2011 Jan 31st

But I Thought You Were My Agent?

A Frequently Asked Question by Hoboken Condo Buyers

When I work with buyers and make an offer for them I always do it in contract form. It is more formal and I believe gives your offer more weight.  Part of the standard form contract package we use in New Jersey which is provided to us by the New Jersey Board of Realtors includes what is called an “Opinion 26″ letter.

Here is what that looks like:  Opinion 26

This letter is legally required and is supposed to tell the buyer who the agent represents, who the title company represents, and that neither the agent nor the title company will provide legal advice to the buyer.  If so desired, the buyer can hire real estate counsel.  The letter explains to the buyer why it’s a good idea to do so.

Here in the world of Hoboken real estate, when an agent works with a buyer we are not really an “agent” in the legal sense of the word.  We don’t normally sign a Buyers Agency Agreement.   I don’t really know why we don’t but I’ve heard brokers claim it increases their potential liability.  I guess they’re not familiar with the legal concept of “implied agency”. Nonetheless, here is what that agreement looks like:

Buyers Agency Agreement

Without a Buyers Agency Agreement, there is no contractual agency relationship created between the agent and the buyer. That’s why we are not really “agents” but more like sales people working with customer. The buyer is free to stop working with his or her not-really-an-agent at any time. Whether not using an agency agreement is a good idea or not is the subject of another post.  In fact, I could probably write a book about our relationship with buyers and the complications that can ensue.

In any event, every time I check the box on the Opinion 26 form that says “I represent neither the seller nor the buyer” I get a call from my buyer saying – but I thought you were my agent!

We are all also required to provide all our customers with a “Consumer Information Statement”.  It looks like this:

Consumer Info Statement

As a lawyer, I can honestly say it is not the best examples of legal writing I have ever seen.  I believe its purpose is to explain to consumers the various relationships and how we can be on both sides of a deal – otherwise known as disclosed dual agency.  In most states dual agency is illegal.  It is recognized that there is an inherent conflict in serving two masters.  Not in New Jersey.

When working as a “Transaction Broker” we are bound to treat our customers fairly and honestly.  I think that is always a good idea in any business.  Any member of the NAR and NJAR is bound by the Code of Ethics and, if he or she fails to live by it, a consumer can file a complaint.  Once an offer is made and accepted, every buyer I have ever worked with has retained counsel.  So even if I am not their formal agent or lawyer, they do have someone representing them and advising them on the legal implications of the transaction.

I thought it might be useful to try to expain all of this and let you all see and read these documents at a time other then when you are about to make an offer on a property and have a ton of other questions on your mind.  Do you think this is a good system?  Does it make sense to you?  I’m curious to hear the consumers’ take on this scheme.  Thanks for reading.  Off to the gym before the snow starts!

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  1. homeboken

    This post summarizes the problem that I have with NJ realtors in a nutshell (with the exception of our blog authors).

    So in NJ, the realtor doesn’t legally represent the buyer or the seller. They do not give legal advice and they could potentially be working both sides of the deal.

    Why exactly am I paying you 6% again? It seems to me that the only value the realtor creates, is having the keys to information system (ie MLS). To me, that access is worth some multiple of the MLS costs, maybe 2-3 times, max.

    When a realtor will not commit to being a Buyer agent, or will not accept any liability as it relates to the transaction. I get skittish. Being a realtor in NJ, is essentially a risk free business with virtually zero barriers to entry (outside of passing a test). That is why there are so many average, to downright awful realtors out there. If I am paying you 6% comission, I expect you to be provide me with value that is worth at least 10-12% of my purchase. Otherwise, I am getting zero return on my investment.

    Again, the above is a comment on the industry as a whole, not the HREN authors.

  2. Craig

    Homeboken – Seller’s agents do contracturally represent the seller. Not so with buyers, but then buyers don’t pay the commission. So look at it this way: as a buyer, you get what you pay for. To answer Lori’s question: Do I like the system as it stands? No. I think an agent should always have a fiduciary duty to a buyer. I especially don’t like that MLS is not made available to the public. The industry witholds this information for one reason: to make sure you always need them.

    While it’s true any member of the NAR and NJAR is bound by the Code of Ethics, what is the penalty for breaching it…a stern lecture? 10 minutes in the penalty box? There are serious consequences if a doctor or lawyer screws up, and those professions are self-regulating. Not so much with the real estate profession. I find it ironic that real estate lawyers earn a fraction of what agents/brokers earn on each deal given that the lawyers assume all the professional liability, provide all the advice, and perform all the due dilligence in protecting the parties’ interests.

  3. Lori Turoff

    Homeboken – As Craig correctly points out – the agent is a true agent of the seller as that relationship is created by the listing agreement. As an aside, the going commission rate in Hoboken is 5%, not 6. I appreciate your making it clear that you are not attacking us personally (thank you ) and I encourage your discussion.

    It is not up to the individual agent whether he or she will commit to an agency relationship with the buyer. These policies are set by the brokerage. We just live by their rules. In my opinion, I would prefer to be a buyer’s agent. I believe that as soon as you start giving a buyer advice and that buyer relies on your advice and if you act like an agent the law will construe you to be an implied agent and the liability is there regardless of the formal agreement.

    Craig – The penalty for a realtor violating the Code of Ethics could be as severe as the loss of one’s license. We can’t practice without a license just as a doctor or lawyer can’t. To me, that is pretty big as it’s the loss of my ability to earn my living so I take it pretty seriously. We can be fined by the NJ Real Estate Commission. We can be sued in a civil action by a customer. We are subject to mediation and arbitration within the industry and can forfeit our commission. So the penalties are real, don’t kid yourself.

