Buyers of existing homes are likely to have an easier time finding a real estate agent to represent their interests, an agent known as a buyer broker, now that the National Association of Realtors has introduced a series of new policies.
Although the changes, which began to take effect Jan. 1, are technical and involve the way Realtors interact through their Multiple Listing Service, the new rules in effect give NAR sanction to the once controversial concept of the buyer broker.
“Real estate is finally catching up with consumerism,” said Lino Darchun, a vice president at Palormo Realty in Chicago.
The changes are expected to have a powerful impact on consumers because the NAR by its very size-it is the nation’s largest trade group, representing more than 700,000 real estate professionals across the country-virtually dictates the way home buying and selling occur.
“The recognition of buyer agency is very positive,” said Chris Eigel, executive vice president at Koenig & Strey in Glenview. “NAR has put buyer agency into the mainstream of brokerage practice.”
“One of the problems has been that buyer representation has been seen as `different’-it overthrows the way business has been done for generations,” Eigel said.
In a traditional real estate transaction, a home seller agrees to list a property with a specific broker, creating an agency relationship between that broker and the seller. Under that arrangement, the broker represents the best interests of the seller at all times during the sale process.
In almost all cases under old rules governing the conduct of Realtors and their access to the Multiple Listing Service, any other real estate broker who became involved in the transaction, including one working with a buyer, would automatically be acting on the seller’s behalf as well, a relationship known as subagency.
Consumer surveys suggest that buyers are often confused about these relationships, believing in many instances that the real estate agents who were helping them find a home were actually working for them and had their best interests at heart.
In fact, the agency question has become so vexing that last week the Realtors joined in an unusual alliance with a previous critic, the Consumer Federation of America, hoping to push states to strengthen real estate agent disclosure laws.
The two organizations said the laws should require written disclosures with a standard form that must be signed by the agent, that disclosure must be made at the first substantive contact with the buyer or seller and that disclosure should be in concise, easily understood language.
The National Association of Real Estate License Law Officials, which regulates real estate brokers, also endorsed the effort.
“Agency disclosure laws in most states do not ensure that home buyers know whom their real estate agent represents,” said Stephen Brobeck, the federation’s executive director. “These disclosures are so important because most agents working with buyers actually represent sellers.”
The confusion in the relationships can harm buyers during price negotiations, for example, if they have disclosed to an agent the price they are really willing to pay for a house even though they are offering less. The agent, as a seller subagent, would then be obligated to the seller to try to get that price.
The groups said six states and the District of Columbia have relatively stringent disclosure laws. Nine states currently meet none of the proposed disclosure requirements. Illinois falls in the middle; it has a disclosure law, but it’s not as stringent as the model proposed last week.
“Confusion about whom a real estate broker or agent represents needs to be totally eliminated,” said Almon Smith, executive vice president of the NAR. “We’re serious about providing the public with this information.”
The NAR, sensing a growing tide of consumer discontent, set up its own task force on the agency question more than 18 months ago.
The Realtors at their annual convention in November agreed to implement a number of recommendations of the task force that will change the traditional agency relationship and open up the field to greater participation by buyer brokers.
The new rules change the definition of the Multiple Listing Service to make it a “unilateral offer of cooperation and compensation,” essentially giving sellers’ brokers the option to work with either buyers’ agents, seller subagents or both.
Previously, it was mandatory that listing agents make only offers of seller subagency through the MLS. And while that did not preclude buyer brokers from having access to the listings and bringing clients to the homes, neither did it spell out that seller agents were indeed permitted to work with buyer brokers.
“Buyers were confused about representation and have been saying `Please tell us whom you represent.’ But we see these changes as the second generation of that kind of disclosure. We’re now saying that it has to be a lot more than (just saying whom you represent),” said Sharon Millet, chairman of the NAR president’s advisory group on agency.
Although buyer representation is widely practiced in states such as California, the Midwest, particularly Chicago, has been slow to embrace the concept.
Early practitioners of buyer brokerage in the Midwest have often run into problems because of general unfamiliarity with the concept, as Beth Wheeler, a vice president at Palormo Realty, found out when attending a state Realtor meeting last fall.
“When the people sitting next to me found out I practiced buyer brokerage, they looked at me as though I was a foreigner,” she said. Midwest consumers are equally confused, Wheeler added, noting the majority of people she sees requesting buyer representation are from out of state.
But that is likely to change.
