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Mary Calvert Team
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An explanation of Buyer Agency.
It is hard when discussing Buyer Agency to know what level of detail is appropriate and whether to cite the laws governing this subject or to simply explain what it means in reality in the marketplace. I am reluctant to do one without doing the other. So, I will try to do both.
At the the point of this update in early 2006, we have handled almost 500 real estate transactions and roughly 350 or so of those have been representing our clients as buyer agent. Naturally, the other 150 or so have been representing sellers. So, we regularly see both sides of the process and accordingly, both points of view.
I have tried very hard to educate our clients about representation. We have placed information on Buyer Agency on the website. We included information on Buyer Agency in our relocation video. But with the busy schedules that everyone has nowadays, sometimes this information is overlooked. So here goes a more detailed discussion of the subject.
The Realty profession emerged over the years primarily as a means for people to sell their properties. Not much thought was given to helping people seek out and buy properties. Accordingly, there were no rules protecting buyers to provide them the same kinds of information and agent loyalty that was being provided to the sellers.
Accordingly, the need arose for a similar more formal arrangement for buyers of properties and the agent who represents them. Eventually this was recognized in the law and so Buyer Agency was born. Buyer Agency represents a steady and growing trend in Colorado and around the country. It comes into being when a licensed agent contracts with a buyer in a real estate transaction. The Broker may receive compensation directly from the buyer or, most commonly, directly out of the proceeds of the transaction.
There are stringent rules in the law as to how the public is to be represented in the course of a real estate transaction. There are two forms of representation; agency and transaction-brokerage. Under Colorado law, a Broker is presumed to be a transaction-broker unless an agency relationship is created by a written agreement between the Broker and the party. The difference between a transaction-broker relationship and an agency relationship is advocacy. See Agency definitons
Advocacy for a buyer amounts to three additional aspects that a Broker is required to do: promoting the interets of the buyer with the utmost good faith, loyalty, and fidelity; seeking a price and terms that are acceptable to the buyer; couseling the buyer as to any material benefits or risks of a transaction that are actually known by the Broker.
See a buyer agency contract!
When a seller decides to list their property, the listing agent normally enters into an agency relationship with the seller. The agent does a thorough analysis of the market to determine how the property should be priced, discusses desired timing for the sale with the seller, and prepares the seller to expect that the buyer will be represented by another agent whose job will be to insure that the buyer's interests are well represented.
Further, the listing agent normally explains to the Seller that a specific amount of the commission will be paid to the agent that brings the buyer. If this amount is inadequate, agents who have clients looking in that price range will not have an incentive to show that property. If inadequate compensation for the buyer's agent is offered, then the buyer's agent has to ask their buyer to provide the balance of the customary buyer agent commission of 3%. When the listing agent places the home in the Multiple Listing Service (MLS), he/she specifically announces to all the other agents what the Buyer Agent commission will be for the agent who brings a qualified buyer and closes the transaction.
Likewise, when an agent arranges to show a home or contacts the seller's agent, he/she should declare their agency status with the client they are representing to the listing agent. This lets everyone in the system know what the agent is expected and authorized to do on the buyer's behalf. Because it would not be very smart for an Agent to waste a lot of time with someone who is not even capable of getting a loan to buy a home, the listing agent can usually be relatively sure that the person looking at the home is at least capable of making a reasonable offer that can be executed.
Ideally, the listing agent lists the home for a fair price, the buyer's agent finds it and shows it to a buyer who wants it, and then the two agents complete the necessary paperwork, inspections, appraisals, and other negotiations in conjunction with the title company and the lender. All of these little factors add up to a successful real estate transaction. At closing, funds are distributed to all those agencies and everyone is paid for their efforts.
An agent has to establish with each buyer exactly what their status of representation is in front of the law. A listing agent can not put a home on the market with no contract. Similarly, an Agent working with a buyer really should not be showing properties on their behalf unless a specific relationship has been established. It does not have to be in writing if the relationship is one of transaction broker, but it does if it is one of buyer agency.
People frequently do not like to sign contracts, especially with a complete stranger and when it obligates them to make sure the agent is compensated. This is true even though the agent is providing expertise, time, and effort on behalf of the buyer with no guarantee of compensation. We understand this. Accordingly it's expected that after a client sees and understands the effort put forth on their behalf that, after a short time, they will feel comfortable signing the buyer agency agreement.
The important thing for a client to know is that if a client signs a Buyer Agency contract, they are engaging a Broker to represent them at the highest form of representation. In order to get out of the contract, a client can request that the contract be terminated. At that point, the Broker will evaluate the situation and give the buyer the option of paying for services already rendered. In this situation a client would still not be able to go and execute a contract to buy a home that was shown to them during the period in which they had a contract with that broker, unless they arranged for the Broker's compensation. The broker that showed the home would be considered the procuring cause for that sale and would then be entitled to normal compensation.
Likewise, it would not be acceptable to use a Broker's services and then without that Broker, contract to buy a FSBO, (a home for sale by the owner), without arranging for compensation for the Broker whose services were used. Normally, with FSBO's, the Broker can contact the seller directly on the client's behalf and arrange for them to provide the Broker compensation, even though the seller is not represented by an agent. (The buyer's agent usually ends up having to do more work in these cases as the seller has no one to accomplish their side of things, but allegiance and responsibility is always to the buyer, and there is no agency responsibility to the seller).
While real estate agents are not attorneys, they are trained in real estate law, there are ethical standards in place, and each market has its own Board of Realtors which also has rules and procedures which must be followed in order to be a member in good standing. The marketplace further dictates that a successful agent must have an impeccable reputation and demonstrate a long track record of satisfied clients. In light of all those factors, I think you should feel totally comfortable signing the buyer agency contract. Imagine how good it makes me feel when my clients get off the plane and ask to sign a buyer agent contract. It sort of cements the relationship right at the beginning.
As mentioned earlier, should you not choose the level of representation afforded with buyer agency, then you will be considered as having a transaction-broker relationship with us. Note that the difference between the two is essentially outlined in paragraphs 4 & 5 of the buyer agency contract. Paragraph 4 delineates Broker services and duties in both forms of representation and paragraph 5 specifies the additonal duties required by the buyer agent where it says, "Broker shall promote the interests of Buyer with the utmost good faith, loyalty, and fidelity; seek price and terms acceptable to the buyer; and counseling the buyer as to any material benefits or risks of a transaction that are actually known by the broker."
Well, there you have it. What you need to know about buyer agency. I hope you find this information useful and that you will feel that you are in the best of hands for your upcoming home purchase.