    As to why there are so many bad agents I think that has more to do with the lack of barriers to entry and the lack of transparency in the industry. Consumers do not understand their rights or relationships or the remedies they have when these relationships are breached. That’s exactly why I write these posts.

  4. teaorcoffee

    Lori – thank you for these posts. I am a clueless consumer, trying to become less clueless! And that’s one reason I keep coming back to this site.

    Can I ask about that 5% going commission rate in Hoboken? I always thought it was 6% too. Why is it lower in Hoboken?

  5. BP

    I think your post needs a little clarification because under NJ law no buyer should be at the point of writing a contract and not have already received the Consumer Information Statement. Agents are required to provide this form upon first meeting a customer / client and clearly mark on the form how they will represent that person. If people look at the form provided by your link above, they’ll see where an agent must clearly state the relationship. Many brokers (the brokerage company, not the individual agents working for the broker) have a policy that their agents working with buyers must choose the Transaction Broker because it does avoid some liability. However, in my experience you can be a Buyer’s Agent without a written contract (if your broker permits)…just mark it on the C.I.S. form.

    Why won’t most buyer’s sign a buyer’s agency form? Because they generally require the buyer to pay that agent a commission if they go off and buy a home without that agent. And just like agents don’t want liability, buyers don’t want that liability.

    I took the following off the NJAR website:

    Consumer Information Statement
    New Jersey law requires that real estate licensees inform prospective buyers and sellers about the four types of business relationships prior to the first discussion of financial matters or the motivation for buying or selling. The Consumer Information Statement (CIS), which must be delivered to the buyer or seller at the time of the first meeting, helps explain these relationships.

    The four business relationships are:

    Buyer’s agent
    Seller’s agent
    Disclosed dual agent
    Transaction broker

  6. BP

    Oh…BTW…you probably should strike out the discussion about a “going rate” for commissions. Any suggestion that there’s a standard rate is a big no-no under the law…

  7. Lori Turoff

    BP – I never stated anything about WHEN you should give the consumer the CIS form. In fact, I have a link to it right in my email signature. Yes, it should be provided at the commencement of the relationship.

    If you read the Buyers Agency Agreement it says nothing about the buyer having to pay the agent if the buyer purchases directly from an owner. The agent must have shown the property to the buyer. Here is the language:

    The brokerage fee shall be earned, due and payable by Buyer to Buyer’s Agent if any property introduced by Buyers Agent to Buyer during the term of this Agreement is purchased by Buyer prior to the expiration of this Agreement, or within___days after the termination of this Agreement.

    Some brokerage firms may have their own form which is different and in which the buyer would have to pay the agent. Yes, that is why buyers don’t want to sign them.

    Finally, under NJ law commissions are always negotiable between the consumer and the agency. It is illegal for brokers to agree to fix commissions among themselves. It is not illegal or wrong to state that most commissions in a neighborhood are a certain amount, which is what I mean by the “going rate”. Excuse my colloquialism. That’s just a readily known fact. One which consumers are entitled to know.

  8. Lori Turoff

    This past weekend’s New York Times Real Estate section – cover article on 6% commissions in NYC: http://www.nytimes.com/2011/01/30/realestate/30cov.html?_r=1

  9. Craig

    Lori – I stand corrected. I had no idea there are some teeth to the ethics rules for agents.

    I learned something new today. I had no idea that commissions were negotiable. I had always thought you either pay the typical 5-6% or you have to go the for sale by owner route. But are commissions really negotiable in real world practice? Wouldn’t most brokers tell you to buzz-off if you tried to negotiate a 4% commission in Hoboken?

  10. Lori Turoff

    Hi Craig – I’m glad I was able to inform you. There are teeth and they are sharp, nasty ones!

    As for commissions – they are negotiable by law. Very often, what happens is that the broker at a particular brokerage will tell its agents that it normally wants x%. The agent does not really have the authorization to take lower as the contract is between the owner and the brokerage agency, not the agent. Sometimes, for very high priced properties, the broker may agree to take less but it’s up to the broker. Whether for that reason or any other reason, the broker has to agree to the commission when it is lower than the normal in-house rate. That said, the agent has to agree too.

    As an agent, when I go on a listing appointment I can tell the seller that I personally won’t take less than a given percentage because the amount of work and effort I spend selling a property is substantial and I believe worth what I charge. If the seller is not happy with my rate, they can go to another agent, even from my own agency, assuming my broker and the other agent agree to a lower rate. So while the broker can agree to take less, I am an independent contractor and can’t be forced to work for less or to work with a seller I don’t wish to represent. (I speak for myself but the same holds true for all agents).

    Are there agents in Hoboken who will work for a 4% commission – sure. But remember all commissions get split when there are two agencies involved. There are also brokers who say the commission is 5% but don’t split that equally between their agency and the agency that brings the buyer. So they often keep 3% for themselves and pay the agency that brings the buyer only 2%.

    Finally, there is what is called a dual and variable rate commission. Let’s say the listing agency also is the agency that brings a buyer. It might even be two different agents but both from the same company. In that case, sometimes the percentage is lower on the theory that the agency is getting both sides of the deal.

    I hope this is clear!

  11. Susan

    “Whether not using an agency agreement is a good idea or not is the subject of another post.”

    Can you please share that post (if, indeed, there is one)? I’m being asked to sign an Exclusive Buyer Agency Agreement for both a Buyer’s Agent and Disclosed Dual Agent for a period of 9 months.

    HELP!

  12. Lori

    Susan – you should discuss that with your agent. What market are you in? Buyers Agency agreements are extremely rare in Hoboken. Most buyers won’t sign them because they are so uncommon. If you are not comfortable – don’t do it. 9 months is way too long!!! Give them 2 to 4 weeks. If you’re not happy, you get to work with someone else!

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