Will the REAL Exclusive Buyer’s Agent Please Rise?

The November 2007 issue of Real Estate In-Depth, the monthly newspaper for Realtor members of the Westchester-Putnam County Board of Realtors, Inc., included an article written by the board’s legal counsel.  The article is entitled ‘New York State High Court to Define Disclosure Duties Of Buyer’s Agents’.   The article refers to a lawsuit filed by a buyer represented as a client in a buyer agency relationship from within a traditional listing company.  The buyer filed the lawsuit after learning that the home he was bidding on was purchased by another buyer who was also represented by a buyer’s agent from within the same company. 

The point of this post is not to discuss the actual case, but to describe the writer’s use of  ’exclusive buyer agents’ from Century 21.   His useage of ‘exclusive buyer agents’, referring to agents from a traditional listing company, is erroneous and very misleading.   Is the writer aware of the true definition of Exclusive Buyer’s Agent, as NAR defined it in the early 90’s?  Without a doubt.  

An Exclusive Buyer’s Agent is an agent from a company called an Exclusive Buyer’s Agency.  This is a company which pledges never to list property for sale, and therefore never represents sellers as clients in an agency relationship.  Sellers are always considered ‘customers’.  Dual agency and conflict of interest with ‘limited loyalty’ are not encountered in a company which practices true agency (ie.: Exclusive Buyer’s Agency, or an Exclusive Seller’s Agency).

The correct way to describe buyer agents from a seller’s listing company is to refer to them as ’non-exclusive buyer agents’.  The article encourages mainstream Realtors acting as buyer agents to use a written contract, known as an Exclusive Right to Represent Agreement, which is available from the Westchester-Putnam Multiple Listing Service.  This agreement, when used by non-exclusive buyer agents, serves mainly to protect the real estate company’s financial and business interests.  The buyer agrees to work only with that agent and company in the purchase of any property.  This obligates the buyer to that agency if he/she becomes interested in a property listed by that agent’s own company, as well as any property listed elsewhere.  The agent’s loyalty and advocacy to that buyer is compromised with dual agency on an in-house sale.  The issue of dual agency (conflicted agency) and the resulting diminution of loyalty, representation, and advocacy to the buyer are not discussed.  The buyer may be obligated to pay a higher fee to the agent for this type of non-exclusive buyer agency representation.

This is unfortunate for the home buyer, as the meaning and intent of  true ‘agency’, as a relationship between an agent and the agent’s principal (client) holds that the agent must place the goals and interests of the client above those of the agent and anyone else in the transaction at all times.  Non-exclusive buyer agents, utilizing an Exclusive Right to Represent Agreement, are contradicting the very meaning and essence of ‘agency’ for financial gain and control.    

Use of this contract by listing companies offering buyer agency is self-serving, as it allows the goals and interests of the real estate agency to be superior to the goals and interests of their respective ’clients’, for transaction control and maximum profit.  Use of this form enables the real estate company to retain the buyer as a captive client, regardless of the level of representation and loyalty the agent can provide.  

When a real estate agent from a listing company claims he or she can be your ‘exclusive buyer’s agent’, and insists that you sign an Exclusive Right To Represent Agreement, one should question that agent’s loyalty, their knowledge of duties owed to you, and ethics. 

The use of an Exclusive Right To Represent Agreement Form DOES NOT magically transform a non-exclusive buyer’s agent from a seller’s listing company into a legitimate Exclusive Buyer’s Agent!!

Be wary of signing an Exclusive Right to Represent Agreement with a non-exclusive buyer’s agent.

What common errors do home buyers routinely make?

Buying a home is one of the most stressful activities in the average person’s lifetime, on par with going through a divorce, paying taxes, or going to the dentist- but it doesn’t have to be!  Because buying a home is done so infrequently, most home buyers do not feel experienced or comfortable enough to ‘do it alone.’ 

