Once upon a time, a potential homebuyer and a real estate agent could merely shake hands and trust that both would do right by the other. Boy, does that feel like a relic of the past! These days, the vast majority of buyers and agents enter into a legally binding contract known as a buyer-broker agreement.
If you’ve never purchased a home before, you might not have realized that there was such an agreement. “One more thing to sign,” you may be thinking with rolling eyes. Well, you’re right. But there are good reasons why buyer-broker agreements exist — they function as protections for the buyer and the agent.
In this piece, we’ll explain the different types of buyer-broker agreements and describe how they work so you’ll understand what you’re getting into before you put ink to paper.
The buyer-broker is a legally binding business agreement signed by both the buyer and a real estate agent before the buyer engages an agent’s services. This agreement clearly delineates what the agent will do for the buyer, the terms of the agreement, and how the agent will be compensated.
The buyer-broker agreement protects both buyer and agent by clearing up any misconceptions about how you’ll pay an agent and what they’ll do for you. It’s a reassurance for both parties that they’ll work with one another’s best interests in mind.
Exclusive right-to-represent contracts are the most common buyer-broker agreement, used in the vast majority of instances. Considered the standard for buyer-broker agreements, this contract outlines what the agent will do for the buyer and describes the buyer’s obligations.
The primary distinction from other agreements is the exclusivity. That means that, once signed, you cannot work with another agent during the time period specified by the contract. That said, a buyer may use this agreement to employ an entire brokerage rather than just an individual agent.
This agreement also lays out what commission the buyer will pay the agent upon purchase of a home, unless the seller agrees to pay the commission as a condition of a home sale.
These contracts are somewhat informal, allowing the buyer to work with another agent if they’d like and requiring no compensation paid to the agent. It doesn’t determine a commission rate for the agent should they represent a sale — that will happen later. Both buyer and agent can break it at any time without penalty.
So, if there aren’t any practical or financial obligations, why does it even exist at all?
This type of buyer-broker agreement may be flexible, but it still offers the agent the security that if you do purchase a home presented to you by a particular agent, they will receive the commission. A buyer will have the fiduciary privileges of an agent, but is free to take appointments with other agents and is under no requirement to pay an agent for their services — unless they buy a home presented by that agent. For a buyer, it’s almost like having your cake and eating it, too.
This third type of buyer-broker agreement outlines the agent’s duties and obligations to the buyer and does provide for compensation. The buyer is still free to employ multiple agencies and will owe the pre-negotiated commission only if a particular agent or agency presents the purchased home.
Where this type of agreement differs from the others is the pre-negotiated compensation. Moreover, it removes the buyer’s responsibility to pay a commission if the agent is paid by another party, such as the seller. Unlike nonexclusive not-for-compensation agreements, nonexclusive right-to-represent agreements waive any additional fees if a third party agrees to pay the determined amount.
Every buyer-broker agreement is different depending on what you negotiate with the agency. That said, non-exclusive agreements tend to have shorter terms, usually no longer than two months. Exclusive agreement terms range anywhere from 30 days to one year.
It’s up to the buyer and the agent to decide what kind of term makes most sense for both parties, which often depends on where the buyer is in their home search.
When you can break a buyer-broker agreement depends on the agreement that you sign. The only enforceable buyer-broker agreement is an exclusive right-to-represent that lays out an agreed commission in the agreement. If you break the agreement by buying a home presented to you by another agent or brokerage, you’ll owe the commission to the agent you signed the agreement with. Then, the other agent you actually bought through might pursue legal action against you to get their own commission.
If you’re concerned about being locked into an exclusive contract with an agent, it’s important to negotiate an exit clause upfront. Agents aren’t required to release you from a contract just because you ask, so make sure you broach the subject before signing — especially if you’re looking at a longer exclusivity term or if you know you want to work with multiple agents.
Agents and agencies may be more flexible on this point than you think. Sometimes, people just don’t click and real estate agents have worked with a lot of people. They don’t want to waste their time working with somebody who isn’t interested in any of the properties they have to show.
If you’re hesitant about exclusivity or an extended term agreement, just talk it out with the agent; they’ll likely understand where you’re coming from.
At risk of sounding like a broken record, whether you should sign a buyer-broker agreement depends on you! Every buyer is unique, every agent relationship is unique, every market is unique, and every agreement is unique.
Some prospective homebuyers don’t even want to use an agent. But if you really don’t know what you’d like in a home and know you’re going to be looking for a while, it’s a good idea to get an agent who knows the market you’re looking in and has the relationships to help you get the best price possible. If they want to sign an agreement, make sure to review it thoroughly (alongside your lawyer, if it’s for longer than a couple of months) and understand it completely.
Buyer-broker agreements exist to protect both homebuyers and real estate agents when they choose to work together. Some agreements are more binding and enforceable than others. Before you sign a buyer-broker agreement, make sure you understand the terms, the services to be rendered, and be clear on what you’re looking for from a buyer-broker relationship.
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