“The public is starting to pick up on it,” said Mary Rzepecki, chief executive officer of the Northwest Real Estate Board. “In the last three months, I’ve gotten phone calls from six buyers off the street requesting buyer agents. Prior to that, I don’t think we ever had a phone call.”
Cam Benson, president of Wildwood Realty in Chicago, began offering buyer representation two years ago and advertised the service in area newspapers.
Yet, because of the lack of response at that time, Benson stopped her marketing efforts. Now, under NAR’s new policies, she expects an uptick in consumer demand for buyer representation and plans to start advertising the service again.
Sara Benson O’Connor is so sure of the burgeoning demand for buyer brokers that she is pioneering one of the first exclusive buyer brokerages in the Chicago area.
“Someone approached me with this idea a year ago and I said it will never work because I was entrenched in traditional thinking,” said O’Connor, currently president of American Home Residential Investments in Chicago, a firm that offers both buyer and seller representation.
In mid-February, O’Connor will open her new firm, Buyers Resources Metro Properties.
While specialization may be coming down the pipeline, it will probably be relegated to smaller firms, many experts agree. Larger firms will try to wear hats of both seller and buyer agency.
“It’s driven by economics. Two fees (for the same company) are better than one,” said George Rosenberg, a real estate agent in Ventura, Calif., and publisher of The Buyer’s Broker Registry, a listing of agents who practice single agency (either seller or buyer representation but never both in the same transaction).
But one of the most vexing questions posed by the new order is how to handle situations in which the real estate agent, or the agent’s company, is representing both a buyer and a seller, a situation known as dual agency.
Dual agency can arise, for instance, where agents take on both buyer and seller clients and eventually match them up. Or an agent may agree to act as a buyer broker, then find that the best house for that buyer is listed by a seller agent from the buyer agent’s own firm.
The new NAR rules permit such dual agencies only if the relationships are fully disclosed to all parties at all relevant parts of the transaction.
Although disclosed dual agency may be legal, it’s sticky, agree many experts.
“It’s a very difficult place to be legally, not a place you want to be on a daily basis. You’ll find yourself between a rock and a hard place,” said Christine Ludwiszewski, staff attorney for Illinois Association of Realtors.
Ludwiszewski said it is difficult to have fiduciary responsibilities to two parties. You can’t negotiate the highest price for the seller and the lowest price for the buyer at the same time, she explained.
“To some extent, we’re taking a big step into the unknown,” conceded Eigel, at Koenig & Strey, acknowledging the difficulties of dual agency.
Those difficulties extend into the issue of compensation as well.
Again, in a traditional MLS arrangement, a cooperating broker bringing in a buyer but still acting as a subagent of the seller would be entitled to split the sales commission with the listing broker.
While there were no rules specifically prohibiting such a split with buyer brokers, there were no guidelines suggesting it could be done, either. Buyer brokers in the past often did work out such a split, however.
Since technically the commission all comes from the seller’s proceeds, many real estate professionals believe it is fair that only agents representing the seller be paid from these funds.
On the other hand, buyer brokers argue that in practice it makes no difference who brings the buyer in the door: If two agents are involved, no matter whom they represent, it is fair to split the commission since there would have been no sale without both parties.
The NAR task force did address the issue with a recommendation that basically said buyer brokers would have to be compensated the same way as seller subagents. But it was dropped by NAR officials who said they wanted more time to study it.
Millet said, however, that the current unofficial practice of buyer brokers being compensated in the same way as seller subagents, out of the sales commission proceeds, will likely become the norm.
There are experts who believe the whole issue of agency representation is overly cumbersome and archaic.
Stephen Baird, president of Chicago area real estate firm Baird & Warner, is a supporter of the facilitator concept, where real estate agents have reduced fiduciary responsibilities.
“Stockbrokers act as facilitators, not as agents for IBM,” he said.
Facilitators work not for commission splits but for fees, charged either hourly, as attorneys and accountants charge them, or at set rates for specific services offered from a menu of choices. Such brokers might work either for the buyer or the seller.
The idea of a real estate facilitator is beginning to emerge in some parts of the country, and the Realtors have said it will be the next issue they study. The Illinois Association of Realtors will be looking at the facilitator concept in upcoming months, said Gary Clayton, IAR executive vice president.
“I’m not sure every buyer and seller expects us to be their leader through the jungle of real estate,” said Eigel. “Buyers mostly want us to find the house. Sellers mostly want us to find the buyers. I’m not sure they need us to act as their full-fledged agents.”
