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 your fee when representing a buyer in a transaction. For insight on the agency duties owed a buyer and the buyer’s benefits on entering into a buyer’s listing agreement, see Part II of this article series.
Maximum protection for payment of a fee earned
Most employing brokers realize a signed buyer’s listing agreement produces the maximum financial return on the effort, money and talent their agents invest when acting on behalf of a buyer. However, they too often do not implement their understanding to use buyer’s listings to improve staff performance through client retention.
Real estate services have great value to members of the public. Nearly all buyers and sellers use an agent to assist them to meet their real estate objectives. Often, brokers and their agents inadvertently allow members of the public to exploit their time and talent without the guarantee of a fee when they sell or acquire property.
The sales agent’s irrational fear of losing the buyer to another agent if they ask for an exclusive right-to-buy listing, and their carelessness about protecting their fee, permits them to believe they will be able to sufficiently bond with a buyer to make a listing unnecessary. Unlike representing a property owner, no MLS rule or seller’s broker is concerned about whether the buyer has formally employed the agent bringing an offer. In the process, a prospective buyer learns much about what they need to know about a particular property from an agent. Far too often they fail to return when they decide to buy it. They frequently, due to peer pressure, turn to friends or relatives who are licensees to do the deal, since bonding without a written agreement is mostly without meaning.
So, when you counsel a potential buyer, and certainly before giving advice, providing information or commencing efforts to locate qualifying properties, just ask the buyer to enter into a written commitment. By so doing, they commit themselves to employ and authorize you to work with them to locate property as their exclusive agent. In exchange, you will have agreed to diligently engage yourself, to the best of your abilities, to continuously do what is necessary to meet their objectives.
As an exclusive agent, when the client buys a property of the type they seek under the listing, 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 they can collect.
The exclusive right-to-buy
An exclusive right-to-buy listing agreement is a form used by a buyer’s agent when employed by a prospective buyer as their sole agent, to prepare an offer to render services on behalf of the buyer to locate and acquire property for a fixed period of time.
By using the listing form, the prospective buyer employs the broker and their agents to locate property in exchange for the buyer’s assurance a fee will be paid when the buyer acquires the type of property they seek. [See RPI Form 103]
A buyer who refuses to enter into a written listing agreement with a broker and their agent demonstrates a clear intention the buyer does not want them as their personal representative. What this unlisted buyer likely wants is an agent to act as a locator or finder of properties, and provide valuable information without any obligation to compensate them for the assistance. Possibly, the buyer has not yet committed themselves to buy a property; “Just looking, thank you very much.” Able and willing, but not ready — to employ a broker to actually do a deal.
Without the buyer’s written promise that a fee will be paid if they acquire property, a broker is entitled to nothing when the buyer “goes around” them and acquires property on which the broker provided them with information.
Without the buyer’s written promise somewhere, the broker earns no fee collectable from anyone. 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]
More importantly, it is unreasonable for a buyer’s broker to expect to receive a fee, no matter who is expected to pay it, when working with a buyer who acquires property located and presented by the broker, unless:
- the buyer has signed some writing relating 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
Various working relationships and compensation arrangements may be struck between a prospective buyer and their agent.
Writings, by their nature, are intended by all who enter into them to be enforced. This includes a signed buyer’s listing calling for payment of a fee when the buyer’s objective to acquire property is met. The seller nearly always pays the fee, but this fee arrangement needs to be specific as to the amount the broker will receive, and included in the body of purchase agreement offers and mutual escrow instructions.
Editor’s note — All assurances 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 whether the fee will be paid by that person or by another in the transaction. [Phillippe, supra]
The following situations, in reverse order of enforceability, demonstrate the various likelihoods of collecting a fee for assisting a buyer:
1. No listing exists. Neither the seller nor the buyer has formally employed a broker. Usually, the seller who acts without a broker is 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.
Occasionally the buyer refusing representation is also experienced at handling their own transactions. More often, however, the buyer is inexperienced in real estate transactions but believes they possess the business acumen necessary to handle the real estate negotiations on their own. Thus, these types of principals feel they do not need a broker to represent them as they can negotiate the sale or purchase themselves. What they need from the brokerage community is someone or some medium to bring properties and buyers to their attention as a possible match.
2. A “one-shot” seller’s listing exists. 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]
The agent fails to ask the buyer to enter into an exclusive right-to-buy listing before preparing a purchase agreement offer or proceeding to contact the owner. Instead, the agent solicits the seller for and obtains 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 in the body of the agreement signed by the buyer requiring someone to pay a specific fee amount to the buyer’s broker if the buyer eventually acquires the property.
Further, the agent was improperly trained to list an unrepresented seller before submitting an offer from their buyer client. Note: this scenario is a dual agency situation which requires disclosure to both the buyer and the seller under rules of agency.
3. Customer turned client. A prospective buyer contacts an agent employed by a broker who has numerous listed properties. The agent exposes the buyer to all the relevant “in-house” listings, none of which are of further interest to the buyer. Having exhausted the in-house inventory of property for sale by seller clients, the agent has alternatives for handling the buyer. The agent may choose to see the buyer off — “Thank you and goodbye.” Or, the agent might consider making arrangements with the buyer to locate qualifying properties listed by other brokers or unlisted for sale by owners (FSBOs) and present them to the buyer.
If the buyer agrees the agent is to act on their behalf to locate qualifying properties, the agent needs to first ask for and obtain a signed buyer’s listing agreement. With the listing, the agent is assured payment of a fee when the buyer acquires property. If the buyer refuses to do so, the agent might still proceed to assist the buyer to locate property but does so at the peril of not receiving a fee.
On failing to obtain a signed listing and deciding to locate property for the buyer, the agent’s next best step is to enter into a fee-sharing agreement with each listing office for property exposed to the buyer, specifically identifying (registering) the prospective buyer. Thus, the arrangements with the seller’s broker protect the time, effort and talent of the buyer’s agent in the event the buyer “goes around” the agent to acquire the property. [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.
4. A buyer’s listing agreement exists. The agent asks for and the buyer agrees, signing 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 employing the buyer’s broker controls the amount and destiny of their fee arranged to be paid by the seller on their buyer’s purchase.
For further discussion on the agency duties owed a buyer and the buyer’s benefits on entering into a buyer’s listing agreement, see Part II of this article series.