By Richard Montgomery
Reader Question: What are the pros vs. cons of buying with a buyer agent representing me on the buying transaction?
Monty’s Answer: Buyer agency (and seller agency) is a concept in the law. Agency law varies somewhat in the statutes from state to state, but my experience is that interpreting the meaning is often challenging. If the statutes stated; “The agent, to their client, must be loyal and keep the clients best interests ahead of any other party, including the agent’s interests,” that clarity may be helpful.
The laws of agency are overrated
The legal concept of agency rubs against human nature’s built-in survival instincts in the real estate industry. In real estate transactions loyalty to the client means putting the client’s best interest in front of any other party. Here is a true story that demonstrates the difficulty of an agent executing on keeping the client’s interests ahead of their own. It also exposes the weakness of the law and consumers relying on agency for protection of their best interests.
A true story
The client entered into a buyer agency agreement. The client’s needs required an investment up to 1.5 million dollars, and the search began. Several showings later the client identified a property they wanted and submitted an offer of $900,000 on the 1.4 million dollar home. The seller (Seller A) rejects the offer without a counter, which causes the buyer to withdraw from the negotiation and continue searching. Subsequently, the buyer agent’s invested at-risk hours continued to accumulate.
Another property surfaces (Seller B) that is a lesser property, but still meets the client’s requirements. The client makes an offer that is accepted, and they deliver the $15,000 deposit. It is a cash transaction, subject only to inspection, and preparations to close began immediately. Two days later the agent takes a phone call from Seller A, who is now experiencing remorse for not negotiating two months earlier, and intimates they will now accept 1.1 million. What should the agent do next? What would most buyer agents do?
It is highly likely the bulk of buyer agents would tell Seller A it is too late, and may or may not communicate to their client that Seller A called. Many agents may not even realize there were options on how to handle this situation. The agent’s rationale is that Seller A has already demonstrated they could be challenging to deal with or change their mind. Additionally, the client has an accepted offer with Seller B and a deposit that could be at risk. Plus, further legal action is always possible. There is extra time that would now be required of the agent to unwind the first contract and attempt to bind another. The agent is likely aware this is a high-risk change fraught with potential complications, and by sticking with the existing contract, only the inspection is required for a commission to be earned. Agents work on success only fees with no salary. They think of at-risk hours every day.
The agent called the client and informed them. The agent then explained the pros and cons of a low-risk way for the client to re-enter negotiations with Seller A. The agent would approach Seller B and disclose the new development and offer to forfeit the earnest money in exchange for a mutual release. If Seller B agreed, then write a new offer on Seller A’s home subject to receiving the joint release from Seller B. The buyer agent’s rationale was that if they were the buyer, they would want the right to make that decision.
Seller B accepted the $15,000 deposit and signed the release and the client purchased Seller A’s house. Had the agent withheld the phone call, the chances of the buyer client ever learning of the conversation would be very low, and agency law would be very perplexing in offering a clear solution. If this buyer agent had gone the other way, the buyer would not own the home they really wanted. The clear driver here was not agency – it was know-how and honesty.
The solution is consumer education
A buyer agent can render an opinion of value. An exclusive buyer agent associates with a company that does not list homes for sale. Think of the buyer agent being the exact opposite of a listing agent. Agency has nothing to do with honesty, competency, or effort. You need to compare and test three prequalified agents.
Richard Montgomery is the author of “House Money – An Insider’s Secrets to Saving Thousands When You Buy or Sell a Home.” He is a real estate industry veteran who advocates industry reform and offers readers unbiased real estate advice. Ask him questions at DearMonty.com.