Why Buyer Agreements Are Not the Solution

We need to talk about enforcing these damn things

For the past year or so, since before the actual verdict in Sitzer v. NAR, a number of brokers, experts, gurus, consultants and others have really zeroed in on buyer agency agreements as the solution to the crisis of compensation.

This is just a short list of articles and posts I’ve found, with key grafs from each, on the topic of buyer agency agreements as well as a great video from LocalLogic with my friend James Dwiggins:

Inman:

Buyer representation contracts are nothing new, and they should not be feared. I can not imagine why anyone would want to work with a buyer who isn’t under contract.

I have been using buyer representation contracts for more than 20 years. They are similar to listing contracts in that they outline the services the agent will provide and the buyer’s obligations. They also specify how the agent will be paid.

Hudson Gateway Association of REALTORS “BARRISTER’s BRIEFING”:

This agreement should be executed when you first establish a relationship. What it guarantees is that, in exchange for a promise from the client that they will pay a commission of “X,” the agent will work tirelessly to find them a property. The agent can seek out properties not only on the MLS, but the agent can approach private listings, FSBOs, social media, the Internet, auctions, and even flyers on telephone poles.

Additionally, if the agent is permitted to seek cooperating compensation from a listing party (listing agent, FSBO, etc.) and it’s offered, the agent will agree to offset the agreed-upon commission from the client with the commission they will receive elsewhere, thus reducing the amount that the client has to pay the agent (Note: in addition, the client agrees to allow the agent to receive compensation from more than one party).

This article is particularly interesting as the author Brian Levine is an attorney and the General Counsel of HGAR.

LocalLogic:

Of course, all over social media, agents are parroting the line that nothing will change post-Sitzer because the buyer agency agreement will protect your commission.

Well, in previous posts, podcasts, and live appearances, I have periodically raised a question — which leads to an issue — with buyer agency agreements. I think it’s time we dive into that question and that issue:

How exactly will you enforce these buyer agency agreements?

Let’s get into it.

Example of a Buyer Agency Agreement

Let’s start by actually looking at one of these agreements as they exist today. There are many of these, and the CAR form is unbelievably complex. Let’s look instead at a simpler one from New Jersey Association of REALTORS, which is only two pages long and written with relatively simple legalese:

Form 121 Exclusive Buyer Agency Agreement Pdf

108KB ∙ PDF file

Download

Download

Here’s page one, with highlights added:

Today, buyers sign these things routinely like they sign all kinds of forms routinely, trusting their agents. Plus, these buyers think the seller pays the agent anyhow.

Tomorrow? When they now know that they’re paying their agent? Will they be so quick to sign one of these without reading it?

If they do read it, and they come across ¶8 that says, “I can represent other buyers who might want the house you want” but “you can’t have any other agent besides me”… how do you think they’ll react?

“Hey babe, I’m ready to take this relationship to the next level. You will be exclusive to me, but I’m gonna date other girls, okay?”

That only flies if you’re Andrew Tate, supposedly. So maybe buyers are cool with that one-way exclusivity, and maybe not. But that’s not important to our discussion here.

Hold all questions and thoughts to the end. I’ll bring it together.

The Injunction

In a previous post, I asked everyone to calm down on assuming what will and will not be allowed by the court in Sitzer.

A whole lot of people are simply assuming that Judge Bough will prohibit the “mandatory” part of BBCR (“Buyer Broker Commission Rule”) and allow for what is more or less the Northwest MLS policy, which is what MLS PIN agreed to in its settlement in Nosalek:

• You don’t have to offer any compensation.

• Any compensation offered will come from the seller to the buyer agent.

• That amount will be negotiable in the purchase agreement.

I suggested that we’re jumping the gun, and that it is far more likely that we’ll get a stronger injunction. Because the DOJ already objected to the Nosalek settlement.

Specifically, I wrote in this post that I think we’ll see a mandatory injunction instead that forces NAR and the MLSs to make accepting compensation from anyone not your client a violation.

