Non-Exclusive Buyer's Agency Contract - A Bet Consumers Can't Lose

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There are two sorts of buyer's agency contracts, exclusive and non-exclusive. Note that this has nothing to do with Exclusive Buyer's Agents, who do not accept property for listing. I disagree with their reasoning on the virtues of doing so, but I can see a reasonable person making the arguments that they do. Despite the fact that ninety percent of my business is as a buyer's agent, I have no plans to become an Exclusive Buyer's Agent. The line their organization takes is that agents tend to work on behalf of their listing clients, neglecting buyers even when they're representing them as well. To be fair, I do see that happening in the industry. The solution is quite simply to refuse Dual Agency. I get referral business by making each individual client as happy as I possibly can, not by hosing one class of clients so that I can make another that little bit happier. I'm only on one side of a given transaction, and my clients will tell you I'm not in the least hesitant to advise them if something isn't quite like I would like it to be. Furthermore, I learn things by listing properties - things that I can turn around and use to help my buyer clients - just as I learn things by representing buyers that I can turn around and use to help my next set of listing clients. Without that feedback between the two very different tasks of representing buyers and representing sellers, I'd be a much weaker agent, whichever side of the transaction I was on.

Now some states permit agents to call themselves "exclusive buyer's agents" if they work with exclusive buyers agency contracts. An exclusive buyer's agency contract, however, does not mean that all of that agent's business comes from representing buyers. It means that they require buyers to sign a contract that essentially prevents those buyers from working with another agent. An exclusive buyer's agency contract says that no matter which property these buyers buy during the period it runs, that agent will get paid. End of discussion. Since the buyers accept responsibility to pay the agent if the seller or someone else doesn't, which isn't a problem if there's only one buyer's agent, because it is in the seller's interest to pay the buyer's agent. However, what the seller pays only covers one agent, so if there's a second agent involved, the buyer has to pay that second agent out of their own pocket. This essentially constrains them to work with the agent they've given that exclusive contract to. Many very weak agents require exclusive buyer's agency contracts because they're scared of the competition - they know they don't measure up, so they cut the competition out by binding them with an exclusive agency contract. They've got good advertising campaigns in effect, good networks of people, whatever - the essential element in their strategy is that the prospective buyers talk to them first, before those buyers understand what's really going on. Not to mention that this does, in some states, allow them to designate themselves as "Exclusive Buyer's Agents." This is confusing nonsense, and not beneficial for consumers.

There is, however, an alternative. This is the Non-Exclusive Buyer's Agency Contract. This is a standard contract, available in all fifty states through the work of the Association of Realtors (self-interested dinosaur controlled by major chains though the organization is, it does do some beneficial work). In California, it's put out as a part of the WinForms program of standard forms, and I suspect the same is true elsewhere. When you strip it of all the legalese, what it says is that If you buy a property that agent introduces you to, then that agent will be entitled to a buyer's agency commission. Notice that construction, straight out of you high school geometry or logic course? If A then B. If not A, then nothing. In other words, if some other agent introduces you to the property you buy, you owe this agent nothing.

Consumers can be working with literally any number of prospective buyer's agents through non-exclusive contracts, and be perfectly safe. There's only going to be one commission due - to the agent who actually gets the job done. Because of this, consumers can sign one of these and start working with any agent, safe in the knowledge they're not stuck with that agent if they find out they're not doing the job they should. The only thing consumers are giving up is the ability to cut out the agent who actually finds the property they want to buy at a price they're willing to pay. Since this is the hardest, most difficult, most time consuming and most liability ridden part of a buyer's agency job, this is only reasonable. You don't go down to the premium mechanic, have them fix your car, and get out of the bill by paying the cheap shop on the corner. That is the real work for a buyer's agent, not the paperwork of the offer and escrow period, or the gladhanding, or even the showing. The ability to recognize and negotiate a bargain are closely related, however, so even if you get a lower buyer's agency commission by cutting out the agent who finds the bargain, or a cash rebate, you're likely to end up paying more overall for the property. How is saving one or two percent and missing out on five percent, ten percent, or more a good investment? The lowest difference I've made in the last year was over fifteen percent, by CMA of properties sold. That's what a buyer's market will do for you. But you're unlikely to find the agent who makes that kind of difference in your area first time out of the box. The non-exclusive buyer's agency contract lets you give every agent you meet the same chance to earn your business - which means consumers get to force the agents to compete on the basis of who actually does the job!

This makes signing such an agreement a bet the consumer literally cannot lose. In fact, the more such bets the consumer makes, the better it's likely to turn out for them. The weaker agents will self-select out of the process in most cases. What this means in plain every day talk is they won't exert themselves because they know they're not likely to end up with the business. The consumer who signs ten non-exclusive buyer's agency contracts might have, at most, two or three agents who actually work for the business. The others simply won't. They know they can't compete, and simply won't bother. Actually, most of them won't sign the non-exclusive agreement. They'll try to talk you into an exclusive agreement, but don't let them. For the consumer's part, they can simply keep looking for agents until they find the ones that will compete.

