Traps are set for buyers
I wish there were a way to tone down this post, but the title exactly describes what happens to buyers who go to open houses or set up appointments with listing or buyer agents. They are ambushed. Imagine if the simple act of visiting a listed home could automatically deprive you of the right to representation and to negotiate your agent’s commission? That is exactly what happens. Every day, all day long, and all over the country traps are set. And it’s the savviest home buyers who most often fall prey to these traps. If anything, I am downplaying the severity of the problem.
It all starts with Realtor listing contracts with sellers
Any time competitors get together and draft standardized fee agreements, you can expect anti-competitive and anti-consumer results. Can you think of another profession in which competitors gather and conspire together to craft standard fee agreements? In Minnesota, Realtors have spent decades working in concert behind closed doors perfecting their fee agreements that are very effective at trapping both sellers and buyers.
The listing contract is an agreement between sellers and listing brokers to sell the house and it sets forth the terms for which the listing brokers are entitled to get paid (and a lot more). The oddest thing about these listing contracts is that they force sellers to pay for buyer brokers. Why should sellers be responsible to pay buyer brokers? Because it’s a good way to artificially inflate brokerage fees…
“The reason commissions are so high is because listing brokers have to share their fees with buyer brokers.” Not true.
Listing brokers will try to rationalize their 5-7% commission demands by claiming that the reason they charge so much is that they have to share their fees with buyer brokers. Yet, they created these listing contracts that “force” them to share their fees. What they forget to tell you is that their agreement allows them to keep the entire commission if you or they find the buyer who ultimately buys your house. They don’t want to share the fee with other brokers.
One result of these anti-consumer listing contracts is that they create a huge financial incentive for listing brokers to limit the marketing of your house so that they can try and “hog” (their term, not mine) the whole commission by keeping other brokers out. Office exclusive listings are one way they do this. Keeping your listing off the most buyer-frequented websites like Zillow, Trulia and Realtor.com is another way they accomplish this.
Listing brokers control when and how much buyer brokers are entitled to be paid.
Buyer broker agreements are supposed to allow for buyers to negotiate the commission paid to their broker. However, the Realtor Buyer Representation forms provide no blanks, selections or any other means for buyers to negotiate. It’s truly smoke and mirrors designed to provide the illusion that buyers can negotiate their own brokers’ fees. The fine print of those buyer agreements says, “Broker is authorized to negotiate and receive compensation paid by seller, or broker representing or assisting seller.” In other words, it doesn’t matter what buyers try to negotiate, buyer brokers are entitled to keep whatever the seller broker offers them. It’s listing brokers who really determine how much and which buyer brokers are entitled to be paid. And that sets up the ambush.
The Ambush: Listing contracts allow the listing agent to keep both parts of the commission if you or they find the buyer.
Listing brokers can get paid double if they can force buyers to work with them. The incentive to prey upon unsuspecting and unrepresented buyers is an almost insurmountable temptation. If listing brokers subjectively feel that they are the reason you have become interested in a home, they can subjectively make the decision not to share the commission with buyer brokers. They are entitled to get paid the commission if, “…if before this Contract expires Broker presents a buyer who is willing and able to buy the Property at the price and terms required in this Contract….” And this form (drafted by a bunch of competitors) provides no selections, blanks, or any other means for sellers to negotiate what happens if sellers find the buyers or who gets to decide if buyers are to be denied their right to representation.
All I did was set up an appointment. That might be enough…
Listing contracts enable listing brokers to subjectively determine if they are going to rob buyers of their right to representation. There’s no warning. Buyers who set up appointments with listing agents and spend a lot of time in the house, who share financial information, ask a lot of questions, and show an interest in the house may find themselves stuck with that agent. Even though the listing agent is legally prohibited from helping you negotiate the terms of the transaction, even though the listing agent provided you with no warnings, even though the listing agent completely baited you into this situation, you may have forfeited your right to hire your own agent and negotiate your agent’s fee. Perhaps a better way to put this is that you have been swindled in one of the worst ways possible. You have been ambushed.
“I won’t show you the house unless you agree to work with me…”
Some listing Realtors actually say this to buyers who call them to see the listed house. Few buyers understand the significance of this terribly dishonest threat. Most believe that listing brokers could never force such a result. Can you imagine how sellers might feel if they knew their listing agents were telling prospective buyers to take a hike? How would you feel if you found out that your listing agent refused to show your house to a buyer unless the buyer agreed to dual agency (no right to representation)? Can you imagine how many buyers might be so offended by this that they might refuse to even consider this house? Yet this happens all the time.
In realty and reality, listing agents actively try to lure buyers over the “line.”
This isn’t just a situation that happens by accident. Listing agents are waiting for buyers to call in hopes of ensnaring them in this trap. And very few buyers understand how this works. As a result, buyers who feel cornered and want to buy the house they just visited get ambushed and forced into working listing agents who are prohibited from offering them any representation at all.
And it’s not just listing agents…
Have you ever visited one of the brokerage sites that list all the properties that are listed for sale on the MLS? They’ll often have a clickable button that states, “Schedule Tour” right next to the picture of the home. They don’t mention that scheduling a tour might deprive you of the right to interview and select your own agent for buying that home. It doesn’t matter that they are not listing the home. It doesn’t even matter that you have never signed a contract. They get paid by the listing broker if you decide to buy that house – even if you choose another agent. Those agents are waiting to ambush you too.
What can you do?
Advice for buyers:
- Be aware that Realtors are trained to deprive you of your right to select your own agent.
- Interview buyer agents from smaller firms that don’t practice dual agency. Big firms all practice dual agency and won’t negotiate the terms of their fee agreements. You don’t need to pick your agent yet, but you should do your research. Find agents who rebate some of the commissions and who provide the best service.
- Setting up appointments: Set up your first appointments with listing agents or agents offering to schedule free tours. Only do one showing and keep it short. Don’t share any information with the agents, don’t show any interest in the house, don’t spend much time in the house (most buyers know in the first 10 minutes if the house is a candidate), and don’t engage with the agents. If the agents ask you questions, just say that you wanted to take a quick look and that you understand that they don’t represent you and you are not comfortable talking with them.
- Negotiate the terms of representation with a buyer’s agent. Once you have located a few properties, negotiate all the terms of the buyer representation agreement (be careful, they are tricky). Here is an incomplete list of negotiating points:
- Make sure you can cancel the agreement. Most agreements do not provide for any meaningful way to cancel. You don’t want to be stuck with an agent you don’t like.
- Keep the term of the agreement under 3 months (there are some exceptions). You can always extend it.
- Make sure that they are only owed a fee if there is a successful closing. Most agreements entitle the broker to come after you for the commission if you default with the seller.
- Never agree to dual agency. Dual agency means that they are legally prohibited from helping you negotiate. As their licensing law clearly states, “Dual agents may not advocate for one party to the detriment of the other.” Click here for the cite. That means you must avoid mid-size to large companies.