The real estate industry is experiencing significant shifts, especially in light of the recent Sitzer/Burnett v. National Association of Realtors (“Sitzer”) case ruling against the industry. Additionally, the ongoing scrutiny by the US Department of Justice into Realtor^® conduct, and common provisions in most listing agreements, suggests that there may be significant changes to the way real estate agents are compensated and by whom.

Buyer Representation/Broker Compensation Agreements

Even before the Sitzer verdict, which found collusion that inflated commission within the real estate industry, brokerages could see the writing on the wall. Not surprisingly, many have been training agents to ask buyers to sign representation agreements in which the buyers commit to paying their own agent for their services.

While the anticipated industry changes are expected to benefit both buyers and sellers in the long term, there are a number of details that buyers should consider before signing any agreement with a buyer’s agent.

Choosing the Right Agent

Many buyer’s agents will request that potential buyers sign buyer representation agreements—in fact, they will be required. While some agents will thoroughly explain the terms and ramifications of these agreements, others may attempt to gloss over their significance or slip it in unnoticed. It’s essential for buyers to understand the agreement fully to avoid unexpected commitments. We have already encountered several buyers who were upset to learn that they inadvertently committed to working with a particular agent from another brokerage without realizing it.

Although the notion of paying for their own agent might catch buyers off guard, this structure offers several benefits. It promotes competition amongst agents, which should enhance service levels and exert downward pressure on commissions. Further, compensation can be tailored based on the agent’s level of competency and time invested, ensuring fair remuneration for their services. For instance, a buyer who finds a home independently and receives no advice on disclosures or financing options may pay a lower rate; whereas, a buyer from outside the area who requires extensive analysis and guidance over months of house hunting may find great value in an agent’s services, justifying higher compensation. Finally, this structure reduces the risk of agents steering buyers towards less desirable properties solely because of higher commission.

However, the experience, expertise, and quality of service vary greatly among agents, making it crucial for buyers to conduct thorough interviews, akin to sellers interviewing listing agents. Steps buyers should take when searching for the perfect agent include:

1. Developing a list of priorities;
2. Researching and interviewing three to five qualified agents, making sure to ask detailed and specific questions;
3. Signing agreements with one or more of the chosen agents.

This process will enable the buyer to ascertain the pros and cons of each agent.

Limiting the Geographic Scope of the Representation Agreement

Local expertise is very important in real estate. Nevertheless, some buyers sign agreements committing themselves to working with one agent despite considering various geographic areas. Most buyers would benefit more from working with different specialists from different regions. For example, one agent might specialize in the Los Altos to Atherton area; another in Hillsborough, Burlingame, and San Mateo Park; and a third in Saratoga and Los Gatos. Agents who claim expertise across all areas often lack in-depth knowledge of any particular locale.

Beyond localized knowledge, buyers benefit when agents are aware of competing agents searching for them in different areas. This motivates all of the agents to act diligently to find the perfect property before one of the other agents identifies a suitable alternative.

Limiting the Duration of Representation Agreement

Buyer representation agreements should strike a balance between giving the agent adequate time to showcase their expertise, work ethic, responsiveness, and value without holding the buyer hostage if they’re dissatisfied.

Generally, contract periods of 60 to 90 days suffice. If the buyer is happy with the level of service provided, they can always opt to extend the agreement.

Agent’s Access to Off-Market Homes

Properties that are sold without being listed on the Multiple Listing Service (MLS) and without marketing through other channels, such as local newspapers, TV commercials, paid online ads, and direct mail, tend to sell for less money than similar properties that receive extensive promotion. While this is typically disadvantageous for sellers, it can present a valuable buying opportunity. Therefore, an agent’s ability to access these off-market properties is a significant advantage for their buyers.

Typically, buyer’s agents who handle a high volume of transactions are well-connected to off-market properties. Similarly, brokerages dealing with substantial transaction volume in specific cities or neighborhoods often have valuable insights into these less-promoted properties.

The Value of a Buyer’s Agent

The past few editions of this newsletter have featured several articles lauding the industry changes stemming from commission collusion cases, settlements, and DOJ action. As a result, some readers might mistakenly assume that the authors of these articles do not appreciate the value of a good buyer’s agent’s services. This assumption couldn’t be further from the truth.

When a seller offers $10,000 or $20,000 to a buyer’s agent, that does not mean that this amount reflects the true value of all buyer’s agent’s services, especially if the agent is exceptionally skilled and knowledgeable, worked with the buyer for a long time, and/or offered extra services. However, it’s undeniable that the beneficiary of these enhanced services is the buyer, not the seller. After all, is it logical for a seller to pay 2% to 3% of the transaction value for the buyer to have a strong advocate who will effectively strategize and negotiate for a lower sales price?

An excellent buyer’s agent can, and often does, provide tremendous value for the buyer. They can help in finding the perfect home and avoid costly mistakes. A savvy buyer will interview several agents and agree to compensate them appropriately based on the agent’s experience, education, market knowledge, and time invested.

By Michael Repka