Musings on Mandatory Injunctions

More and more smart people, like James Dwiggins in the video above, are pivoting away from the MLS PIN type of arrangement to something more subtle. In the video above, watch from around 19:50 mark.

The pivot is that there will be no sharing of commissions at all, but that the buyer will instruct the agent to put into the purchase agreement a term where the seller will credit the buyer or pay the buyer directly to pay the buyer agent.

It is a way of rerouting the payment, as James says.

He is correct that telling buyers that they can’t negotiate a credit with the seller is (likely) unconstitutional violation of the freedom of contract.

Okay, let’s go with that scenario.

Seller Pays Buyer Scenario

So post-strong injunction, the only available path is a combination of:

• Buyer Agency Agreement

• Negotiated purchase agreement where the seller gives buyer money.

My strong sense is that if the seller’s credit to the buyer is conditional, that is, “As part of this contract, I agree to give you $10,000 to be used only to pay your agent and if you fail to use the $10,000 to pay your agent, then you must return it to me” or something like that… I think the courts will have problems with that.

That is too nakedly an attempt to evade the injunction against the seller paying the buyer’s agent. It’s a little bit like some dealer claiming “I didn’t sell him drugs; I sold him information on exactly where he might find some drugs, hidden in a can behind a dumpster.”

Judges are just not that stupid. If the local MLS, whose mandated rules were violated, plays dumb… the judge will spank the living shit out of that local MLS. Contempt charges and fines are no joke.

So the more likely arrangement is the purchase agreement having the seller crediting the buyer at closing to pay for expenses and fees, whatever they be. That’s legally fine. That path looks more like:

“Hey, I wanna buy your house, so I’m making a full-priced offer. But uh, I have a lot of expenses after I buy your house, and I just put a ton of cash down for the downpayment… so I’m gonna need some cash back to pay for expenses including paying my agent.”

“Sure, would $15K do it?”

“That works.”

In the scenario that James and other experts in real estate envision, the buyer then writes a check to the agent for $15K as per the Buyer Agency Agreement. No problem!

Except…

People Do Violate Contracts… All the Time

Fact is, people might have a contract… then breach them. Sometimes on purpose.

Say I contract with a roofer who does a shitty job (in my opinion). I can refuse to pay said roofer and dare him to take me to court. Tenants have signed leases, which are legally binding contracts; landlord-tenant courts exist because tenants don’t pay the rent, despite said binding contract.

The legal industry would be a tenth of its size today if companies and people did not have contract disputes.

So having a Buyer Agency Agreement might be best practices for a bunch of reasons, but I’m going to need to understand what you understand about enforcing said Agreement.

Problem #1: First Time Homebuyers

Thing is… buying a house for the first time is probably the point in your life when you are the most broke. I know I was when I bought my first house. We liquidated almost everything we owned, including some of the 401(k) to make the downpayment on the house, and still had to borrow money from my wife’s family. There was a month or two in there (since we were both making good money) where we knew we were house-rich but cash-POOR. A lot of ramen those months.

So is the thinking here that the buyer would stroke a check for tens of thousands of dollars at the precise moment when he is the most broke he has ever been and still spending thousands on the hundreds of little things that first-time homebuyers have to buy? Like a lawnmower? Trash bins? Furniture?

Some people would do that, because they have a contract. I’m willing to bet that most people, especially in 2023 America rather than 1933 America, would seek to renegotiate.

“Look, Susie, I know I agreed to pay you $15,000 and I know we have a contract, but I needed to buy a lawnmower, and these giant trash bins, and we had to get a new bed because the one we had doesn’t fit our bedroom, and my car broke down and the baby got sick… can we work something out here?”

I’d love to hear from buyer agents here.

What is the scenario where you tell your client, who you just helped put into their new home, who is now cash-poor and broke, “Fuck you, pay me!”

Supposing you take the hardline stance and you take your client to court and win.

After doing that, tell me more about how “The best compliment you can give is a referral!” bit is going to work out for you.

