For whom does your broker work?
The real estate maxim is, the broker works for the one who pays the commission. Traditionally, that’s the seller.
But for some buyers, the conventional broker’s role poses a conflict of interest. They ask: How can a broker have my best interest at heart when he or she is being paid by the seller? How can a broker help me find the best property at the best price when he or she is bound legally and financially to serving the seller’s best interest?
If you find yourself having these qualms about traditional brokerage, you may want to investigate a relatively new type of brokerage that has recently gained a foothold in the Chicago area, and found acceptance from the National Association of Realtors. It’s called buyer brokerage.
Here’s how it’s supposed to work: You find a buyer broker you want to work with and then sign an exclusivity contract that states you will not look for a house with another broker for a specified period of time. The buyer broker will hunt for homes that are appropriate for your needs and budget. He or she will negotiate every facet of the contract, striving to get you the best price and terms. Some buyer brokers will even help you find the best mortgage and homeowner’s insurance with the most favorable terms. Then they will represent you at closing.
If you’re wondering how buyer brokerage is different from the way your broker treated you when you bought your last home, the answer may surprise you.
On your side
The buyer broker is on your side. He or she is bound by contract to provide you with all the information you need to buy your dream home at the lowest price possible, and on the most favorable terms. Sharon Miraglia, a sales agent in the Libertyville office of Koenig & Strey, says one reason she likes buyer brokerage is that she often feels constricted by the laws of agency, which govern what she can say to the buyers she works with.
“I was working with a young couple that had spent months looking at houses. We narrowed it down to two choices, and I knew one was a poor choice,” Miraglia recalls. “It would be a hard resale, and it was in a bad location. But I couldn’t tell them not to buy it, because I was working for the seller.
“So I suggested we look at them side by side and compare them. That’s what they did and they selected the better one. But I never said, `Here’s what you should offer.’ Maybe the majority of (sub-agents) say those things, but I don’t. I don’t think we’re supposed to be doing that.”
Miraglia freely admits that if she had been working with the couple as a buyer broker, she would have told them upfront about the first home’s problems.
“If I’m working for the seller, my job is to bring in the best offer. When I’m working as a buyer broker, I feel free to give that kind of advice as well as to suggest different pricing (strategies) my clients might offer,” she says.
Definitions
What exactly is a buyer broker?
A buyer broker is a broker who makes a commitment to represent the best interests of the buyer, rather than the seller. But the buyer must pay for that loyalty, and in addition to signing the exclusivity contract, the buyer also assumes responsibility for paying the buyer broker’s fee.
“We view the seller as an adversary, and we can provide information that the seller’s agent can’t provide,” says Tom Phillips, general sales manager for AI Goodman Realty Inc. in Wilmette. “We can find out the true motivation of the seller and disclose that to the buyer. The selling agent won’t disclose facts that might be detrimental to the sale, such as if the couple is getting divorced, getting transferred or if the house is in foreclosure.”
As buyers’ representatives, buyer brokers must identify themselves as such when they first call to set up a showing. One of the problems they face is that even within the industry, not everyone knows what a buyer broker is.
And although buyer brokerage has been slowly creeping into the local residential real estate vernacular for the last five years, experts say that it was only last year that any significant number of buyer brokerage transactions were completed.
Still, the numbers are significant enough to warrant a major change in the National Association of Realtor’s code of ethics. More than 50 changes were adopted at their recent convention, all of which remove obstacles to buyer brokerage, says Bud Smith, NAR vice president and chief operating officer.
But obstacles remain. Experts say buyers generally have trouble with two facets of buyer brokerage: the exclusivity agreement and the payment for services rendered.
Exclusivity
When a buyer opts for buyer brokerage, he or she is asked to sign an exclusivity agreement. According to most of these contracts, the buyer agrees to work only with the buyer broker for a certain length of time. If the buyer purchases a home within the exclusivity period, he or she will owe the broker a fee.
Koenig & Strey’s “Exclusive Right to Represent Buyer Contract” is a three-page document that spells out the terms and conditions under which the broker will act as a buyer broker. Everything in the contract, says Chris Eigel, general sales manager for the brokerage firm, is negotiable. Including the length of the contract.
In the contract, the buyer broker agrees to use his or her best efforts to identify residential properties available for acquisition; to arrange for inspection of these properties; to negotiate a contract acceptable to the buyer; to safeguard and protect any confidential or proprietary information that the buyer may disclose; to disclose to the buyer any non-confidential information that would materially affect the buyer’s decision to acquire the property; and, to assist the buyer in securing financing or other commitments or services necessary to close the contract.
The buyer agrees to work exclusively with the buyer broker; to comply with reasonable requests to supply relevant financial information that may be necessary; to be available upon reasonable notice and at reasonable hours to inspect property that might be appropriate; to otherwise cooperate with the buyer broker; and, to pay the buyer broker’s compensation.
