What’s a Buyer Representation Agreement?
A buyer representation agreement is a contract between a person who wants to purchase a home and a real estate agent. This type of agreement represents consumer protection legislation aimed at keeping buyers of real property informed about the details of a prospective purchase as well as incentivizing a seller’s agent to encourage his client (the seller) to fully disclose all relevant information about the property.
The minimum requirements of a buyer representation agreement are set out in the Real Estate Council of Alberta Regulations, Standard of Practice 3(g)-2: "(g) a statement that a brokerage has a fiduciary responsibility to the Buyer and that the responsibilities of the Listing Brokerage or any other brokerage involved in the transaction may be different; (h) a statement regarding what information that the Buyer must provide to the listing brokerage if the Buyer wishes to have such information kept confidential."
This legislation recognizes that a buyer has certain rights and a particular information set that is necessary for an informed transaction , and also understands that an agent’s role in a real estate transaction is fundamentally one of trust. A buyer representation agreement is a means of formalizing those elements. Because of the vested responsibility of the agent towards the buyer, a buyer representation agreement also has the effect of making a buyer more likely to use a licensed real estate agent when buying real property, as the responsibility of the agent will inform the decision-making of the buyer throughout the process.
In the context of a real estate sale or purchase, a buyer representation agreement also, necessarily, has an impact on the buyer-agent relationship, and can also impact upon the purchase agreement.
Legal Requirements: Is It Compulsory?
The legal requirements for buyer representation agreements vary greatly, depending on the jurisdiction in which they’re being used. In some areas, such as the entire country of Finland, its use is legally mandated, while in others legislation does not deal with it at all. In many places, especially states and provinces that follow common law, the courts have dealt with it through the application of the common law principles of agency.
In New Zealand, the real estate agents’ industry has adopted the practice of making Buyer Agency Agreements commonplace since May 2011, when the Real Estate Agents Authority (REAA) came into effect. This legislation requires an agent representing a buyer in a residential property transaction to have a signed authority (the Buyer Agency Agreement) from his or her client. The agency agreement can be exclusive to the one property or can apply to a series of transactions (repeat services), and there are rules about what kinds of services can be included.
Buyer agency agreements are also mandatory in all the territories of Australia, although the process by which they become legally binding varies from state to state. They come into effect when the agent has notified the buyer in writing that they are being represented by that agent, and that buyer consents. In Western Australia, for instance, this only includes properties that have been extensively assessed by the agent.
In Canada, there are no federal statutes that deal with buyer representation. However, most provinces have made it mandatory that the duties and responsibilities of the real estate industry be included in a written representation agreement. All Canadian provinces (except Alberta) have also passed laws that provide the statutory obligations of real estate agents who have been given the authority to represent a buyer.
It was only in 2014 that the state of California made a law that required the written disclosure of the nature of an agent’s role in a real estate transaction. However, the buyer agency agreement was not a part of that law. Instead, the law has provisions that allow Realtors to put down in the buyer’s agency agreement that the payment of commission or compensation to the buyer’s agent is conditional on the actual payment of that commission or compensation from the seller, not simply contracted to be paid. Every state has different ways of regulating the work of real estate professionals, and these may be part of real estate licensing, related to consumer protection legislation, or they may be regulations put down by the professional organizations themselves.
Advantages of a Buyer Representation Agreement
The drafting and execution of a written buyer representation agreement has many advantages for both the buyer and the real estate agent. From the buyer’s perspective, a written agreement provides the buyer with certainty that the real estate agent is legally obligated to be committed to assisting the buyer for the duration of the nomination period. A written buyer representation agreement also introduces a process of mutual discussion between the buyer and the real estate agent to identify the buyer’s needs and expectations from the nominating process. In particular, a buyer representation agreement is beneficial in situations where there are multiple buyers purchasing as partners or where the buyer relies on the advisor of another person such as an attorney or family member. The agreement serves to record the relationship and expectations of the buyer as between the buyer and the nominated real estate agent.
By having a written buyer representation agreement, the buyer has the ability to make clear and record specific limitations on the buyer’s authority to instruct the nominated real estate agent. For example, there may be situations where a buyer wants to limit his/her authority to enter into a purchase contract independent of the lawyers’ review of the purchase contract. The agreement is also a useful record to support commission claims in situations where multiple realtors are involved in the purchase transaction. The agreement ensures that all of the realtors involved are working on behalf of the same buyer.
From the agent’s perspective, a written buyer representation agreement confers certain protections and benefits. By entering into a written agreement with the buyer, the nominated real estate agent is more likely to become informed of the buyer’s specific needs in a timely manner and is better positioned to serve the buyer’s best interests. If there is a dispute over whether a valid buyer representation agreement exists, the real estate agent is better protected to rely on a written agreement. Finally, the adoption of written buyer representation agreements in legislation provides the real estate agent with the freedom to offer buyer services without the obligation to fulfill duties and responsibilities not yet contemplated by legislation. A buyer representation agreement is one of those anticipatory documents drafted by real estate agents which provide guidance in situations that do not fall within existing rules.