Problem #2: Minorities and Low-Income Families

In this podcast from NAR recorded on October 16th, the podcast host Marki Lemons Ryhal interviews Katie Johnson, NAR’s Chief Legal Officer. The transcript is available on that page. In that, we find this:

Katie Johnson (14:15):

I want to touch on your real story because that is the story for millions of Americans. And there are reports by economists who have studied this issue.

Cheney's report sticks out in my mind the most, and it's available on competition.realtor. And they studied the issue, what if buyers had to pay directly out of pocket?

And their economic analysis shows that that will harm first time home buyers. As you just said, it will harm low income and even middle income home buyers and it will have a disproportionate effect on minorities. And so the outcomes that the plaintiffs are trying to achieve take us back in time and seriously harm the majority of consumers who can now potentially buy property. That may not be the case if the plaintiffs had their way.

Given just how important “disproportionate effect on minorities” is to NAR’s opposition to the verdict in Sitzer, not to mention the overall legal/policy arguments NAR has made and continues to make… you’re telling me that REALTORS will be suing low-income families and minority buyers who disproportionately can’t afford to pay the Buyer Agency Agreement?

Does anybody think that someone like Abra Barnes, the 2023 NAR Fair Housing Champion Award winner, is going to be taking a lot of her clients to court if they change their mind about paying her after the seller offers them $10,000 at closing for expenses? Really?

So when her client, who got off Section 8 housing to become an owner, gets $15,000 from the seller negotiated in the purchase agreement and says, “Look, how about I pay you $1,500 instead?” you’re telling me that Ms. Barnes is going to sue her to enforce the Agreement?

“We have a contract!” is legally correct, but morally? Practically? Socially? Those Woodlawn United board meetings are gonna be awkward as hell if Ms. Barnes is suing a bunch of black people who became owners in Woodlawn.

I don’t see it happening.

It will be so much worse when it’s the nice white lady REALTOR suing the black first-time homebuyer for breach of contract. New York Times and WSJ (who has apparently declared war on NAR) are going to have a field day with those stories.

Buyer Awareness

Last but hardly the least, once buyers come to understand that they have to sign a (fairly one-sided) Buyer Agency Agreement that creates a legally enforceable obligation to pay the buyer agent… they’re going to want to know more.

They might actually read the Agreement. And have questions. They might ask, “So how come you get to represent other buyers who might be my direct competition for the house I want?”

Or, “So you earn this commission if you introduce me to a house, right? If I find the house on Zillow myself, that’s not you introducing me to the house, right?” Now the agent has to go into an explanation of procuring cause.

And then there are these questions that no agent today wants to answer:

• “Why am I paying you a percentage of the house I’m buying? Aren’t you supposed to work for me and get the price lower?”

• “You wrote $15,000 in here — what exactly are you going to do for me for $15,000? That’s what I make in three months.”

• “If the seller doesn’t give me any money, I still owe you this, is that right?”

• “Tell me again what you’re going to do for me for all this money I’m on the hook for? Tour the houses, okay… negotiate and manage the transaction… okay… Can I just hire a lawyer and you for $1,500 each instead?”

• Etc. etc.

Point is that buyer behavior will change once they become fully aware of the fact that they, and not the sellers, are on the hook.

In the End

Which is why I have been predicting — sure to be wrong or your money back (NOTE: this is a free public post) — that what we’ll end up with when it’s all said and done is hourly rates for buyer agents.

No need for a difficult-to-enforce Buyer Agency Agreement; get paid as you go, up front, by the buyer directly. If the buyer can’t afford to pay you, you won’t waste your time driving someone around for free. If you negotiate a credit from the seller for your buyer, that buyer is going to be pretty happy and recommend you to everyone he knows. Maybe give you a bonus, which is entirely discretionary.

We can explore that in future posts as I am nearing the email length limit here.

The real point I’m making is that buyer agency agreements, currently being touted as some sort of a silver bullet for commission woes, are anything but once you think about them. Having the legal right to payment and enforcing that right practically speaking are two different things.

But you are entitled to your opinion on this. So tell me: How do you plan to enforce these binding Buyer Agency Agreements against the first-time, low-income homeowner who breaches it?

-rsh