYER’S AGENTS

The obvious advantage for home buyers of having their own realty agent, instead of working directly with the listing agent (called a dual agent), is a buyer’s agent is free to point out the defects of home whereas the listing agent must primarily look out for the seller’s best interests.

But a drawback of having a buyer’s agent, instead of letting the listing agent handle the transaction as a dual agent and earning all the sales commission, is the listing agent then lacks the flexibility to “adjust” the sales commission downward to successfully close the transaction.

When a home buyer works directly with the listing agent who acts as a dual agent, that dual agent is not supposed to disclose confidential information to the other party, such as the lowest price the seller will accept or the highest price the buyer will pay.

But it is difficult for some dual agents representing both parties not to reveal confidences, such as steering the parties to a higher or lower price to put the sale together. However, when the buyer is represented by a buyer’s agent, that agent cannot reveal confidential information and likely to negotiate a better price and terms for the buyer.

Another possibility is the listing agent represents the seller only and the buyer is not represented by any agent. But this situation is becoming extremely rare because smart home buyers realize they need agency representation in one of their largest lifetime financial transactions.

HOW TO FIND A GOOD BUYER’S AGENT

If you’re selling a home, it’s not difficult to find a good listing agent. Several interviews and you should be able to find a competent listing agent. But finding a sharp buyer’s agent is more difficult because most experienced realty agents prefer working with home sellers. As the old real estate motto says, “Those who list last.”

Friends and business associates who have recently bought a home will gladly recommend their buyer’s agents if they were satisfied with the service.

Another method is to visit advertised weekend open houses to meet the listing agents. Most of these agents are also seeking buyers and will eagerly offer to act as a buyer’s agent on other homes. Sooner or later, you will find an agent with whom you can work to represent you as a buyer’s agent.

When you find a buyer’s agent you like, however, be wary about signing any buyer’s agency agreement. Some buyer’s agents try to contractually tie up prospective buyers for 90 to 180 days. Even if the buyer purchases a home alone, or through another agent, the contractual buyer’s agent gets half the sales commission. But better alternatives include (1) not signing any buyer’s agency contract or (2) signing only a 30-day buyer’s agency agreement, just in case the buyer’s agent turns out to be ineffective.

DON’T GET CONFUSED ABOUT AGENCY CONTRACTS

Home buyers who have any doubt about whom a realty agent represents in the transaction should not hesitate to ask. If you wander into a weekend open house, it’s obvious the agent you meet represents the home seller.

But that agent can also represent you, as a dual agent. If that seems like a conflict of interest, it is. However, it is perfectly legal if disclosed to both buyer and seller. Better yet, disclose to any listing agent you meet that you are already represented by your own buyer’s agent.

To avoid agency confusion, most states now require realty agents to disclose in writing who they represent in the home sale. If you are not clear on this issue, be sure to ask before signing any other paperwork.

CONCLUSION

Just as home sellers have their listing agents, home buyers need their buyer’s agents to look out for their best interests. To avoid confusion over who represents whom, most realty agents will gladly present a written agency disclosure form to both buyers and sellers.

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