Ethical Homes

Why is it in your interests as a buyer to sign an exclusive Buyer-Broker Agreement with your real estate agent in Virginia and the District of Columbia?

The default situation: Seller Agency

By default, in both Virginia and DC, all real estate agents by law work for all sellers (even if the agents and sellers have never met before), and have a legal obligation to protect the interests of those sellers; they are considered “seller agents”, and the relationship that they have with the buyer is termed “seller agency”.

Seller agents can provide information about particular properties to buyers, but their primary loyalty is to the sellers of the properties; a seller agent, however, cannot do anything that would be in the interests of the buyer rather than the seller.

Take, for example, a situation where an agent is showing a buyer a house with an asking price of $400k. Suppose the buyer loves the house, and tells the agent to put in an offer on their behalf, but mentions in passing that they like the house enough that they’d pay $420k for it if needed. That agent will submit the offer at $400k for the buyer—but by law, the agent also has to tell the seller that the buyer would go as high as $420k, and advise the seller to counter-offer at that price.

Similarly, if the buyer wants to see whether $400k was a reasonable price for the property, the agent could prepare a Competitive Market Analysis of similar properties that were available or had sold recently—but the agent could not include in that CMA any properties that would imply that $400k was too much to pay for the property—if two similar properties had sold recently for only $375k, the agent would have to omit those properties from the CMA that they prepared for the buyer, and only include higher-priced properties that supported the higher price.

Again, an agent who is in the default “seller agency” relationship with a buyer can:

• talk to the buyer about real estate in general, but only to provide evidence of general market conditions that will encourage the buyer to purchase listed properties;
• show listed properties to the buyer;
• provide the buyer with the “official” information about listed properties;
• provide advice to the buyer so long as that advice does not harm the interests of the seller in any way.

The better alternative: Buyer Agency

Obviously, this isn’t a good scenario for buyers, so Virginia and DC (after a lot of lobbying from consumer rights advocates) have done two things to protect buyers.

The first is a requirement (which, sadly, many agents ignore) that before an agent can engage in any “substantive discussion” about a property, they must explain the fact that they are currently representing the seller of that property by default, and acting solely in the interests of that seller. There’s also a form that local jurisdictions require that buyers sign, in order to confirm that this “agency disclosure” was made; that form is normally supposed to be signed before any discussions happen, but states have now conceded that it can be signed the first time that an agent and a buyer actually meet in person if the disclosure itself happens on the phone or online.

The other way that Virginia and DC acted to protect buyers is by creating a “buyer agency” relationship, where a real estate agent represents a particular buyer’s interests instead of that of sellers. In buyer agency, a real estate agent working with a buyer can:

• talk to buyers about real estate in general, including providing information about potential market downturns and risks;
• provide honest opinions and analyses about the relative values of properties;
• expose the buyer to properties other than those listed by other real estate agents (including showing properties For Sale By Owner);
• show properties to buyers;
• negotiate offers on behalf of the buyer; and
• in general, represent the interests of the buyer to the exclusion of the interests of the seller.

There is no such thing as a free lunch, of course, and so entering into a buyer agency relationship with a real estate agent has some caveats as well. There are three major such twists:

There needs to be a contract

The first unique feature of buyer agency is that it requires a contractual relationship between the real estate agent and the buyer, to sever the traditional seller agency relationship and explicitly specify the duties and obligations of the agent to the buyer. This relationship is established via a contract called a “buyer-agent agreement” (also known as a “buyer agency agreement” or “buyer-broker agreement”) such as these samples for Virginia (PDF) and the District of Columbia (PDF).

Entering into a contract like this isn’t inherently a bad thing; it’s always good to spell out the responsibilities of someone who is working with you. But entering into any contract isn’t something that should be done lightly; buyers need to make sure that they understand every paragraph of the agency agreement that they sign, including any obligations that it might place them under. (A good buyer agent will always explain the entire buyer agency agreement to a client beforehand, and in fact this is one of the better ways to find a good agent—if an agent can’t explain the nuances of a 3-4 page contract such as the buyer agency agreement to their client, then their ability to explain the 10-20 pages worth of contracts that need to be signed just to make an offer on a property should be called into question.)

The buyer’s agent is (ostensibly) directly paid by the buyer

The second twist that buyer agency introduces is in the compensation of agents. Traditionally, a seller of a property hires an agent (a “listing agent”) to sell their house, and offers them a commission based on the final sales price of the house—perhaps 8% of the sales price. The listing agent then offers some fraction of that commission—often 50%, or in this example, 4% of the final sales price of the house—to whichever agent brings the buyer who eventually purchases the property (the “subagent”). This is actually why agency law in VA and DC is biased towards the seller in the way that it is—sellers argued, with some good reason, that if they were paying the commission of the subagent, then they wanted that agent to be acting to protect their interests, rather than those of the buyer, and the courts agreed with them.

