By Richard Montgomery
Reader Question: I signed a contract with a buyer agent. We found a house and made an offer. The house failed the inspection, but the seller had the right to cure. I was not comfortable and walked away. Now my agent wants to enforce the buyer agency agreement. I talked to my attorney, and she questions the strength of the agent’s demand and said the purchase agreement was not well drafted. The list was $184,900; the offer, $199,000. What do you think?
Monty’s Answer: Not being an attorney I cannot give a second opinion on a legal matter. Consider taking the buyer agency agreement and the purchase agreement to a second attorney. If both lawyers concur your agent is in a weak position, you will have to decide which direction to take. It may be helpful for you or your attorney to try to negotiate a reasonable settlement, or you may decide to tell the agent “No” and see what happens.
The contract controls
The Buyer Agency agreement in my state is five pages long – 235 lines. Contract wording from state to state can vary, but here is the controlling language in our WB-36 buyer agency contract:
“ If this Agreement calls for a success fee, it is agreed that Broker has earned the success fee if, during the term of this Agreement (or any extension of it), Buyer or any person acting on behalf of Buyer acquires an interest in property or enters into an enforceable written contract between owner and Buyer to acquire an interest in property, at any terms and price acceptable to owner and Buyer. Broker’s compensation remains due and payable if an enforceable written contract entered into by Buyer per lines 26-29 fails to close. Once earned, Broker’s compensation is due and payable at the earlier of closing or the date set for closing, unless otherwise agreed in writing. ”
Many states have similar contract language. In your state, this clause may be the source of the contention. Wisconsin WB-1, the exclusive right-to-sell form, commonly called the listing contract, has similar language. Controversy over success only fees on the WB-1 also can create a similar situation.
A typical occurrence
It is likely that the majority of real estate brokers and agents fail to point out the meaning of this compensation clause to their client. Literally, one sentence here is impacting you now, there are literally hundreds of circumstances that could occur in the process. It would take hours to identify and explain each “what if” scenario. It is also common that consumers do not read the contract carefully, or do not understand the implications. Realistically, most transactions close without this fee issue.
When the buyer and seller sign the purchase agreement, that contract is between the purchaser and the seller. Events can take place between contract acceptance and closing over which the broker has no control. The contract the agent has with their client is a separate contract. When a consumer hires a broker/agent to sell the property, or to locate property, that agency contract says due and payable if the enforceable contract fails to close. Enforceable means all contingencies satisfied.
Brokers/agents stay involved, as a courtesy to help ensure there is a closing. Buyers and sellers can experience the “jitters” in this major, and often emotional, real estate transaction. People question their judgment; are we doing the right thing?
From the contract’s point of view, the agreement is to find a ready, willing and able buyer, or seller, for the property. The physical closing is after-the-fact.
So what is a buyer or seller to do?
The best solution for consumers is to read every document before you sign. This transaction is likely the most important in your financial affairs. Now that you know the broker is paid on enforceable contracts, in the future, remember to ask the broker/agent if that sentence can be modified to read that the fee is due only when there is a closing. Many brokers would be open to that change when they are negotiating the listing/buyer agency agreement. They would likely balk at amending the agency contract after the problem appears.
When a buyer or seller refuses to honor the contract, the wording discussed here in the agency agreement will often be the transaction’s saving grace. When faced with paying a pre-agreed fee with nothing to show for it, most reluctant participants will go to closing.
“Richard Montgomery gives no nonsense real estate advice to readers most pressing questions. He is a real estate industry veteran who has championed industry reform for over a quarter century. Send him questions at DearMonty.com.”