Wed. May 25th, 2022
what’s-a-buyer-broker-agreement,-and-what-should-you-know-before-signing-one?

Gone are the days where a simple handshake could solidify a working agreement between a buyer and their real estate agent. Instead of a handshake, buyer’s agents are presenting homebuyers with a document called a “buyer broker agreement” — and you might not know what that is!

If this is your first time buying a house, the buyer-broker agreement is just another document in a long list of others that require your John Hancock. However, if you’ve purchased a home before the 1990s, you might be wondering why this document is necessary.

Before we go into detail about the buyer-broker agreement, let’s first clarify what a buyer’s agent does.

What does a buyer’s agent do?

A buyer’s agent is a real estate professional who’s going to be your new best friend during this exciting and sometimes stressful endeavor. We spoke to Josh McKnight, a top-selling real estate agent in Pennsylvania, and he describes the role of the buyer’s agent:

“A buyer’s agent has a fiduciary responsibility to their client, the buyer, to make sure that they understand the language in the contract and make sure they’re buying a home that fits their needs. They make sure the buyer is choosing all the correct contingencies and that they’re not being taken advantage of. They also have a responsibility to make sure that the home is worth what the sellers are asking for, and will work with the buyers to make an offer.”

In short, working with a pro who legally represents you and looks out for your best interests — throughout the entire home purchase process — is a very good thing. It’s certainly possible to buy a home without the representation of a buyer’s agent, but in a competitive market where things change rapidly, you’ll be glad to have a knowledgeable professional on your side.

Buyer-broker agreements, explained

The buyer-broker agreement is an important — and legally binding — document that’s designed to protect both the buyer and the buyer’s agent. This agreement clearly outlines what the agent will do for you, the terms of the agreement, and how the agent will be compensated, which depends on what kind of buyer’s broker agreement you have.

Exclusive right-to-represent contracts are the most common buyer-broker agreement. The document will outline what the agent will do for you — the buyer — and will further describe your obligations.

For example, you may be on the hook to pay your agent’s commission, as is detailed in the agreement, but if the seller agrees to pay the commission (which is, fortunately for buyers, the norm!), you won’t have to worry about that.

The defining factor of this agreement is that, once signed, you cannot work with another agent during the specified time period. You can view a sample of an exclusive right-to-represent agreement here.

Nonexclusive not-for-compensation contracts can be broken at any time by either the buyer or the agent. This type of contract will allow you to work with any other agent if you’d like, and there is no compensation paid to the broker from your end. This type of buyer-broker agreement affords you the fiduciary privileges of agent representation when viewing houses with that particular agent, but you’re not beholden to them exclusively, and you won’t have to make up for any compensation that isn’t paid out by the seller in the event of a purchase.

Nonexclusive right-to-represent contracts state that the buyer will compensate the broker — if commissions are not fully covered by the seller — if the buyer purchases a house their agent presents to them. Under this contract, though, the buyer can purchase a home with another broker as long as their original agent didn’t propose that particular property.

What is a buyer-broker agreement?

As you’ve probably discerned by now, a buyer-broker agreement is a document that establishes a business agreement between the buyer (you) and your real estate agent’s supervisor (also known as the broker).

A buyer-broker agreement is used to protect the buyer as well as the real estate agent representing them. It outlines the scope of work the real estate agent will do for the buyer, while giving the buyer reassurance that the real estate agent has their best interest at heart, McKnight explains.

If something goes wrong and you aren’t happy with the real estate agent you initially started working with, you can also ask the broker to assign a new agent to work with you.

The components of a buyer-broker agreement

A buyer-broker agreement consists of several important parts.

Duties

This section of the agreement outlines the responsibilities of your real estate agent. Some of the tasks your agent will do for you include the following.

Show you properties that meet your needs

A buyer’s agent is going to sit down with you to help you figure out how much house you can afford and what requirements the house should meet. They will sift through property listings in your desired area and schedule appointments to show you homes that best fit your criteria. They’ll give you a general rundown of the neighborhoods where you’re shopping for homes and will answer any questions you may have along the way.

Explain documents, procedures, and disclosures

A buyer’s agent will gather appropriate documents and review them with you. They’ll recommend the proper inspections for your house, and they’ll even arrange to have those inspections done.

