Another Buyer Broker Story

The right of a consumer to be represented themselves by a real estate agent has been the law in Connecticut for at least a decade now, but it is still not understood by many people.  In the commercial arena, where many buyers are more sophisticated, and are used to buying and selling real estate under earlier regulations, it has been slow to take full effect. The way that the law is currently written, it requires a real estate agent to have a written representation agreement with a buyer, before s/he shows that person any listings other than his/her own company's listings, where the listing agreement with the seller would give the agent representation of at least one of the parties. A dual agency agreement must also be signed by all parties, when the agent represents both the buyer and the seller.

Why am I explaining this again?  Because so many people do not understand the law.  I got a call a couple of weeks ago from an attorney, skilled in real estate, and also licensed as a real estate agent.  He told me that he had recently bought a property, which he had previously called me about (to ask questions about the area, not to represent him on a specific property).  He said that he realized only after the deal was done that the listing broker had gotten paid to represent him, because he didn't have a buyer broker agreement.  He had thought, as many people do, that he would save money if he was not represented.  The way it works, though, is that the agent is (almost always) paid by the seller, as a result of a listing agreement, and that fee is named in that agreement, regardless of whether another agent is involved.  That means that, if there are two agents, the agreement between the two agencies (almost always) divides that commission.  If there is no selling agency, the listing agreement would still be in effect, so the listing agency would get that commission.  While that listing firm would owe certain duties to anyone, and would do the necessary work to put the transaction together, the fee wouldn't change just because the buyer chose to be unrepresented.  Brokers who do not represent a person, though, cannot give advice on value, except to state the listing price.  So that question--what's it worth?--can only be answered legally by an agent who represents you.

So why don't buyers want to sign buyer broker agreements?  Sometimes, they want the right to buy something without the agent, or with another agent.  Sometimes that's fair, although sometimes it isn't, depending upon the amount of ground work that has already been, or is being, done.  Sometimes they aren't authorized to sign, which is a problem that the CT Legislature plans to take up this year--it can be fixed by having a commercial buyer broker agreement signed later in the process.  In some cases, they are dealing with more than one agent in different areas, a problem that can be fixed with the proper documentation.  Many times, though, it's just a knee-jerk reaction against signing anything.  But when's the last time you saw a doctor?  If you declined to sign the HIPAA form, I bet that you didn't get in.  (And, actually, I'd put my money on a bet that you signed it, and never even read it.)  Why should real estate not have paperwork also?  It's good business, and good practice. And, it's the law.

How We Get Paid

Every so often, I think it's worth reminding people about how real estate professionals get paid.  It often bears on how we answer questions about clauses in our listing contracts, for instance, and reminds us that our field is often misunderstood.
 Most clients have a vague idea that real estate salespersons are independent contractors.  I suppose that, if they really thought about it, that would lead them to realize that we live on commissions, and those are earned only when transactions close.  We have no salaries, no benefits, and no guaranteed payments for the work we do.  Our listing agreements entitle us to get paid only when certain conditions are met, and must be in writing.  Our buyer broker agreements, which many people are actually told by attorneys not to sign, are required in order for us to show property not listed by our own company, and are necessary documents in any claim for a commission.
Clients often request that certain clauses be removed, or ask why they are present.  The answer is usually that we are trying to point out in advance when compensation is owed.  One good example would be lease renewals.  Owners often forget, once a tenant has been in place for a while, that a real estate agent was responsible for bringing him in.  We can only get paid for the original term at the time of the lease signing, and then we bill again if and when the lease is renewed.  Sometimes owners ask why we request a month's rent as a commission on a lease for one year or less.  There, it's simple economics:  it costs us more to put up and take down the sign, enter the listing into marketing channels, and complete the lease and paperwork than we can earn, if we're not careful.  We don't control the negotiations, so it's not up to us to decide how long the lease should be.  Therefore, we need to make sure that the minimum amount we receive will cover our expenses.
There should be another system to handle these issues.  In NYC, for example, apartment tenants pay their own brokers 15% of the first year's rent at the time that the lease is signed.  Other similar advisors, such as attorneys and investment bankers, receive retainers against future fees, when assisting commercial clients.  Having us front all the costs and using our time without upfront compensation is an outdated model, and will probably change some day.  The only reason it hasn't changed yet is akin to the old saying that Willie Sutton robbed banks because that's where the money was; owners and sellers pay commissions because they are receiving the cash at the closing or signing. If banks allowed buyers to finance the commissions in the mortgage amount, for instance, I think the system would change quickly.  It makes sense that people should be paying their own professionals, and that they would be owed something for their time.  It can't happen quickly enough for us!

Commission Overrides

Most people are familiar with the typical residential commission situation, where the listing agent controls the rate and the offering to the buyer's agent.  That is, the owner signs a listing contract with the real estate broker, and he/she offers a BBC (buyer broker commission) to cooperating agents who represent buyers.  Sometimes half is offered, but often less than half is posted; the theory there is that the expenses of marketing a listing outweigh the costs of servicing a buyer.

The commercial market doesn't work that way, in most cases.  Many properties are not advertised on the MLS, because many commercial brokers don't choose to belong.  Therefore, the custom is for the agent representing the buyer to confirm the commission with the listing broker, usually in writing.  It is not uncommon for the buyer's agent to ask for a "full" commission (also known as an override) from the owner, for bringing in the buyer.  Here the theory is that the agent who controls the buyer controls the transaction.

I'm not advocating for one method over the other, but I'm pointing out the difference, because there is often a "shoot the messenger" atmosphere when we ask the owner to pay an override.  Although it's negotiable, like all real estate commissions, an owner who wants to fill his or her space may feel pressured into paying it.