Buying a home involves a myriad of mortgage products, inspectors, and engineers, to dealing with termites, radon, buried oil tanks, assessments, zoning issues, certificates of occupancy, appraisers, attorneys, title companies, insurance, and other services and concerns.  Home buyers rely on real estate agents to ‘help them through the process.’   The challenge is, most real estate agents represent the interests of sellers by law, and may not provide you with the best services and providers to protect your interests.

There is more far information available to consumers when buying a kitchen appliance, a television, or even an automobile, than buying a home.   Buying guides, such as Consumer Reports, offer a lot of information for a wide variety of products and services.  Because these items are generally purchased more frequently, and the monetary obligation is less daunting and far-reaching than buying a home, buyers feel more comfortable and experienced acting ‘on their own’ when buying products and services other than a home.  

So, after all that, here are some of the routine mistakes that buyers frequently make… 

1- Calling the listing agent or listing company for a property they have interest in seeing.   Why?  Because that agent and the agent’s company directly represent the best interests of the home seller.  Their job is to find the best buyer offering the highest price at the best terms for their client, the seller.   Most real estate agents by law represent the best interests of the seller, not the buyer.  An ordinary seller’s agent may offer to be your ‘buyer’s agent’, but that introduces the possibility of dual agency, which means you are essentially on your own, or no representation at all, which again means you are on your own.   They cannot provide you with information or counsel which would help you, while lessening the seller’s chance of selling at the maximum possible price and best terms.   Their job is to sell you a house, not help you buy one with your best interests in mind.  Seeing a home through a particular agent may obligate you to work with that agent in buying that home if you have already presented an offer for it, depending on the situation, and if certain protocol was properly exercised by the agent.

2- Visiting an open house, and buying the home through the listing agent at the open house- for the above-stated reasons. 

3- Using mortgage companies, home inspectors, attorneys, and other providers referred to them by an ordinary seller’s agent.  Because that agent represents the seller, and is obligated to do his or her best to bring that buyer to the closing table, quite often the providers referred are ‘rubber-stampers’, who will do the job, but not necessarily with your best interests in mind.  They depend on real estate agent referrals for work.  If a referred home inspector finds ‘too many problems’ with a house, that inspector risks losing future referral business from that agent and company.  A referred mortgage provider may not offer the most competitive rates, terms, and fees, and may be referred because they can get the deal closed, or because there is an affiliation with the real estate company. 

4- Asking a seller’s agent how much to offer, what a property is worth, what the drawbacks are of a certain home, neighborhood, school, or town, etc.  Seller’s agents cannot provide this type of information to unrepresented home buyers (customers).  Only an exclusive buyer’s agent from an exclusive buyer’s agency (a company which does not list property for sale) will provide this type of information, and much more, to home buyers, on any property.

5-  Providing the listing agent or a seller’s agent with personal and financial information, including your income, motivation to buy, mortgage potential, and other sensitive information.  They are required to disclose this info to any seller whose property you are interested in buying.  The result is you may end up paying more to buy this property than necessary.

What’s a homebuyer to do?  Smart homebuyers shop for a dedicated buyer’s agent before they start looking at homes. 

Only an exclusive buyer’s agency can guarantee 100% loyalty, representation, protection, advocacy, confidentiality, and disclosure to home buyers on any home 100% of the time.  A ‘part-time’ buyer’s agent from a company which lists homes for sale by law simply cannot provide this guarantee or level of service to home buyers.

NYS Agency Disclosure Law- Your Rights As a Home Buying Consumer

A study by the Federal Trade Commission (FTC) in 1983 found that over 72% of home buyers thought that the agent showing them homes represented their interests, when in fact they represented only the interests of home sellers.  

This study was prompted by complaints, mainly by home buyers, that information they gave ‘their agent’- unbeknownst to home buyers- was being passed on to home sellers.  This information was being used to the seller’s advantage to help negotiate maximum selling prices at the best possible terms.  The agents were following their legal duty of ‘full disclosure’ as ’subagents’ to sellers.   This included disclosure of sensitive information by real estate agents to home sellers of properties listed by companies other than the listing company.  Up until the Agency Disclosure Laws, few home buyers were ever aware of this.