Help you write and submit your offer

Once you find the house that you’d like to make an offer on, the buyer’s agent will offer you advice about what they think is a reasonable offer for the home. Then they’ll write it up and present it to the listing agent to give to the seller. If the seller rejects the offer, the buyer’s agent will consult you and negotiate on your behalf.

Monitor contingency time limits

There are a lot of steps in buying a house, and each of those steps will take a certain number of days to complete. The buyer’s agent will help make sure things like the home appraisal, the home inspection, and mortgage approval are completed on time.

Be your support on closing day

A buyer’s agent is going to work hard to make sure that you get the house you’re interested in buying. When closing day finally comes, they’ll offer support and guide you through all of the paperwork (there’s going to be a lot!) and ensure that the transaction goes off without a hitch.

Term length

The length of your buyer-broker agreement is one of the first things laid out in the contract. During this time, you are contractually obligated to honor the agreement for that time frame.

Typically, the agreement will last for six months. However, some agents will request a full one-year agreement, while others will agree on a 30-day agreement. This is generally a negotiable term, so just talk it over with your agent if you have concerns about the proposed length of your buyer-broker agreement.

Termination

It is usually possible to terminate the buyer-broker agreement if either the buyer or the agent feels that the arrangement isn’t working out. This section of the contract will outline how someone can terminate the agreement, how much prior notice needs to be given and a dollar amount the buyer will have to pay if the advance notice is not given.

Buyers should beware, however, that because buyer-broker agreements are actually between you and the brokerage — not just one specific agent — your request to terminate may be countered with an offer to simply assign you to a different agent within the same brokerage.

That said, brokers usually understand that when one party wants out, pressuring the other side to continue probably isn’t going to do anyone any favors.

“I don’t like to hold anybody to contracts,” says Adam Slivka, an Irwin, Pennsylvania-based agent with 10 years of experience. “If someone wants out, I probably don’t want to work with them, either — you know what I mean?”

As long as you’re not trying to weasel out of your agreement as soon as your purchase offer has been accepted, there’s likely room to talk things through and part ways amicably.

“It just depends on the circumstance and the broker,” says Slivka.

Compensation

Two types of compensation could be listed in this section of the agreement: Retainer fee and payment.

Retainer fees are placed in the agreement to compensate agents for their time and any expenses that may have been incurred while looking for a buyer’s dream home. Frequently, agents will use retainer fees as a way to differentiate the serious buyers from the ones that aren’t committed.

Payment is outlined in this section as well, and a lot of buyers have questions. In 2020, the average commission rate for a home sale (including both buyer and listing agents) was 5.656%, but — and remember that there will always be exceptions — it can range as low as 3% and as high as 7%.

But you, the buyer, will rarely be responsible for your real estate agent’s commission. Once the transaction has finalized, the seller will pay their agent (the listing agency) all commission costs. Then the listing agency will pay the buyer agency what they are owed.

If, however, you happen to fall in love with a house that is for sale by owner, you will be responsible for compensating your agent — unless you’re able to negotiate with the seller and get them to agree to cover a suitable fee (usually 3% of the sales price).

“When you’re dealing with a for sale by owner house, that seller isn’t tied into any kind of relationship with the multiple listing system,” explains Dan Robins, a 20-year agent in West Chester, Pennsylvania.

“You need to clarify that up-front with your agent to make sure you’re on the same page — if it’s a $500,000 house, your closing costs might increase by $15,000 if there’s a 3% commission built into that buyer-broker contract.

“Buyers need to be aware of that before they sign.”

Representation

This section of the agreement outlines what kind of representation you have.

If you agree to designated representation, this means that your agent will show you homes listed by other agents from their real estate agency. If you agree to dual representation, your buyer’s agent is now a dual agent. With a dual agent, you agree to see properties that your agent has listed with the sellers, and your agent will represent both you and the seller. Dual agency is not legal in some states due to the potential for conflict of interest.

Exclusivity

This section details exclusivity rights that the buyer agrees to.

If you’re in an exclusive agreement with an agent, this means you will work with them and only them. You can negotiate the commission rate, but if the seller agrees to pay additional commission and it is disclosed, the buyer’s agent may receive more. However, that doesn’t mean your agent is going to slack on their duties — they still have your best interest at heart.

