Everyone wants to save money when buying real estate. In today’s internet driven market place, buyers have a wealth of information at their fingertips. This often drives buyers to believe that they can save big by acting as their own agent and work directly with the listing agent. They call the listing agent and arrange to see the property. Sometimes the listing agent will refer another agent to meet the buyers at the property, and ask them to sign a Buyer Representation Agreement with the showing agent. Sometimes the listing agent will show them the property and offer to work with them to write a contract on the house. The listing agent tells them that they can save on the buyer agent commission, which is exactly what the buyer wants to hear.
What is going on behind the scenes? Anything unethical? To understand that you would need a good knowledge of the Texas Law Of Agency, and how licensed agents are bound by it. The vast majority of consumers have no idea what it is, and yet they try to make one of the largest investments of their lives without understanding the most basic aspects of a real estate transaction.
A couple of definitions are required.
Broker: A licensed real estate broker is an agent that has had extra training in the industry and can sponsor, or employ, licensed sales persons. All real estate commissions are paid to the brokers who then split with the salespeople handling the transaction.
Sales Person/Agent: A licensed real estate agent who must be sponsored by a broker. The agent acts a representative of buyers or sellers.
Agency: The relationship between a principal and an agent who acts for the principal within the specified authority granted by the principal. The principal is entitled to rely on the agent, who places the principal’s interests above those of his own.
Single Agency: The practice of representing either the buyer or the seller, but never both in the same transaction.
Dual Agency: The practice of representing both the buyer and the seller in the same transaction. Done only with the written consent of all parties in a transaction. Discouraged in many states. Many brokers prohibit their agents from this practice because of high risk of liability.
Expressed Agency: An agency created by specific agreement, whether written or oral, between principal and agent. Those specific agreements are the listing agreement and the buyer representation agreement.
Buyer Agent/Buyer Broker: A real estate agent or firm who is employed by and works for a buyer in a real estate transaction. A buyer agent owes fiduciary duties to the buyer.
Listing Agent/Listing Broker: A real estate agent who markets the seller’s property and represents the seller during the sale of the seller’s property. Also known as the seller’s agent. The seller’s agent owes fiduciary duties to the seller.
Subagent: A licensee who represents a principal through cooperation with and consent of a broker representing the principal and who is not sponsored by or associated with the principal’s broker. If an agent does not have an agreement to represent the buyer, the agent represents the seller as a subagent. Anytime an agent represents the client of another broker other than their sponsoring broker, they act as a subagent in the transaction.
Fiduciary Responsibilities: The creation of the agency relationship creates a duty between a licensee and a principal called a fiduciary duty. The fiduciary duty is a relationship of trust and confidence between principal and agent. The Law Of Agency imposes on the agent duties of obedience, loyalty, disclosure, confidentiality, accounting, and reasonable care and diligence. A real estate agent owes complete fiduciary duties to the principal they represent and must act in the best interests of the principal (the client) while also being competent and treat all parties honestly and fairly (whether the seller or the buyer).
Commissions: Commissions are generally paid by the seller of a property to the listing broker. The amount is agreed to in the listing agreement. It is typically 5-7% of the sales price of the property. The listing agent then decides how to split the commission between themselves and an agent that brings a buyer. It is typically split 50/50 with an agent that represents a buyer. There is usually no commission paid to subagents. Buyers do not usually pay commissions.
So what does it mean to be “represented”, and why does it matter?
A licensed agent always represents someone, whether seller or buyer. The agent owes that client full fiduciary duties as described above. If an agent does not represent someone, then they are owed only honest and fair treatment. The agent must put the interest of the represented party above all else. It is imperative to know who represents who in a transaction.
As noted in the Subagent definition above if an agent does not have an agreement to represent a buyer, then that agent represents the seller, and thereby owes the seller full fiduciary duties. Are there any buyers on this planet that would knowingly work with a subagent in a major transaction? I doubt it, but the key word is “knowingly”. And the subagent usually does not get a commission anyway. So a buyer asking an agent to “just help us write the contract” without a buyer representation agreement is unlikely to be done by an agent. No one wants to be liable, especially when they are likely working for free.
At the beginning of this article, we began with the buyer wanting to save big money by trying to work directly with a listing agent, and thereby saving the buyer agent commission. The buyer is trying to act as their own agent, and have the listing agent just handle the paperwork.
In trying to negotiate with the sellers and their agent, the buyer is in a very weak position. The fact is that the buyer does not have all the proper information, tools, and experience needed to successfully negotiate an offer at market price or lower.
The listing agent represents the best interests of the seller, and must work to get the seller the best possible return.
As you hopefully now understand, the buyer is unlikely to save any money, and more likely to pay more than if the buyer were represented by his own agent. Additionally, if the buyer subjectively feels they were not treated honestly and fairly then the buyer may file complaints with the real estate commission, or litigation. It is unlikely they will get anything from these efforts because they agreed to be un-represented.
There were two scenarios laid out earlier. In the first scenario the listing agent referred another agent to act as buyer agent. This is the proper thing to do. The listing agent probably does not want to represent both buyer and seller. And the seller and listing agent broker probably doesn’t want that either. The buyer may feel they have been the target of a bait-n-switch, but the buyer doesn’t understand the issue.
In the second scenario the listing agent agreed to show them the house and help them to write a contract for the house. This agent is attempting to act in a dual agency capacity likely without the full understanding of the implications by either buyer or seller. The agent must remain neutral. Why would the agent try to do that, and who benefits? The agent is the only one benefitting in this scenario by keeping more of the commission paid, of course. Remember, the commission is agreed upon between seller and listing broker, and the seller is paying for full representation not nuetrality.
If a buyer truly wants to save money in a real estate transaction, then the buyer must understand everything involved in a real estate transaction and have all the needed information to make an informed decision. The best, safest, and most profitable way to do that is to have a licensed agent represent the buyer.
So you buyers out there do yourself a favor and save big $$$ by using a licensed agent to represent you, and have the seller pay for their services to you. Everyone will be much happier in the end.
Greed is the inordinate desire to possess wealth, goods, or objects of abstract value with the intention to keep it for one’s self, far beyond the dictates of basic survival and comfort. Source: Wikipedia.org