Written by Benny L. Kass on Tuesday, 23 September 2014 9:28 am
You want to buy a house so you start shopping around. On Sunday, you decide to visit a number of properties that are on the market. You have not engaged a real estate agent to assist you.
When you enter the various houses, you are greeted by a real estate agent who is “house-sitting”. She or he welcomes you, asks you to sign-in, and invites you to look around.
Who does that agent represent? What obligations — if any — does she have to you and to the seller?
Let’s look at some basic terms:
Seller’s agent — the property owner has listed his house with a real estate brokerage, and the agent working for that company has a duty of loyalty to the seller. That does not mean that this agent cannot answer your questions. In fact, agents are legally obligated by law to treat all parties to a real estate transaction honestly and fairly, and must answer all questions truthfully. However, if you provide any personal or financial information to the seller agent, be warned that this information will be shared with the seller.
Buyer’s agent — here, there is a written agreement between you and a real estate agent that makes it clear that the agent is working exclusively for you. Unless you authorize disclosure to the seller, your buyer’s agent must keep any information you give her confidential.
Dual agents — (also called “dual representation”). Here, both buyer and seller are represented by the same agent. Both parties must sign a form, prepared under the auspices of the various local Real Estate Commissions. The form requires informed consent. For example, in the District of Columbia, sellers and buyers are put on notice that “when the parties agree to dual representation, the ability of the licensee (the agent) and the brokerage firm to represent either party fully and exclusively is limited.” It should be noted that Maryland law does not allow such dual representation.
Designated representation — (often confused with dual representation). This is a variation on the dual agency concept. Here, the real estate firm assigns one agent to assist the buyer and another to assist the seller. According to the Maryland Real Estate Commission, the real estate company (or broker) is called a “dual agent”. “Dual agents do not act exclusively in the interests of either the seller or buyer, and therefore cannot give undivided loyalty to either party. There may be a conflict of interest because the interests of the seller and buyer may be different or adverse.”
Why? Let’s assume you are prepared to pay up to $450,000 for a two-bedroom condominium. You find one that you like and offer $410,000. You tell your designated agent that you really are prepared to go up to the higher amount, but want to negotiate. Since that agent does not have a duty of loyalty to you, there is always the possibility that this information — which you thought was confidential — will be given to the seller.
The laws in most jurisdictions require that agents give buyer and seller a form disclosure, which must be signed before any meaningful discussion (or action) is taken regarding the property. So when you enter the house on Sunday, the house-sitting agent does not have to provide you with any disclosures. However, once you start having a substantive discussion, you must be advised who the agent is representing and sign the written disclosure form. According to District law, which tracks the laws in many other jurisdictions, the “disclosure shall be made in writing at the earliest practical time, but in no event later than the time when specific real estate assistance is first provided.”
It is confusing. Sellers want the best possible price, and buyers want a bargain. And real estate agents are the intermediaries, who attempt to get the parties to a happy meeting place and ultimately a real estate contract.
What should you as a buyer do to protect yourself? Should you agree to a dual representation? Should you hire a buyer’s broker? Or should you go it alone, getting guidance from you legal and financial advisors?
There is no easy answer. Some people feel confident enough that they don’t need — or require — outside assistance. Others, want the guidance and comfort of a professional.
If you are asked to agree to a dual agency or designated representation form, don’t just sign. Ask questions, such as: why is this important? what if I don’t sign? can I retain a buyer’s broker who will truly represent my interests? if I provide information to my designated agent, will that information be given to the seller? And of course, the most important question: do I have any financial obligation to anyone whether I buy the property or not?
In this connection, if you opt to go with a buyer’s broker, read the agreement carefully. Normally, if you do go to settlement, your agent’s commission will be paid by the seller. A portion of the commission will go to the seller’s agent and the rest to your agent.
But if you do not go to settlement, or if the seller refuses to pay your agent, how much will this cost you? In today’s economy, where money is tight, and lenders are overcautious, every penny counts, and you must know your financial exposure before you sign any agreement with a buyer broker.
Perhaps the most important advice: don’t talk too much to anyone. Don’t tell any broker or agent how much you really want to spend on a house. Most brokers are honest, but there is always the temptation to provide confidential information to the other side.
And one more suggestion: you will want to get a letter from a mortgage lender indicating that, based on the information you have provided, you can qualify for a loan. I call this a “comfort letter”; it is not a firm loan commitment because the lender has not seen the sales contract nor has an appraisal been done. But the seller wants comfort that you have the financial ability to buy his house.
I recommend that any such comfort letter be produced after a real estate contract is entered into. The contract can have a contingency that within 5 days after contract ratification, you will get such a letter for the seller. Why? Because all too often these letters state that based on the lender’s review, you are able to obtain a loan of X amount. And that X may be considerably higher than you are prepared to pay — or at least on which you are starting the negotiations. Why telegraph the seller that you are able to pay more than your offer?
Real estate, to a large extent, involves the art of negotiation. Don’t put all of your cards on the seller’s table until after you have reached agreement.