A Buyer-Broker Agreement, then, also specifies that the buyer will pay the commission of their agent directly. Many buyers see this as a negative, since they feel that they will have to pay more for a property—the sales price, plus the buyer agent’s commission—but the truth is that they actually end up paying essentially the same amount for the property. Since listing agents and their subagents are all paid out of the profits from the sale of a house, and those profits come from the payment that the buyer makes for the house, in reality the buyer is indirectly paying all of the commissions for any agents involved. Recognizing this fact, listing agents offer to buyer agents an analogue of the commission that they offer to subagents (usually at least as much as they offer to subagents, in fact). Most Buyer-Broker Agreements specify that that “co-op commission” is credited towards the amount that a buyer owes to their agent, so that co-op commission from the listing agent usually subsidizes the amount that the buyer would owe their own agent.

There is still the possibility that the co-op commission is less than the commission agreed to in the Buyer-Broker Agreement, of course. The amount that Prudential Carruthers Realtors® specifies in their Buyer-Broker Agreement, for example, is 3% of the final sales price of the purchased property, and while co-op commissions in the current Metro Washington DC market are usually 3%, they are occasionally as low as 2%, and properties that are for sale by owner (”FSBO” properties) sometimes offer no co-op commission at all; in such a case, the buyer would have to pay to their agent the difference—for a 2% co-op commission and the standard PCR commission of 3%, the buyer would have to make up the missing 1% of the commission. While that difference technically needs to be paid as a single lump sum at the time of closing, it is not uncommon to be able to increase the purchase price of the house by that extra amount, and have the seller provide a “seller subsidy” back to the buyer, so that the buyer can effectively roll their commission payment into their mortgage and finance it along with the rest of their purchase. At that point, then, the fact that the buyer is on the hook for a fixed commission amount just becomes a matter of always factoring in the co-op commission for a particular property, and adjusting the “effective” price of the property accordingly.

Exclusive Agency

The third big change that Buyer Agency introduces into the picture is the concept of Exclusive Agency—almost all Buyer Broker Agreements require that buyers only work with one agent, and specify that a buyer is responsible for the agent receiving their commission after the purchase of any property during the term that the agreement is in effect, even if another agent works with the buyer. Although this at first seems like an overly restrictive requirement, it is much less burdensome than it appears, and actually ensures a better level of service for buyers than the apparent flexibility of being able to work with multiple agents.

The first reason that Exclusive Agency is a good thing for buyers is that real estate agents, like everyone else, are human, and as a result they spend far more time on “guaranteed money” than “possible money”. Buyers often think that by refusing to enter into Exclusive Agency relationships via a Buyer-Broker Agreement—by remaining “customers”, as the local real estate statutes term them, rather than become “clients”—they can retain multiple agents to work for them; if one agent can find a house for a buyer in a month, the reasoning goes, can’t five agents find a house in a week?

The problem is that agents know that this is what most buyers who aren’t in Exclusive Agency relationships are doing, and so of course if given a choice between spending their time with exclusive clients with whom they are working as partners, or spending their time with a buyer who might turn around and buy from another agent, they will almost always (whether they realize it consciously or not) devote the lion’s share of their time to their exclusive clients, and then follow up with their other buyers as an afterthought.

And remember, the law requires that an agent protect the interests of any clients that they have through Buyer Agency relationships ahead of the interests of anyone else—including ahead of customers who have not signed Buyer-Broker Agreements; that means that any new properties that an agent finds have to first be offerred to their Buyer Agency clients, and only offerred to customers if all of an agent’s clients express no interest. So rather than getting the services of, say, five agents, the buyer who refuses to sign exclusively with any of them usually ends up with less information and attention than a buyer who is working exclusively with one good agent.

The second reason that Exclusive Agency isn’t very restrictive is that, as the name implies, Buyer Broker Agreements are actually contracts between buyers and real estate brokerage companies, rather than between buyers and individual agents. As a result, buyers do, in fact, have multiple agents working for them—they have all of the agents of the brokerage company in question working for them, although only one of those agents (or sometimes a small team of agents) is the “designated agent” who is primarily responsible for helping them.

Finally, some buyers are concerned by the exclusive nature of Buyer-Broker Agreements combined with their long durations, and fear that if they are truly dissatisfied with their agent, they will still be forced to work with them for months. One side effect of the fact that the contracts are between buyers and real estate brokerage companies is that a buyer who is unhappy with the service they are receiving from their agent simply has to inform the managing broker at the brokerage company, and they can be reassigned to another designated agent, with no hassle. Buyer-Broker Agreements are designed, moreover, to be easily terminated, and the courts have held that brokers cannot force a buyer to continue to work with them under a Buyer-Broker Agreement if the buyer does not wish to continue doing so (nor would any brokerage company want the bad press that would inevitably accompany any attempt to do something of that sort); as a result, on the off chance that a buyer is dissatisfied with multiple agents from the same brokerage company, all they need to do is ask the managing broker to release them from the Buyer-Broker Agreement, and they will be free to find a different company with which to work. What the long durations of Buyer-Broker Agreements effectively do, then, isn’t tie the buyer in to a long-term obligation to their agent; instead, those long durations are actually there to ensure that the agent can effectively represent the interests of the buyer during the entire course of the buying process, while the buyer still retains the option to terminate the relationship at any time.