The result of this FTC study was for each state to enact their own version of a Real Estate Agency Disclosure Law, which would explain to buyers and sellers the types of real estate agents available, their respective duties, and who represented whom in a real estate transaction.

New York State’s first Agency Disclosure appeared in 1992, with some notable revisions and changes made, leading to the most recent version.  It is interesting to note that Dual Agency at that time was considered a ‘legal and ethical gray area that State and Realtor officials recommend avoiding.’  Today, Dual Agency is a normal and accepted practice offered by most real estate companies (see previous posts on the pitfalls and dangers of Dual Agency to home buyers).   Dual agency mainly benefits the interests of the real estate company, by allowing it to keep an entire commission (double the money), while providing half the work and representation to the buyer and seller.

The current version of Agency Disclosure explains Seller’s Agent, Buyer’s Agent, Dual Agent, Dual Agency with Designated Sales Associates, and Broker’s Agent.  It is required by law that this form be provided to any consumer at ‘the first substantive contact’, before viewing any property, and before providing the agent with any personal or financial information about themselves.   The consumer is asked to sign the disclosure form and should be given a copy. 

The consumer always has the right to choose the type of agent they want to work with.   A buyer need not consent to Dual Agency with a simultaneous and notable reduction of the agent’s duty of undivided loyalty.  You can be referred to a different real estate broker (agency) to represent you on that transaction.

Please visit our website to read the current NYS Agency Disclosure, and also view a copy of a notice written by the NYS Department of State Counsel’s Office entitled ‘Be Wary of Dual Agency.’

Mortgage Pre-Qualification/Mortgage Pre-Approval- What’s the Difference?

One of the very first steps a home buyer should take, before choosing a real estate agent (preferably an exclusive buyer’s agent from an exclusive buyer’s agency) and prior to the home search, is getting mortgage pre-qualified or pre-approved.  This will give you an idea of the amount of financing a lender will provide based on your credit, income, and other requirements.  However, these terms are often used interchangeably.  What’s the difference?

A mortgage pre-qualification is the quickest and easiest way of getting a general idea of how much a lender may offer to lend you.   The lender will usually run a credit report, and then issue a written certificate based on verbal [undocumented] information, including your income and employment status.  A pre-qualification is usually provided at no cost to the potential borrower.   Pre-qualification letters are less meaningful than a pre-approval.   Many listing agents will require a mortgage pre-approval with an offer to purchase, but will frown upon receiving a mortgage pre-qualification.

Note:  A pre-qualification or pre-approval are not a guarantee or commitment to provide financing.  Only a formal unconditional loan commitment may be considered a firm approval to provide financing.

A mortgage pre-approval requires written documentation and verification of income, assets, credit, and employment.  A pre-approval requires completing a formal loan application, and an application fee is typically charged.  A pre-approval is much more reliable as a written indication of how much financing a lender may provide.  A Good Faith Estimate should be received by the borrower within 3 days of the loan application, which will give a borrower an idea of estimated closing costs, based on an estimated sales price and property taxes.

Ask the mortgage officer how much the monthly PITI payment will be based on the loan amount requested.  PITI is mortgage principal and interest, taxes, and homeowner’s insurance.  Is this figure within your budget, or is it more than what you can comfortably afford?  If it is too high, consider a lower price range, a more affordable area, or a different type of housing (ex.:  condo or co-op). 

How Are Exclusive Buyer’s Agents Compensated?

Many people believe that the seller pays the commission in a residential real estate transaction.   Well, the fact is, while real estate commissions are normally disbursed by the seller’s attorney at the closing, the buyer is providing the funds for the brokerage fees as part of the purchase price, which is the source from which the commission check(s) is/are paid. 

Real estate commissions are built into the asking and final selling price of residential property listed through the Multiple Listing Service (MLS).  The buyer is paying these fees, which are included as part of the actual total purchase price.  If the buyer is buying a home through an ordinary seller’s agent, that buyer is not receiving agency representation or protection, but is still providing the funds for the commission to the listing and selling agents.  The listing and selling agents represent the interests of the home seller with legal duties to negotiate for the highest possible price at the best terms for the seller.  