Indeed, it's only when signing an exclusive contract that consumers are making a bet they can lose. Not only can they, they are extremely likely to. Remember the ten non-exclusive contracts you signed in the last paragraph, out of which you got two agents who were willing to actually do the work? Look at that the other way around. Eight out of ten didn't, and the real proportion is probably higher than that. So if you sign an exclusive buyer's agency contract, those are the kind of odds you're facing. Eighty percent or more chance you're locking your business up with an agent who won't really do the most important parts of the job. I get calls from these people's victims all the time, asking me to work for them without any chance of getting paid. My answer is no. I'm perfectly willing to compete for the business, but I'm not willing to work without pay so that someone else can get paid. I'm eager to make the bet that I can out-compete other buyer's agents, but if someone else has already been awarded the gold medal, I'm not going to so much as head for the stadium. How hard do you think the person who has been pre-emptively awarded that gold medal is likely to really work for you? If the answer you got is, "not very" then you understand why you shouldn't sign an exclusive agency agreement. But buyer's agency is one competition where "time in the competition" doesn't control who wins. If you don't award that gold medal before the competition is held, good agents will compete, and they'll work all the harder because if they don't measure up, you can always find some more agents who will. Isn't that what you really want as a consumer?

Caveat Emptor

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7 Comments

Barbara Feldman said:

Your argument is specious. If you substitute "exclusive LISTING agent" for buyer's agent, it would be laughed out of the system. No one gets paid until a house is sold, so anyone who chooses to represent a buyer rather than a seller will work as hard as they can to find the right house for their customer.

Moreover, without some form of committment, what is to prevent a buyer from using an agent, then going directly to the seller or the seller's agent to try to cut a deal? It's happened to me more than once.

As to both representing buyers and sellers, I believe this is called "Dual agency" and is illegal in NY. Of course it helps you, but does it help a seller who is under pressure to sell to give you that information so you can help the buyer lower the price by confiding in him?

Dan Melson Author Profile Page said:

But a buyer's agent is not a listing agent, any more than a car buyer is a car salesman. In fact, it is your argument that makes so many "conclusion does not follow from the premises" errors as to be laughable.

Furthermore, you are completely ignoring the fact that a non-exclusive agency agreement does prevent the buyer from circumventing the agent who has done all of that work. The only thing it doesn't do is lock the business up with a potentially incompetent agent or an agent who has conflict of interest, or any of a large number of potential problems.

And accusing me of favoring dual agency is both an ad hominem and a straw man. I have written extensively against dual agency, and if a buyer should insist on putting an offer in on one of my listings, I insist they sign a non-agency agreement in return. Furthermore, another advantage of non-exclusive agency is that if one of my buyers should ever want to put an offer in on one of my listings, they are in no way obligated to me. I can tell them that they really should find another agent to put that offer in, and there is absolutely nothing to bind them to me.


Rich said:

As a buyer I completely agree with Dan and I thank him for writing this article. I think anyone bad mouthing it is obviously a cynical agent that uses these exclusivity contracts to make up for there short comings. I am the sort of person who doesn't like to be "sold" something, if I want it I will do my own research and find it myself.

This also applied to houses and currently I found a house myself through public records that is owned by the bank, I did all the research and am very interested all I need is someone to show me the house and honestly I'm ready to make on offer. However the agent Coldwell banker assigned me too won't work without an exclusivity contract, I said "no dice" and will find another agent. Why would I sign that, I've never met him I have no idea how me works or if he would be good for me. This guy could have potentially took half an hour to show me a house I found, filled in some info on a standard contract and gotten paid.

I hope more consumers adopt this approach because I will work harder for myself then any agent would. I realize not everyone is like me and some people screw around agents but I feel that a strong agent who knows what there doing doesn't need to automatically resort to the exclusivity contract especially in cases like me where I would essentially do all the work.

Kelly Chi said:

Dan, thanks very much for this great article. My husband and I are first-time home buyers looking for an agent right now.

You mentioned that many agents will say no to a non-exclusive agreement. But what is your suggestion for finding an agent who will? Should we ask outright what sort of agreement they will give us, just to save time and weed out the ones who aren't willing? Or do we meet them, and try to build some trust first? We are in no way looking to screw over an agent -- we just want to be sure that they are working hard for us, and of course we want them to be paid for all their hard work.

Dan Melson Author Profile Page said:

Just ask, right up front. No use wasting your time and theirs if they require an agreement you're not willing to give them

d r said:

I need help. I unwittingly signed an exclusive buyers contract (first time buyer...). The realtor did show me some homes, about 10. However, my friend said she would sell me her home, at a reasonable price. She and I worked out a deal on our own. I did not involve the realtor. I was honest and I did tell him I was buying a friend's home. Now that the process is finished, he is demanding a commission. Is there is a way to compromise or get out of this?

Dan Melson Author Profile Page said:

If it goes to the courts, they're pretty much going to win the case and their money and you're likely to end up paying all legal costs as well.

That said, it's bad business to be suing your clients, and bad publicity to be demanding money you really didn't earn whatever the contract says, and the fact that they didn't do the job and are demanding money anyway has got to be the worst thing an agent or brokerage can have become known to prospective clients.

Perhaps the interplay of these two items gives you the idea for a strategy, but I can't give you legal advice because I'm not an attorney.

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This page contains a single entry by Dan Melson published on March 19, 2008 7:00 AM.

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