Sign here, please: Why buyers are being asked to sign a contract when working with a broker

You face a mountain of paperwork when buying real estate in New York City and many buyers who are working with a broker are now being offered something new to sign: a buyer’s representation agreement.

Real estate firms have been busy in the last few weeks refreshing or creating new agreements to make it clear to buyers that broker compensation is negotiable as part of participation in recent antitrust settlements. To that end, in mid-August, the Real Estate Board of New York (which has not yet joined the national settlement) added new guidance on broker fees to a six-page checklist to help firms who joined the settlement apart from REBNY create their buyer’s representation agreements.

Jennifer Carey, director of sales at REAL New York, said her firm used REBNY’s checklist to draft their new buyer’s representation agreement, boiling it down to a four-page document.

The contract serves buyers by providing a new level of transparency and clarification on the role of a buyer’s broker, Carey said.

“We want to make sure buyers feel this transparency for this biggest purchase and know the services a broker is going to provide,” she said. That’s especially important now that a buyer could potentially be on the hook for paying the broker’s fee.

“So far, buyers are begrudgingly accepting” the contract, said Doug Wagner, director of brokerage services at BOND New York. It’s an adjustment, he added. “Buyers never had to think about [the agent’s fee] because it was coming out of the purchase price.”

But eventually, buyer’s representation agreements will “become commonplace,” he said. After all, rental agents have been using representation agreements for years, he pointed out.

Here’s what you need to know if you’re a buyer and your broker presents you with this new type of buyer representation agreement.

What’s the story behind these new buyer’s agreements?

The new buyer’s representation agreements are an outcome of the National Association of Realtor’s (NAR) $418 million antitrust settlement—and they differ from older iterations of buyer’s representation agreements in one important aspect: Real estate firms around the U.S., as a condition of their participation in the settlement, are required to adopt buyer contracts that state commissions are fully negotiable and are not fixed amounts. The contracts must also spell out how much the agent will be paid.

In case you’re wondering, NAR doesn’t have a real presence in NYC, instead most firms here are members of the REBNY trade group, which along with 26 other real estate firms faced a separate antitrust suit. This summer, a judge paused the New York antitrust suit.

REBNY is in discussions to join the NAR settlement and the terms will be finalized in the coming weeks and months, according to REBNY.

How do broker fees in NYC work now?

In January, commissions for brokers who are members of REBNY were officially “decoupled.” Instead of a seller paying a 5 or 6 percent fee that would then be split between the seller’s and buyer’s brokers, a seller now will agree to one fee for their broker and a separate fee for the buyer’s broker.

That means a seller could potentially offer the customary 3 percent fee to the buyer’s broker, or a lower amount, or nothing at all. In the latter two circumstances, your broker could ask you to make up the difference, and so by signing a buyer’s agreement, you may be committing to pay a fee in the absence of a seller-paid commission. [Editor's note: After publication, a Compass broker contacted Brick to say that they are using representation agreements that state the buyer's agent commission is zero, "meaning the buyer is not committing to paying us anything."]

What does a buyer’s agreement say about broker fees?

The section on compensation in the buyer's representation agreement you are asked to sign will be some version of this part of the REBNY Representation Agreement Checklist:

This all seems rather confusing

If the language above made your head explode, you’re not alone.

Barbara Fox, president of Fox Residential, said she has spent the past few weeks revising her firm’s new buyer’s representation agreement in an attempt to reduce the legal terminology and boil it down to two pages.

“I just gave it to my husband, a corporate lawyer, to look at, and he said, ‘I don’t even understand it.’ Now I’m rewriting it again,” Fox said.

The important thing for buyers to be aware of: Each NYC real estate firm is creating their own representation agreement, so they will appear different from each other. “Like the Wild West,” Fox said.

“Our agreement delineates what we do for a buyer,” Fox said. Many buyers “don’t really know what we do, they think we just open the door and turn on the light.” But in NYC, buying real estate is complicated, especially in co-op and condo buildings because of the board package, she said. “Outside NYC, buyer’s brokers probably do a lot less.”

What should you look for in a buyer’s agreement?