When a buyer purchases a home through an exclusive buyer’s agent (EBA), most, if not all, of the compensation to the EBA is already covered, through MLS cooperation with the listing agency, so it usually costs the buyer no more to use an EBA than buying a home through any seller’s agency.  However, the buyer gets much more from EBA representation, including loyalty, protection, evaluation, verification, negotiation, and advocacy- duties and services that no seller’s agency acting as a ‘buyer’s agent’ can provide or guarantee.  This translates into savings in time, money, and effort.  These savings quite often can be very substantial. 

Exclusive buyer’s agents are Realtor members with the same access to visit any MLS listed property, just like any Realtor, and are typically compensated the same way as any Realtor- through the proceeds of the transaction.   EBA’s help to level the playing field for home buyers in what was, for many years, strongly tilted to benefit home sellers only.  The fairly recent move by the National Association of Realtors and various state Realtor associations towards sanctioning dual agency as an acceptable practice mainly benefits the financial interests of the real estate company.

Before calling the listing agent/company of a property you are interested in viewing, consult an exclusive buyer’s agent.  It will be one of the smartest decisions you make towards the purchase of your next home! 

Key Definitions (Part 4): Exclusive Seller’s Agency/Exclusive Buyer’s Agency

For the past 90 years or so, all real estate agents were Exclusive Seller’s Agents.  When a real estate agent lists a home for sale, that listing agreement is actually a contract.  An agent from the listing company, as well as any agent from any company other than the listing company, by law represents the interests of the seller, in a client-level relationship (subagency).   This includes legal duties to negotiate for the highest possible price at the best possible terms for the seller, and to disclose everything they know about any buyer that would increase the seller’s final selling price, and improve the terms of sale. 

Example:  If a buyer customer tells an ordinary seller’s agent to make an opening offer of $340,000, but mentions he/she is also willing to pay the full asking price of $400,000 for the home if necessary, that agent is required by law to pass this information on to the seller (fiduciary duty of full disclosure).  This is traditional real estate [seller's] agency, and the way the real estate business has been for many, many years. 

Seller’s agency is good for sellers, but not very good for home buyers…

…which is why Exclusive Buyer’s Agencies and Buyer Agency Representation have grown tremendously in popularity in the U.S. over the past several years.

BEWARE:  Most real estate agents claiming to be ‘buyer’s agents’ are not true [exclusive] buyer’s agents!  This practice exposes the buyer to non-representation or dual agency on a property listed with that agent’s company, and only serves to benefit the financial interests of the listing company.  They are non-exclusive buyer’s agents, although they may require you to sign an ‘exclusive right to represent agreement’, which only benefits the agency, not the buyer.

If an agent claims to be an exclusive buyer’s agent, and that agent lists property for sale, or works for a company which lists property for sale, that person/agency is not an exclusive buyer’s agent.  This is an unethical and fraudulent use of  ‘exclusive buyer’s agent’ as an agency and agent choice.

Exclusive buyer’s agents work for companies called Exclusive Buyer’s Agencies.  Exclusive Buyer’s Agencies and their agents never list property for sale.  Sellers are considered customers, not clients (Refer to Definitions, Part 1 to explain these key terms).   

Not listing homes for sale is the only way to ensure, by law, that home buyers are fully represented 100% of the time by the company with undivided loyalty on any property, without the pitfalls of dual agency or non-representation to the buyer.   This practice enables the exclusive buyer’s agent and his company to concentrate on finding the best home for the buyer client.   No ordinary seller’s agent saying they can act as a ‘buyer’s agent’ can make this claim or guarantee undivided loyalty 100% of the time.

Exclusive buyer’s agents verify listing information for accuracy, provide fair market value reports, advise buyers on how to negotiate most favorable price and terms, protect and maintain buyer confidentiality of sensitive financial and personal information, disclose what is right and wrong with any property of interest, and much more.  Exclusive buyer’s agents are typically Realtors with the same access as any Realtor to visit any property listed with any  seller’s listing company.