Editor’s note: This month, Inman News explores real estate compensation practices as an area of focused coverage. Join the discussion: Click here for details.
It wasn’t always easy representing just homebuyers.
Thomas Early recalls colleagues refusing to let him show their homes. He remembers a major brokerage offering him only a 1 percent buy-side commission.
"We were the oddballs," said Early of Buyers Real Estate Brokerage in Columbus, Ohio, which represents only homebuyers and does not accept property listings.
Now, two decades later, Early’s business is thriving. And some professionals in this real estate specialty are earning commissions on par with traditional agents and brokers who work with both buyers and sellers.
More importantly, "exclusive buyer agent" has become part of the industry lexicon, widely recognized by consumer advocates and the National Association of Realtors.
"I’m extremely well accepted in my market," Early said. "We have people jumping from the traditional side to the buyer’s side."
It is the exclusive buyer agents (EBA) who bucked convention by telling consumers ahead of time what the fees and commissions are and passed along broker bonuses and rewards to clients. These agents continue to campaign for greater transparency in real estate disclosures and talk about reforming compensation practices, envisioning the day when buyers and sellers separately pay their own agents.
"Traditional real estate brokers and agents have grudgingly come to accept them. Representing the buyer is good. That avoids conflicts with dual agency," said Bruce Hahn, president of the American Homeowners Grassroots Alliance and American Homeowners Foundation, a homeowners’ advocacy group in Arlington, Va.
Under dual agency, the same real estate agent or agents from the same office can represent a buyer and seller in a single home-sale transaction — the practice is outlawed in some states.
Despite their established presence in the industry, EBAs remain a minority voice.
"The real problem that we have is the consumer is not really aware of the EBA process. The agency disclosure statements are a real mess (nationwide)," said John F. Sullivan, president of the National Association of Exclusive Buyer Agents, which represents about 450 members and 120 brokerages in North America.
Only a handful of states such as California and Illinois include EBAs in their agency disclosure forms, he said.
To the average consumer, the confusion centers on one word: exclusive.
"Every state allows buyer’s agency now," Sullivan said. But "there is a fine line between ‘buyer agency’ and ‘exclusive agency.’ "
For generations, real estate agents worked for sellers. In the 1980s, buyer’s agents started to emerge in the West and then spread to the East. The industry, though, didn’t see it as a profitable way to do business. Traditional agents saw these newcomers as a threat and feared commissions would be driven down.
"Nobody really represented the buyer. The (traditional) agents really didn’t know how to negotiate," Sullivan said. "They didn’t like having to share commissions."
Steve Casper, a veteran Cincinnati Realtor and NAR executive committee member, said it was human nature for agents to balk at first. "It was something new. Where there is something new … there is resistance."
But states started to enact regulations for buyer’s rights to fair representation and more homebuyers began walking into brokerages asking for agents to represent them. Agents also started to organize. They lobbied lawmakers and spoke out at Realtor events. They created training and accreditation programs.
In 1988, Denver Realtor Barry Miller founded the Real Estate Buyer’s Agent Council.
In 1995, the National Association of Exclusive Buyer Agents formed. "We were not going to go away. We were loud about what we were doing," said Early, a former NAEBA president.
Recognizing the trend, NAR acquired the Real Estate Buyer’s Agent Council in 1996. It has become the dominant group covering all forms of buyer representation, growing to more than 50,000 members — most working at companies that also work with home sellers.
"From the public standpoint, they are going to get the same representation from an exclusive buyer agency and a non-exclusive buyer agency," Casper said. "I happen to act as a buyer’s agent who will take listings."
The difference, NAEBA says, is its independence from sellers. The association sees flaws in the traditional real estate compensation structure, arguing consumers can be left in the dark over how much agents are paid.
"There is no doubt that consumers don’t understand whose interests are involved. It is critical to understand what the flow of money is and who is getting what," said Barry Zigas, director of housing policy for the Consumer Federation of America. "Buyer’s agents are an important alternative for consumers," he said.
Typically, sellers pay a 5 percent to 6 percent commission that is based on the total selling price of the home — this percentage rate can vary by client, agent, broker and company, and some companies offer a compensation structure that is not based on a percentage rate — with the listing agent offering a portion of that rate to the buyer’s agent.
During housing-inventory gluts like today, it’s common for sellers to entice buyer’s agents with jumbo commissions, rewards or other incentives such as cash bonuses and vacations. But consumer advocates fear these sweeteners could prompt some agents to steer clients toward homes that most benefit the agents’ pocketbooks.
NAR doesn’t require agents to tell buyers ahead of a purchase what they will be compensated. Federal rules require fees to be disclosed at closing.
Exclusive buyer agents detail their compensation upfront and have clients sign a contract spelling out the pay before they start house-hunting. The most common fee is a 3 percent commission based on the sales price. Some buyers may negotiate a straight fee or an hourly rate. If there is a shortfall in the agent’s final commission, the client will pay the difference.
Any seller "bonus goes to the buyer. It doesn’t impact EBAs," Sullivan said.
For unlisted property such as properties sold directly by the owner, compensation becomes part of the offer and paid from the seller’s proceeds. In specific transactions, such as a property sale between family members, EBAs often charge a 2 percent commission, with 1 percent paid in advance.
Agents also may require a retainer ranging from $100 to $500. The fee is usually applied to closing costs.
EBAs point out they have a legal responsibility to their clients as they accompany buyers on showings, offer advice on bids, negotiate contracts and help with the settlement. Their main goal is negotiating the lowest sales price — even if it means earning a few hundred dollars less in commission.
"They’re going to get representation and it will never be pulled away from them," Early said.
Of course, the buyer’s agents who work for listing companies perform much of the same tasks. But consumer advocates say potential problems can crop up for buyer’s agents working at listing companies, especially firms that command a large market share in a region.
Despite disclosures, consumers may not fully comprehend that the agents involved in a home sale have a potential conflict of interest when shown a home listed by their brokerage. Those concerns are heightened in dual-agency scenarios, as the same agent or brokerage company ends up collecting both sides of the commission (the buy-side and the sell-side).
"There is a lot of confusion that comes out of dual agency. There is a lot of suspicion," Hahn said. "We would prefer disclosures be absolutely clear on dual agency and exclusive buyer agency."
But disclosure practices are spotty at brokerages across the country. A 2007 NAR report profiling sellers and buyers found about one in three disclosure statements are signed during the first meeting between agents and their clients. Roughly 25 percent of the time, the documents are signed when a contract is written.
Sullivan wants to change that practice. His association is crafting proposed legislation for Congress to impose uniform disclosure rules to ensure EBAs are listed as an option for consumers.
"The problem is you have 50 (states with) different disclosure statements," Sullivan said. Consumers "should be aware of their agency options. It is something consumers deserve."
Gilbert Mohtes-Chan is a freelance writer in California.
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