REBNY's choose-your-own adventure approach to drafting a buyer’s representation agreement raises red flags for University of Buffalo contracts law professor Tanya Monestier. She recently published a report, "Buyer Representation Agreements Post NAR Settlement: Terms Buyers Should Be Aware Of," as reported by Inman, which addresses the confusion surrounding these new agreements across the U.S. (Her report did not include REBNY's checklist.)

“I have reviewed several dozen of these new forms,” Monestier wrote in the report. “By and large, they are all very complicated and will not be understood by the average buyer and seller. Many of these contain terms that would come as a surprise to a buyer or seller, and terms that signal how [R]ealtors plan to circumvent the NAR settlement,” which in turn “ultimately harms consumers by keeping commissions high.”

Brick asked for Monestier's feedback on REBNY's guidelines.

She was alarmed by some inconsistent language and omissions she found. “Bad drafting worries me because this is a template,” she said. On the positive side, REBNY’s checklist says a commission is only owed if the transaction closes. “Most buyer’s agreements say that if the buyer defaults, they also owe a commission,” she said.

Monestier identified four key points a NYC buyer should watch out for when being presented with a buyer’s representation agreement:

1. Commission fee overage

If the Seller’s offer of compensation is equal to or greater than the Commission listed in this section, no compensation shall be due to Buyer’s Broker from Buyer.

Monestier noted that the checklist point above is silent on what happens to the extra money if a seller offers to pay more than what you agreed upon. “Ask to have any excess credited to the buyer,” she said. “A seller might refuse, but either way, a buyer or seller should get it, not an agent.”

2. Dual agency consent

If Buyer chooses to view a Dual Agency Property, Buyer hereby provides its advanced informed consent to dual agency to Buyer’s Broker. Buyer acknowledges that when Buyer’s Broker is acting as a dual agent.

With the wording above, “just going to see a property constitutes consent,” Monestier noted. However, later in the same section is a provision for putting in writing your consent to dual agency, which is when a broker simultaneously represents both the seller and the buyer in the deal. This is confusing, she said, and there’s no discount spelled out if you agree to a dual agency.

3. Other buyers

In the event that the Agent represents another buyer interested in a Potential Property that Buyer is interested in, the Agent must receive the consent of the Buyer and the other interested buyer before the Agent may make an offer on such Potential Property.

Monestier has not come across an agreement like this that requires one buyer to sign off before another buyer can make an offer. The subsequent graph spells out a more typical response: If one agent is representing two clients interested in the same property, one client would be handed off to another agent for representation.

4. Cancellation clause

Monestier didn’t find a cancellation clause in the checklist (however brokers that Brick spoke to said their firms added termination clauses to their buyer’s agreements, so be on the lookout for them).

“An elderly gentleman in Texas contacted me because he was considering signing a one-year buyer’s representation agreement with no termination clause. I don’t think you should try to lock someone in for a year, you shouldn’t hold someone hostage, Monestier said.

Do you have to sign a buyer’s agreement?

The answer is: It may depend on the firm. Carey of REAL New York said, “We’re not telling agents to not work with someone who won’t sign an agreement.” 

Still, it may be reassuring to buyers to know that at present, sellers are continuing to pay the usual fees for buyer’s agents in order to cast the widest net and draw in the most potential buyers, especially for Manhattan and Brooklyn co-op and condo apartments. 

Even so, you may be reluctant to sign because you're not convinced you really need a broker. Carey has met buyers who were “adamant they don’t need an agent” based on a bad experience in the past. Going it alone may work if you’re buying a house in the outer boroughs, but buying in a NYC co-op or condo building is much more complicated as a result of the application and interview process.

“An experienced agent makes sure you get across the finish line,” she said. “It feels awful to get turned down.”

If you’re not comfortable with a particular buyer’s representation agreement, that may be your signal to shop around for a different firm.

And that’s also why Wagner thinks there’s a benefit to having differentiation among the agreements. For example, you may find a more flexible agreement with a smaller firm.

Either way, you can expect greater clarification on how much your agent is making.

“This is finally our moment to bring more transparency to the marketplace,” he said.

You Might Also Like

Co-ops 10 steps to creating a stellar co-op or condo board application

Negotiating + Financing Buying without a broker to gain an edge and the risk of working with a dual agent

Sell Are NYC sellers paying smaller commissions to buyer’s brokers?