Common Provisions in Buyer Agreements
Buyer representation agreements may contain several clauses that are either required by, or generally conform to, DoPA and the Legal Profession Act 2006 (Qld). At a minimum purchaser clients will provide the agent with instructions for the purpose of locating a property for sale that conforms with the purchaser client’s requirements within a specified indicated price, which are incorporated into the agreement. This information will normally include at least:
The duration of an agreement is typically at least an exclusive three-month term, with an option or notice to extend the term. These agreements are typically offered on a no sale, no fee basis, although this is not required by law. Other clauses usually included in these types of agreements include the provision of services by the agent, who usually by the agreement is required to:
Commission and other fees for services provided by the agent are often set out in a schedule attached to the agreement. An agreement may also allow the agent to charge any additional costs incurred for locating a property, including search fees or access to database information. There is no obligation in DoPA or the Legal Profession Act 2007 (Qld), or the legal profession’s professional conduct rules for law practices in Queensland on the amount of commission or any other fees charged by real estate agents.
Selecting a Real Estate Agent
When it comes to choosing a real estate agent, it is a very personal decision for the buyer. First of all, the buyer has to like the agent or at least feel comfortable with the agent’s personality. The second consideration should be whether the buyer believes that the agent is sufficiently knowledgeable about the community as well as the current conditions in the local real estate market. It is important for a buyer to know that they can trust their agent. A buyer could start with recommendations from a friend or relative , or perhaps they have already conducted open house visits to get a sense of the agents who practice real estate in the buyer’s community. As soon as a buyer finds an agent that seems to be a good fit for their needs, a buyer representation agreement should be discussed. In some cases, the buyer may need to talk with a number of agents in order to find the right one.
Potential Pitfalls Without a Buyer Agreement
The outcome of a residential real estate transaction is often heavily influenced by the actions, inactions and opinions of the parties. The subtle nuances that govern the actions of people with whom you do business can spell the difference between a successful and unsuccessful transaction. Without a buyer representation agreement, you may be unwittingly parting ways with thousands of dollars because you and your realtor each had different expectations of the relationship.
For example, in a situation where the Buyer finds the property on his own and asks the realtor to submit an offer, the offer itself should state whether the buyer’s broker has the right to represent the buyer at the inspection, whether the buyer will pay the full commission to the seller’s broker if the sale does not close, whether the buyer will be responsible for the payment of any disbursement fee for the splitting of the commission with the seller’s broker and whether the buyer’s broker is an agent or sub-agent of the seller. Without the buyer representation agreement, the buyer’s broker is an agent of the buyer and his primary role is to protect the interest of the buyer. A potential conflict of interest arises where the buyer is representing himself as his own broker and that he is responsible for remuneration of two brokers. It then becomes the buyer’s agent’s obligation to ensure that the offer clearly states that in spite of the buyer "acting" for himself, the buyer’s broker demands full payment of the agreed commission, if the sale does not close.
Further, it would also be prudent to stipulate that the buyer’s agent is an agent of the buyer, and not the seller. At the time of the showing, if there are two agents (one seller’s agent and one buyer’s agent) present at the same time, the buyer may assume that both agents are his own and may not understand that the seller’s agent is working for the seller’s benefit only.
An agreement that sets out the duties and expectations of the agent is advantageous to both the buyer and the agent. The buyer knows exactly who is working for him and he knows what his agent is obliged to do for him. The risk of miscommunication is minimized and the likelihood of success increases.
Frequently Asked Questions About Buyer Representation Agreements
Common questions and answers about buyer representation agreements are as follows:
How do buyer representation agreements work when it comes to new construction? Because of the existence of special agency relationships that the builder may have with its real estate agents (i.e, buyer’s agent), new home builders will generally pay the commission due and owing to a buyer’s agent minus the discount given to the buyer’s agent for not having performed a search of the MLS to find a suitable property. So while the agreement must be in writing, it need not require any compensation from the buyer (unless the buyer agent plans on doing some extensive research of properties). Assuming a buyer does sign a buyer representation agreement, if a buyer’s agent should insist on representing the buyer in a new construction situation, then the cost of that commission shall be taken into account for the purposes of the mortgage prequalification amount. Can you negotiate the terms of a buyer representation agreement? Certainly. While a standard buyer representation agreement provides that the buyer can terminate the agreement with 24 hours’ notice, this notice period may be negotiated to fit the buyer’s needs. What if I decide I want to work with a different buyer agent: before or after making an offer? The buyer representation agreement is terminable by 24 hours’ notice by either party without penalty. As with any contract , it is better if the parties can agree to the release than to have to artificially exercise a right of termination, where possible. A buyer who decides to work with a different agent should have the motivation to communicate that decision to the first agent so that they may both avoid any unnecessary costs or delays. That said, if a buyer decides to work with the builder directly without an agent, the buyer must remember to communicate that decision to the first agent. What are the advantages of a buyer representation agreement? The advantage of entering into a buyer representation agreement is that it gives the buyer confidence that they will not be out manoeuvred or mistreated as a result of the fact that they do not have their own representation. It also provides comfort in knowing that the buyer’s agent has a professional obligation to provide advice and services solely in the best interest of the buyer without encumbrance from any other parties. Why is a buyer representation agreement important? A buyer representation agreement governs the relationship between the buyer and their agent. It is important because it gives the agent the exclusive right to represent the buyer in a residential real estate transaction for the duration of the term and it provides a framework for the scope of the buyer-agent relationship.