Brokerage Reminder: The buyer’s listing – a prerequisite to representation

This two-part Brokerage Reminder discusses the importance of an agent obtaining a buyer’s listing agreement prior to acting on a buyer’s behalf. Part I discusses the methods for protecting a fee when representing a buyer in a transaction. For insight into the agency duties owed to a buyer and the buyer’s benefits on entering into a buyer’s listing agreement, stay tuned for Part II of this article series.

Fee protection through an exclusive right-to-buy

When considering a buyer’s listing agreement, a real estate licensee may irrationally fear losing the buyer to another agent by asking for an exclusive right-to-buy listing. Unlike representing a property owner intending to sell their property, no MLS rule or seller’s broker is concerned with whether the buyer has formally employed an agent to help them craft and submit an offer. [See RPI Form 103]

Thus, when counseling a potential buyer — and certainly before giving advice, providing information or commencing efforts to locate qualifying properties — it is prudent to ask the buyer to enter into a written commitment. In so doing, the buyer commits themselves to employ and authorize the agent to work with them to locate property as their exclusive agent.

Here, when the client buys property, no matter how or by whom the property is located, the broker and their agent who worked diligently to meet the buyer’s objectives have earned a fee — and collect it.

A buyer’s agent uses an exclusive right-to-buy listing agreement when employed as a sole agent by a prospective buyer. The agreement directs the agent to prepare an offer to render services on behalf of the buyer to locate and acquire property for a fixed period of time — in exchange for the buyer’s assurance a fee will be paid when the buyer acquires the type of property sought. [See RPI Form 103]

A buyer who refuses to enter into a written listing agreement with a broker and their agent sends a clear signal they do not want the agent as their personal representative. They may only be looking for a locator or finder of properties without any obligation to compensate them. Without the buyer’s written promise that a fee will be paid, a broker is entitled to nothing when the buyer goes around them and acquires property based on information the broker or agent provided.

Occasionally, a broker will arrange a fee-sharing agreement with the seller’s broker to document a prospective buyer as their client. Thus, the buyer’s broker will be paid if their buyer acquires a specific property, a situation usually applicable to only one property. [See RPI Form 105]

Ultimately, it is unreasonable for a buyer’s broker to expect a fee when working with a buyer who acquires property located by the broker, unless:

• the buyer has signed a writing related to the property which contains a fee provision [Phillippe v. Shapell Industries, Inc. (1987) 43 C3d 1247]; or
• the seller’s broker has agreed in writing (or orally) to share their fee with the buyer’s broker regarding the identified buyer. [Jenkins v. Locke-Paddon Co. (1916) 30 CA 52; Lusi v. Chase (1959) 169 C2d 83]

The fee-payment bargain

Written agreements are made to be enforced. This includes a signed buyer’s listing calling for payment of a fee when the buyer acquires property. The seller nearly always pays the fee, but this fee arrangement needs to specify the amount the buyer’s broker will receive (and share with the buyer’s agent).

Editor’s note — All assurances of payment of a broker fee on a real estate transaction are required by contract law (Statute of Frauds) to be in writing and signed by the person who agreed a fee will be paid, regardless of who pays the fee in the transaction. [Phillippe, supra]

However, depending on the type of listing, the likelihood a fee may be collected for assisting a buyer varies.

When no listing exists, neither the seller nor the buyer has formally employed a broker. A seller who acts without a broker may be an experienced real estate investor, subdivider, land speculator, real estate owned (REO) lender or other well-seasoned owner capable of negotiating a real estate transaction without representation.

Buyers who refuse representation, however, tend to lack experience in real estate transactions. However, many believe they possess the business acumen necessary to handle negotiations on their own. A broker may bring properties to their attention as a possible match, but collection of a fee is unlikely and unenforceable without any written agreement.

Occasionally, a buyer is willing to make an offer through an agent who locates an unlisted property and brings it to the buyer’s attention. [See RPI Form 103-1]

This is not an exclusive right-to-buy listing — instead, the agent solicits the seller for a “one-shot” right-to-sell listing containing a promise to pay a fee when the agent produces a buyer who acquires the property. On getting the listing, the agent prepares and submits an offer from their buyer.

This brokerage situation typically includes the use of a deficient purchase agreement form that does not include a fee provision requiring that someone pay a specific fee amount to the buyer’s broker when the buyer acquires the property.

Further, this scenario is a dual agency situation, which requires disclosure to both the buyer and the seller.

Enforceable listing agreements

Consider a prospective buyer who contacts an agent employed by a broker with multiple listed properties. The agent presents the buyer all relevant “in-house” listings, and failing that, makes arrangements with the buyer to locate qualifying properties listed by other brokers or unlisted for-sale-by-owner (FSBO).

When the buyer agrees the agent is to act on their behalf to locate qualifying properties, the agent needs to first obtain a signed buyer’s listing agreement. With the listing, the agent is assured payment of a fee when the buyer acquires property. Should the buyer refuse to put their agreement in writing, the agent may still assist the buyer in locating property — but might not receive a fee for their trouble.

On failing to obtain a signed listing, the agent’s next best option is to enter into a fee-sharing agreement with the broker of each listing  presented to the buyer, specifically identifying — registering — the prospective buyer. Thus, the arrangements with the seller’s broker protect the time and effort of the buyer’s agent in the event the buyer goes around the agent to acquire the property independently. [See RPI Form 105]

Further, when the agent prepares an offer for their unlisted buyer, the purchase agreement form the agent uses needs to include a fee provision in the body of the purchase agreement signed by the buyer setting out who is to pay the fee — most likely the seller — and what amount the buyer’s broker is to receive. Any mutual escrow instructions are to also include the same fee provision.

Ideally, the buyer agrees to sign an exclusive right-to-buy listing agreement employing the agent’s broker. Thus, the buyer authorizes the broker and their agents for a fixed period of time to locate and negotiate the purchase of suitable property of the type the buyer seeks.

A seller of suitable property to whom an offer will be submitted may or may not have signed a seller’s listing agreement with another broker. Either way, the listing agreement controls the amount of their fee arranged to be paid by the seller on their buyer’s purchase.

This article was originally posted January 2016, and has been updated.