If you’re in a nonexclusive agreement, then you, the buyer, may work with other agents to purchase a property.

Property description

This paragraph clearly states what kind of property you are looking for and the price range. Because this paragraph specifies what type of property you want to buy, it may grant you the ability to use another agency to look for something else.

For example, if you are working with an agent to find a new summer home, and the property description states you want a single-family home in the $100,000 to $150,000 price range, then you can probably work with another agent to find an investment property — like a 10-unit complex in the $800,000 to $900,000 price range — but clarify this with your initial agent first.

Confidentiality is one reason to sign a contract; the other reason might be that the agent then knows you’re a little more serious. Hopefully they’ll put a little extra effort in to make things happen or to find a property for you as a client.

  • Adam Slivka
    Adam Slivka
    Real Estate Agent


    Close

    Adam Slivka
    Adam Slivka
    Real Estate Agent at C21 Fairways

    • Years of Experience
      10
    • Transactions
      286
    • Average Price Point
      $220k
    • Single Family Homes
      282

Frequently asked questions, answered

Should you sign a buyer-broker agreement?

If you’re serious about buying a home, it’s in your best interest to sign a buyer-broker agreement and reap the benefits of proper representation.

“Until you sign that agreement, an agent has no fiduciary relationship with you,” cautions Slivka. “So, if you go through a house with an agent and you say, ‘Wow, I would pay $X for this house!’ and you’re not being represented by them, they have no real obligation not to tell the seller’s agent, ‘Hey, do you think we can put this together for $X? Because this is what I know the guy will pay.’”

Slivka acknowledges that agents should still deal honestly and in good faith whether a buyer-broker agreement is in place or not — but, technically, what you tell them prior to signing is not confidential because you’re not yet a client.

“Confidentiality is one reason to sign a contract; the other reason might be that the agent then knows you’re a little more serious,” says Slivka. “Hopefully they’ll put a little extra effort in to make things happen or to find a property for you as a client.”

How long is the contract valid?

As we touched on earlier, the length of a buyer-broker contract can vary, but it’s safe to assume that six months is a standard place to start. Talk to the agent if you think you’ll want more or less time — or perhaps if you prefer to limit your contractual agreement to a particular home.

“Sometimes buyer-broker agreements are tied to a specific property,” says Robins. “That’s usually a more commercial-oriented use; I work with a lot of investors, and investors often have more than one broker they deal with. When I do buyer contracts for my investors, I’ll put the address of the property in the contract so it’s only valid for that property.”

Is this an enforceable contract?

Well, it wouldn’t be a contract if it weren’t enforceable! Yes, your buyer-broker agreement is enforceable from both sides — if either you or the undersigned brokerage fails to hold up your end of the deal, the other party can take action. This is why it’s so important to thoroughly read through the agreement prior to signing and address any questions or concerns from the outset.

What happens if you want to get out of the contract?

Again, as we noted above, it’s essential to talk to your agent as soon as you start feeling that twinge of “I want out.”

Whether it’s a personality clash (can the issue be solved by switching to a different agent from the same brokerage?), a breach of trust, or a lifestyle shift (maybe you’ve decided not to purchase a home right now after all), the best hope for an amicable parting of ways is to have an honest conversation.

What happens if you buy a house with a different agent?

Unless the buyer-broker agreement you’ve signed allows for this, you’ve breached the contract.

“Technically speaking, the [original] broker would be due a commission,” says Robins. “These things usually get negotiated out somehow, but they’re under contract — so there’s a commission due.”

Your best bet is to avoid this scenario and only work with the agent with whom you’ve signed a buyer-broker agreement. Should something come up that makes this impractical — perhaps you’ve found a home in a different state, or you’ve switched gears to a totally different type of property — talk to your agent and find a solution together.

Which agreement is best for you?

The buyer-broker agreement that works best for your scenario will vary depending on where you live and which agent you’d like to help with your home search. Whichever type of agreement you go with, buyers are advised to pay close attention to the compensation and termination sections of the contract before signing on the dotted line.

And talk to your agent if you have any questions; remember, the buyer-broker agreement exists to protect you both.

Header Image Source: (Medienstürmer / Unsplash)

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