by Miriam J. Baer, Assistant Legal Counsel
In North Carolina, real estate licensees are traditionally presumed to be agents for the seller, whether they are acting as the listing agent or the selling agent, because it is the seller who pays them. In the absence of an agreement or other strong evidence to the contrary, that is still the case today.
The listing agent agrees to represent the seller by virtue of the listing contract. Although the selling agent often works more closely with the buyer, he too agrees to act as the agent of the seller, typically by accepting the listing agent's offer of subagency through the MLS. Thus, both agents owe the seller a variety of fiduciary obligations including the duties of loyalty, obedience, confidentiality and disclosure of information.
There is now a growing interest on the part of some licensees to act as agents for prospective buyers rather than agents for sellers. In these situations, the individual who, in a traditional co-brokerage transaction, would have been the "selling agent" (a subagent for the seller), instead agrees to act as the buyer's agent or "buyer's broker." This means that no fiduciary relationship exists between the buyer's agent and the seller; the duty owed by a buyer's agent to the seller is simply one of fairness and honesty. However, the buyer's agent does have a fiduciary relationship with the buyer, requiring the buyer's agent to act in the best interest of the buyer and to obtain the lowest possible price for that buyer.
Two central issues often arise in transactions involving buyers' brokers: disclosure and compensation.
Disclosure
Because buyer's brokerage is still a new concept in this state and is relatively unusual in residential transactions, disclosure is a must, and in fact is required by law.
Under the Real Estate License Law, it is unlawful for a licensee to make a willful or negligent misrepresentation or omission of any material fact. The fact that an agent represents a buyer is material, and should be disclosed at the earliest opportunity. Failure to do so would be considered a negligent or willful omission.
The Real Estate License Law also prohibits a licensee from representing more than one party in a transaction without the knowledge of all the parties for whom he acts. If the licensee is being paid by the seller but purporting to represent the buyer, the law requires disclosure of that fact.
Disclosure (which can be oral) should be made as soon as possible - usually when the buyer's agent sets the appointment to show the property. A listing agent who receives a request from a buyer's agent to show the property should normally permit the showing. The listing agent should not foreclose any potential purchaser from the seller, whether or not that purchaser is represented by another real estate agent.
It is recommended that the buyer's agent make written disclosure to all parties when a buyer whom he represents becomes seriously interested in negotiating the purchase of a particular property. Such disclosure should be made no later than at the time of presentation of the offer. Buyers' agents should ask an attorney to draft a form disclosure statement which can be used in applicable transactions. It is preferable to have the disclosure statement signed by all parties. Although written disclosure is not required by law, it more clearly demonstrates that all parties were aware of the buyer's agency situation.
The written disclosure should also address the manner in which, and by whom, the buyer's agent will by paid. This "compensation and disclosure agreement" thus serves the dual functions of notifying all concerned whom each licensee represents and how each will be paid.
Compensation ...
Traditionally, all agents involved in real estate transactions have been paid by the seller. Listing agents have been paid in accordance with their listing contract with the seller, and have in turn shared their commissions with selling agents in accordance with a cooperating brokerage agreement or through the MLS.
With the entrance of buyers' brokers into the market, however, the manner of paying those brokers has created confusion and friction between the parties and their agents.
... By the Buyer
Buyer's brokerage works most smoothly when each party is responsible for his own agency costs. The seller pays the listing agent according to the terms of the listing contract, and the buyer pays his agent according to the terms of a separate agreement. Thus, if the buyer is willing to pay his own agent, that buyer's agent should ask his attorney to develop a form compensation and disclosure agreement to provide for his compensation by the buyer and to make the necessary disclosures as discussed earlier.
The compensation and disclosure agreement may provide for payment to be based on either an hourly wage or a flat fee. In either case, the buyer's agent may choose to also charge the buyer for expenses. In the case of a flat fee, the buyer's agent may want to consider charging a graduated fee based upon the price range of the house. Thus, the brokerage fee for a house listed in the $755000 - $100,000 range might be less than the fee for a house in the $200,000+ range. The buyer's agent could also include some bonus or incentive payments based on the percentage decrease from the list price he negotiates for the buyer.
It is not recommended that a buyer's agent be paid based upon a percentage of the purchase price, because that would create a conflict of interest for the buyer's agent. He would receive a higher commission if the buyer paid more for the house. However, his agency duties to the buyer require him to negotiate as low a price as possible, thereby creating a clear conflict of interest.
In addition, the buyer's agent should include in the compensation agreement a definite termination date. The compensation agreement is analogous to a listing contract. and as such, should not be for an indefinite time.
Likewise, the compensation agreement should include a Fair Housing disclosure to provide that the buyer's agent will show the buyer properties without regard to the race, color, religion, sex, national origin, handicap or familial status of the buyer or seller.
... By the Seller
The primary difficulty with the buyer paying his own broker is that it may increase the total agency cost of the transaction. If the seller pays a full commission to the listing agent while the buyer pays an additional fee to the buyer's agent, the transaction is more expensive for the parties, perhaps making it more difficult for the buyer to purchase property.
To avoid the problem of extra brokerage fees, some buyers' agents attempt to obtain payment from the listing agent. Others ask listing agents to reduce their fees. If all parties agree, in order to expedite the transaction, the listing agent may choose to share his commission with a buyer's agent or to reduce his own commission, perhaps by the amount which otherwise would have been shared with a selling agent or by a comparable flat fee. This does not mean that the buyer's agent becomes the agent of the seller. Instead, the buyer's agent continues to owe the full range of fiduciary duties to his principal, the buyer.
However, unless listing agents agree to do so, they are not required to reduce their commissions in order to facilitate a sale to the buyer who has his own agent. A listing agent may refuse to negotiate a commission split with the buyer's agent since the buyer is rejecting the listing agent's offer of subagency. At the time of listing, a listing agent should discuss with the seller the possibility of a buyer's agent entering the transaction and how that would be handled, so that the seller cannot later complain that he lost a sale due to the listing agent's unwillingness to work with a buyer's agent.
If the seller is opposed to payment of the buyer's agent, the seller can prevent the listing agent from sharing his commission, even if the listing agent is willing to do so. Remember that as an agent and a fiduciary of the seller, the listing agent owes the seller a duty of loyalty and obedience. For a listing agent to share his commission with a buyer's agent against the wishes of the seller would be both disloyal and disobedient. Therefore, the seller has veto power with regard to payment of a buyer's agent. But the seller should understand that by exercising that veto power, he may lose a sale.
After discussing the situation with the seller, the listing agent should be prepared to advise a buyer's agent whether co-brokerage will occur, so that the buyer's agent will know the limitations of the transaction. If no commission split can be arranged, the buyer and his agent may consider another property.
If the selling and listing agents will cooperate, a "compensation and disclosure agreement," as mentioned in the "Disclosure" section, should be completed. Such an agreement cannot be included in the purchase contract because Commission rule prohibits the inclusion of commission provisions in form contracts.
In addition, whenever a portion of the commission is to be paid to a buyer's agent, the lender must be advised, and the payment must appear on the closing statement.
Caveat
Because buyer's brokerage is a new and largely untested area, the Commission does not have forms available for use by licensees interested in acting as buyers' brokers. Interested licensees should therefore contact their own attorneys for further advice and assistance.