Sounds simple enough, but for buyers used to working with whatever broker they please for whatever length of time suits them, the idea of being bound to a single broker, even for a few days, can be disquieting.
Payment
The exclusivity agreement also covers the issue of payment. Buyer brokers have a fiduciary duty to the buyer because it is the buyer-not the seller-who pays them. The fee can be structured either as a flat payment, hourly or as a percentage of the purchase price of the home.
According to the contract, a fee-which will be 3 percent of the purchase price minus the retainer-will be due at the closing. The buyer also agrees to pay a fee if he or she acquires real estate within six months of the agreement’s termination, if the property was presented to the buyer by the buyer broker.
Most of the time, the buyer broker’s compensation ends up being paid by the seller. What happens is the seller’s agent agrees to split the commission with the buyer broker, just as the seller’s agent would agree to split the commission with a conventional broker.
Industry observers say having the buyer broker-who represents the buyer-ask the conventional broker-who represents the seller-to split his or her commission can be a major stumbling block.
To a lay person, it looks like a conflict of interest.
It can be confusing, admits Koenig’s Eigel, but if the buyer brokerage is disclosed-as is required by Illinois state law-and the seller’s broker agrees to split the commission, then technically there is no conflict of interest.
Experts say that at first, buyers only want to work with buyer brokers if it isn’t going to cost them anything out of their own pocket. Most buyers want to put every penny into their home, even if it means using a conventional broker.
“We were assured by Sharon (Miraglia of Koenig & Strey) that there would be no additional cost to us,” notes David Koptik, a staff software engineer for Baxter Healthcare Corp. “We would have paid her something (if the selling agent hadn’t agreed to split his or her commission), but we didn’t have to. Whenever we saw a house, Sharon made the point of saying upfront to the selling agent” that she was a buyer broker.
Generally, the buyer broker’s services to the buyer do not end with the successful negotiation of the contract to purchase. Buyer brokers also help their clients find qualified inspectors and favorable mortgage rates.
Some go much farther. Tom Hathaway, co-founder, president and chief executive officer of The Buyer’s Agent Inc., a nationwide network of buyer brokers based in Germantown, Tenn., says his buyer brokers are trained to offer 26 services to their clients, including negotiating with up to two dozen mortgage companies for the best loan price, shopping for homeowner’s insurance, and negotiating for title insurance and attorneys’ fees.
That’s all well and good, but Eigel says there are issues within the buyer brokerage framework that have yet to be fully resolved.
Almost all brokers who do buyer brokerage make the significant portion of their income as conventional brokers, meaning they take listings and work as sub-agents with buyers.
What happens, asks Eigel rhetorically, if an agent working as a buyer broker has a buyer who is interested in one of her listings?
“I had this happen,” recalls Debra Pallotto, managing broker and co-owner of Cobalt Real Estate Investment Corp.
“I was representing the buyer who was interested in a listing held by our office. But because the office is small, I was aware of what was going on with the listing. So I disclosed to the buyer and seller and asked them if they were comfortable with the situation. They were, but I would have been happy to refer the buyer to another agent if he hadn’t been happy,” Pallotto says.
“People who are real advocates of buyer brokerage are the ones that don’t have a big listing operation,” explains Eigel. “They try to carve out a niche for themselves. But we can’t do that.”
Pressure tactics?
Do buyer brokers ever pressure their clients to buy something if their exclusivity contract is about to expire?
“It’s hard to pressure buyers, and I don’t think the situation would be any different than if I worked with you as a traditional sub-agent,” notes Eigel. “In fact, I think the sub-agent would be more nervous because he wouldn’t have a contract to protect him. As a buyer’s broker, I’d know that if the buyer was happy with me, he would renew the contract.”
Not all buyers would agree. First-time buyers Dawn and Bill Hickey of Bensenville say they’ve had a nasty experience with a buyer broker who applied enormous pressure and even took the couple to court.
“He told us we could afford a $95,000 home when in fact we could only qualify for a $65,000 home. . . . The broker pressured us to buy a HUD home or a trailer home, which was totally inappropriate and not at all what we wanted,” Dawn Hickey says. “After he prepared a (losing) bid for us on a property he had never seen, we decided not to work with him anymore.”
She says that when they informed the buyer broker of their decision, he sued them for $936, claiming they owed him $65 per hour for all the time he spent with them before and after they signed the exclusivity contract. Hickey says the court ruled in their favor.
Mark Ver Bryck, an architect who purchases homes for rehabilitation and resale, says he has used both conventional and buyer brokers and he’s been happy with both.
Recently, Ver Bryck made an offer to buy a for-sale-by-owner home with his buyer broker.
“The property wasn’t even listed in the multiple listing service,” he says. “And even though that project didn’t come to fruition, my interests were best served in that the broker was able to find the property and negotiate with the seller for the offer while representing my interests.
“A conventional broker wouldn’t have even found the property.”
