Role of the buyer’s agent

 

The auction is a variation on the traditional real estate sale. Instead of relying on curb appeal and individual buyer showings and negotiations, the sale of the property is widely advertised through mailings and newspaper promotions. Additionally, unlike most transactions, the date the property will be sold is definitively set: the day of the auction itself.

Like a traditional sale, an owner’s auction is controlled by real estate law (requiring property disclosures), agency law (licensee advisory and fiduciary duties/representational behavior) and licensing law (a licensed listing broker must be employed by the seller or auction company to oversee all property disclosures and contracting).

The central goal of an auction is no different from a traditional transaction: to pair a seller with a bona fide purchaser and close the transaction.

Though the method of soliciting buyers is different, the central goal of an auction is no different from a traditional transaction: to pair a seller with a bona fide purchaser and close the transaction. Thus, the only real distinction is how the prospective buyers are located and gathered for the oral bidding.

Just like a regular sale, the prospective buyer at an auction, called a bidder, is best protected when represented by an agent. The agent provides him with proper oversight and advice on what to learn about the property and surrounding area if the buyer is to know enough about the property to determine its current value and thus be able to bid wisely.

The fee agreement: get a writing with the buyer

 

The work the agent performs for the buyer at an owner’s auction is the same work the agent would do for any buyer he represents, except for the elimination of the initial step of locating qualifying property.  Tantamount to the agent’s personal financial success – his fee – he must enter into a single property fee agreement with the prospective buyer even if the listing broker has agreed to share the fee he receives from the seller. [See first tuesday Form 103-1]

As each auction contains a multitude of buyers, an agent representing a buyer has absolutely no guarantee his buyer will be the one to place the highest bid. Thus, a buyer’s agent under a regular buyer’s listing agreement calling for a fee to be paid on the buyer’s acquisition of the property runs the very real risk of receiving nothing in the way of compensation for his time, effort and talent conducting due diligence investigations and assisting in the bidding.

The single property fee agreement is essentially a contingency fee agreement, in contrast to an advance fee arrangment, setting the fee amount based on whether or not the buyer acquires the property as the highest bidder.

When the buyer does not acquire the property, the fee under the single property agreement can call for compensation based on an hourly wage (say, $50) for the agent’s time spent investigating and assisting the buyer prior to completion of the auction. [See first tuesday Form 103-1 §5.3(a)]

Alternatively, when the buyer does not acquire the property, the agent can arrange to be paid a flat lump-sum fee for his services rendered. [See first tuesday Form 103-1 §5.3(b)]

Since the agent must split his fee with his employing broker, the negotiated flat-fee must be sufficient to make the representation a worthwhile endeavor for the agent, for example $2,000 or $3,000. Just like in any traditional transaction, the broker must pay the typical transactional expenses for his office’s involvement in the transaction, such as errors and omissions insurance and general overhead costs.

When the buyer does acquire the property as the highest bidder, the fee arrangement for that event is a percentage of the price paid, say 2%, but also could be a lump sum dollar amount, say $6,000. [See first tuesday Form 103-1 §5.1]

The fee agreement fully itemizes what specific tasks the agent is to do to receive his fee, such as:

  • evaluating the economic suitability of the transaction;
  • attending an open house with the buyer prior to auction and inspecting the property;
  • obtaining and analyzing a title profile on the property;
  • examining pest control reports;
  • obtaining plat maps of the area surrounding the property;
  • checking the property’s proximity to schools, markets, financial institutions, etc.; and
  • developing an opinion of the property’s fair market value. [See first tuesday Form 103-1 §3.1]

The buyer’s agent needs to be paid under some formula for handling auction situations when the buyer does not win the bidding contest. If not, the agent will receive nothing for the investment of his time, energy and talent investigating the property and assisting with the bidding – the epitome of sunk costs. Sunk costs are not recoverable under any present or future condition and are lost forever.

Thus, solicitations to represent buyers at auctions containing this risk of lost time and effort must either be avoided or properly structured in a listing agreement so an agent’s efforts are spent on fee generating arrangements. An agent who represents a buyer at an auction will experience this risk, unless they enter into a written fee agreement at the outset of the representation.

Some auction companies require the buyer’s agent to register with the auction company 24 to 48 hours prior to the auction and use a broker/agent fee sharing agreement to set the fee the listing agent or the seller will pay the buyer’s agent (usually 2% of the purchase price if the transaction closes).

Auction companies mandate buyer agent/broker registration to avoid the risk of unscrupulous agents and brokers emerging from the woodwork after the highest bid has been placed, claiming they represented the highest bidder and are thus entitled to a fee.

By itself, the auction company’s registration and fee-sharing agreement provides a fee for only one agent’s time, effort and skill since they only agree to pay a fee if:

  • the buyer represented by the agent placed the highest bid; and
  • the transaction ultimately closes.

However, the buyer’s agent who uses a single property fee agreement affords himself the ultimate protection by providing payment of some amount in the event his buyer does not purchase the property, as well as when he does. [See first tuesday Form 103-1 §5.3(b)]

When an auction company requires the buyer’s agent to register with them, the single property fee agreement becomes a prelude to the fee-sharing agreement entered into with the listing broker and the auction company. If the agent’s fee described in the auction company’s fee-sharing agreement is less than the amount agreed to in the single property fee agreement, the agent can either:

  • refuse to accept the auction company’s fee unless it is altered to reflect the amount agreed to be paid by his buyer in the single property fee agreement; or
  • modify his agreement with the buyer to allow the agent to accept the shared amount from the listing broker and auction company and be paid the remaining amount by his buyer.

The agent negotiating to conform the amount of the fee set in print on the fee-sharing agreement to the fee amount agreed to in the single property fee agreement does so by deleting and entering the change on the face of the fee-sharing agreement, an action called interlineation. Everyone involved in the transaction then initials the change to be certain it is effective as though it occurred before signing the agreement.

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