Should You Use a Buyer's Agent?

To put it bluntly, Carrie and Ryan Fitzgerald of Washington, D.C. were "clueless" about home buying when they decided to purchase a condominium.

"We weren't sure where to start. A friend in Boston suggested getting a buyer's agent instead of a real estate agent, so we thought we'd give it a try," says Carrie.

She went online, and using the search words "buyer's agent" for the Washington area, came up with Steve Israel, a broker for Buyer's Edge of Bethesda, Md. Two months later, the Fitzgeralds signed a contract for a two-story loft condo.

"Steve totally exceeded our expectations," Carrie says.

An exclusive buyer's agent differs from other real estate agents or brokers in that they don't represent sellers. Some, like Israel, never list properties for sale and only work with buyers.

Nowadays, with many homebuyers starting their search on the Internet, it's common for buyers to pick up the phone and call the agent who is listing the home that they want to see. But is this a good idea? Buyers' agents argue that it's not and say this method could end up costing buyers money.

Is a buyer's agent right for you? Understanding how real estate transactions work can help you decide -- before you shop for a home.
Understanding Relationships: Where Is Your Broker's Loyalty?

The real estate agent listed as a point of contact for a house on the multiple listing service (or MLS) is called the listing agent. This person has entered into a contract with the seller to market the house and serve as the seller's consultant throughout the sales process.

A listing agent has an established relationship with the seller, which is why buyers' agents encourage buyers to find someone to represent them in a home purchase. A listing agent is interested in getting the best offer for his or her client -- an offer on which a listing agent's commission is based. Obviously, it's in the listing agent's best interest to sell the house and in their financial interest to sell it at the best price.

Oddly, real estate contracts are written so the buyers' agent fee is usually also dependent on the final sales price. But more on that later.

Dual Agency: Playing for Both Sides

When a buyer contacts the listing agent asking to see the house and having the agent help draw up a contract offer on it, the buyer is, in effect, asking that agent to represent both parties of the contract. This sets up what's called "dual-agency," in which the agent's broker handles both sides of the negotiations.

Some states ban dual agency. And all states have made non-disclosed dual agency illegal (when a broker doesn't explain to both parties that he is representing both the buyer and seller).

But laws on disclosed dual agency vary in those states where it is allowed. In these states, there is a document in the contract called an "agency disclosure" form that spells out the relationship between buyers, sellers and agents.

In a dual-agent agreement, an ethical agent is supposed to become more of a transaction facilitator. In effect, they would not be an actual advocate of either party but mostly an information provider and communication conduit. The agent would be able to convey offers and counteroffers but can't provide opinions or advice to one party or the other. They can answer questions and explain the transaction but aren't supposed to advocate for the buyer or the seller.

This setup is usually not in either party's best interest. (It does, however, give the entire commission to the listing agent, which is a win for that broker).

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Going Solo: Working Without an Agent

Sometimes, experienced buyers will act without an agent, coming up with their own offer and hiring a lawyer to draft a contract. This is best for buyers who understand the market like a professional and know the ins-and-outs of negotiating a sales price and contract details.

But new buyers like the Fitzgeralds, or those who don't have the time to study market trends, should consider finding their own expert, someone who will act in their best interest, says Steve Israel, the Fitzgeralds' broker.

"They really should ask for references and interview agents, looking for someone who they find trustworthy and they want to work with," Israel says.

The Deal: Signing a Contract

Once a homebuyer has found an agent, they'll sign an agreement with them, called a buyer-broker contract. The details of a buyer-broker agreement stipulate the agent's fee and when he or she should be paid in a transaction.

Real estate agents make their money when a sales transaction is complete (when the home goes to "closing"). In most real estate transactions the seller includes, in their listing contract, a line stating the percentage of the final sale price that will be paid to the listing broker. The contract also mentions what portion of that percentage will go to the agent who brought in the buyer.

That's right. A listing contract states how much the buyers' agent receives, usually a percentage based on the final sales price. In a nutshell, in a traditional real estate transaction, even though the buyer's agent works for the buyer, his or her commission is based on final price.

So how do buyers ensure that their agents are really acting in their best interest? They should carefully read any agreements that their representatives want them to sign and be prepared to negotiate the terms of their buyer-broker agreement. Some buyer's agent companies, like Israel's, offer different payment options, including fixed-price, hourly fees or the traditional percentage based on the final sales price.

"There is an obvious conflict of interest with the structure in how any real estate agent gets paid," Israel says. "But in the end, most customers opt for the percentage route and are reassured by the amount of work we put in."

Buyer-Broker Agreements

The three different types of buyer-broker agreements offer varying degrees of representation for the buyer. The most restrictive is the exclusive buyer-broker contract, which commits the buyer to using one agent exclusively, guaranteeing that the agent will get paid for any real estate transaction conducted within the covered time period.

The three types are:

  • Non-Exclusive/Not for Compensation: This contract defines the terms for the relationship between buyer and broker but does not bind the buyer to work only with the agent. (If, say, a buyer finds a home on his own and decides not to use an agent for help drafting a contract, he or she is not obligated to pay a commission to the broker.) The buyer also can use another broker if he or she wants.
  • Non-Exclusive/Right to Represent. With this type of contract, a buyer can use other brokers if he or she desires. But this contract obligates the buyer to ensure that the broker receives his or her commission if he or she introduces the specific property to the buyer or acts at all on the buyer's behalf.
  • Exclusive Right to Represent. This type of contract obligates the buyer to pay a commission even if the buyer finds the property him or herself or uses another broker. Sometimes these contracts stipulate that the buyer will ensure that the broker receives a certain percentage of the commission. The obligation for a buyer to pay his or her agent's fee is usually waived if the seller's contract says that the seller will pay the fee of the buyer's agent.

Another of Israel's clients, Julia Spicer, signed an exclusive contract with Buyer's Edge after finding a house that she wanted to buy. She needed assistance in drafting an offer and contract, and Buyer's Edge gave her a discount for doing her own legwork, she said.

Spicer recommends buyer's agents for those who prefer to do their own searching.

"When I saw the house, I called a traditional agent in the neighborhood asking them to help me with a contract. They told me I didn't want the house and tried to steer me to one of their own listings," Spicer said.

Referred to Buyer's Edge, Spicer and Israel drafted a proposal and she bought the house.

"He has enormous experience working on real estate deals. If I were in the market, I'd definitely use a buyer's broker," Spicer says.

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