Month: August 2024

Navigating Buyer Broker Contracts: Empowering Consumers with Better Terms

When entering into a buyer broker agreement, it’s crucial to understand the terms and conditions laid out in the contract. These contracts can often contain provisions that may not be in the best interest of the buyer. To help consumers make informed decisions, Consumer Advocates in American Real Estate (CAARE) offers insights and suggestions for negotiating more favorable terms.

CAARE Buyer Broker SuggestionsDownload

Our Buyer Broker suggestions review key aspects of buyer broker agreements and how to ensure you’re protected as a homebuyer.

1. Termination Clauses

  • What They Say: “This contract may only be canceled by mutual agreement of the parties.”
  • Consider This Instead: Include a clause allowing either party to terminate the contract before its expiration without any obligations if not under contract for a property.

2. Failure to Close

  • What They Say: “If Buyer refuses to close the Purchase for any reason other than the failure of seller to perform, Buyer shall pay Broker all the compensation due under this Contract.”
  • Consider This Instead: The buyer should only be obligated to pay the fee upon successful closing. This protects you from being financially liable if the deal falls through for reasons beyond your control.

3. Additional Fees

  • What They Say: “Buyer agrees to pay an administrative fee/transactional fee of $______ in addition to other compensation owed.”
  • Consider This Instead: Be cautious of these junk fees hidden within the contract. Avoid agreeing to them as they can inflate your costs unnecessarily.

4. Protection Period

  • What They Say: “Buyer owes the Broker the full compensation if within ______ days after expiration of this Contract, Buyer purchases a property Broker has shown or exhibited to Buyer.”
  • Consider This Instead: Reject protection periods that could require you to pay the broker even if you don’t use them to buy a house after the contract expires.

5. Dual and Designated Agency

  • What They Say: “Buyer will agree to dual or designated agency representation and will consider properties listed by Broker.” OR “If Buyer declines Dual Agency, Buyer will not be shown listings owned by the brokerage.”
  • Consider This Instead: Maintain the right to cancel the contract if dual or designated agency arises, allowing you to hire a different broker without any obligations.

6. Additional Services

  • What They Say: “Buyer directs Broker to arrange for a qualified closing agent to conduct the closing.”
  • Consider This Instead: Ensure that the broker/agent assists in shopping for and comparing prices for lending, title, warranty, and insurance services. They should recommend at least three providers in each category who are unaffiliated and not offering additional compensation to the broker.

7. Arbitration & Class Action Lawsuits

  • What They Say: Terms related to arbitration or prohibitions on class action lawsuits.
  • Consider This Instead: Avoid brokerages that include such terms, as they strip you of important rights and legal recourse.

8. Referral Fees

  • What They Say: “Neither the Broker nor Agent shall accept or pay any referral fees on any transactions that involve the Buyer.”
  • Consider This Instead: Prohibit referral fees, as they can limit your negotiation power by directing significant commissions to third parties.

9. Seller Compensation

  • What They Say: “If compensation is not being offered, Buyer instructs Broker to negotiate seller credits to cover broker fees.”
  • Consider This Instead: If you’re unable to pay your broker out of pocket, include a request for seller credits in your offer to cover broker fees. Communicate this strategy with your lender.

10. Bonus Tips for Buyer Broker Negotiations

  • Dual & Designated Agency: This type of representation is often a source of consumer complaints. We suggest you decline it to ensure proper representation.
  • Seller Concessions: These can reduce closing costs, offer flexibility, and improve negotiation outcomes, giving you better control over your funds.

Why CAARE’s Advice Matters The real estate industry has long operated under traditional methods that may not always serve consumers’ best interests. CAARE provides guidance that empowers buyers to negotiate better terms and avoid common pitfalls. If something in your broker’s advice seems off, don’t hesitate to reach out to us.

About CAARE Consumer Advocates in American Real Estate is the only nonprofit organization in the nation dedicated to consumer protection in residential brokerage. Our goal is to ensure transparency, fairness, and advocacy for homebuyers navigating the often complex world of real estate transactions.

For more information or assistance, feel free to reach out to us at info@caare.org. We’re here to help you make informed decisions and be better protected in your home buying journey.

CAARE is not your attorney and is not licensed to provide you with legal advice. These suggested contract changes should be reviewed by your attorney. We are not familiar with your state’s laws surrounding these matters and only an attorney in your state may properly advise you. The purpose of these suggestions is to call attention to some of the contract terms we believe are anti consumer and anticompetitive. How you address these terms is a matter of law and is to be determined between you and your attorney.

How Consumers Will Benefit From the New Realtor Fee Structure

Changes in the way Realtor fees are determined should save consumers billions in real estate commissions. For the first time ever, buyers can negotiate the fee of their buyer agent. If brokerage fees are lower, more sellers will be able to afford to sell and the pool of homes for sale should increase. 

In the past, seller brokers shared their fees with buyers’ brokers. When competitors “share” fees it is the same thing as collusion and it causes fees to be higher than they would in a free market. It was an unnecessarily complex practice that made it nearly impossible for buyers to negotiate the fee of their own agent and cost home sellers hundreds of billions of dollars in inflated commissions. It allowed listing brokers to set the buyer broker fee artificially high and since listing brokers are buyer brokers half the time they benefitted from these unfair fees. The new rules will empower buyers to negotiate these fees and put them in a better position to buy the house that they desire.

And remember, buyers do not need to come up with the buyer broker compensation out of pocket. It is now standard practice to ask the seller for a credit to pay for the buyer agent. For the seller, this works out great because instead of paying a buyer broker 3%, they might only owe a small flat fee to pay your buyer agent (structured as a seller credit to the buyer). Buyers who want their offer to be more appealing to sellers will now have a huge incentive to negotiate with their buyer agent and ask for a seller credit.

Here are CAARE’s suggestions to help consumers take advantage of the new rules when negotiating fees.

Advice for Sellers:

Do not offer money directly to buyer brokers. When sellers offer money to buyer brokers, it presets buyer broker fees higher than they should be. And if the buyer has negotiated a lower fee with their buyer broker, it could result in the excess brokerage fees going to your listing agent instead of you. There is no good reason to offer money to buyer agents other than to artificially inflate the fees that brokers charge. Plus, Realtors just lost a major lawsuit for offering money to buyer brokers on the Multiple Listing Service. The case was about artificially inflating fees, and not so much about the Multiple Listing Service. Please avoid agents who suggest you continue with the practice of offering money to buyer brokers. 

Do not offer money to buyers upfront.  If you offer money to buyers, you will be giving up an important negotiating position. You do not know how much the buyer has agreed to pay their buyer broker. If you offer too much money to the buyer, the buyer may have lender restrictions that prohibit them from benefitting from your offer. The better practice is to offer nothing and let the buyer request a seller credit. If the buyer has negotiated the fee with their buyer broker, that seller credit could be far less than the amount you were going to offer. Let the buyer make the first move.

Advice for Buyers:

Negotiate the fee you will pay your buyer broker. This fee should be a flat amount that reflects the work you expect your agent to do. Avoid agreeing to a commission based on the purchase price. Your agent should be focused on getting you the best deal, not benefiting from you paying more.

Request a seller credit. When making an offer, ask the seller for a credit to cover your buyer representation fee (whether you use a broker or an attorney). If you negotiate a fee of around 1%, you will likely save the seller about 2% in commissions. Plus, if your offer only includes a 1% seller credit and a competing buyer asks for 3%, your offer becomes more attractive, increasing your chances of acceptance. Additionally, Fannie Mae, Freddie Mac, and the VA have all confirmed that concessions used for agent compensation do not count towards your concession loan limit, giving you even more flexibility in structuring your offer.

Avoid buyers’ agents who let you “skip homes.” Some brokerages include a clause in their agreements that asks if you want to skip homes that don’t offer upfront compensation to buyer agents. They wrongly tell you that you will need to pay their fee out of pocket. This is inaccurate and is a way for them to unfairly discriminate against sellers who don’t engage in price-fixing buyer brokerage fees. There is no reason to skip homes, because any offer you write will likely include a request for a seller credit to pay for your buyer representation fees. And if your request for a seller credit is denied, you can walk away from that offer with no harm done. In other words, there is no risk to you or the agent to writing offers on homes that don’t offer a buyer broker fee. In fact, homes that don’t offer a buyer broker fee are better situated to benefit buyers and sellers. Many sellers may not offer compensation upfront, but that doesn’t mean you can’t negotiate it in. If you skip homes just because they don’t list a fee, you could miss out on many great options within your budget where you could have negotiated your agent’s fee.