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Buyer Broker Agreements

Proper Usage of Buyer Representation Agreements:

The California Association of Realtors (C.A.R.) publishes three different Buyer Representation Agreements:  1) Buyer Representation Agreement-Non Exclusive-Not for Compensation; 2) Buyer Representation Agreement- Non Exclusive; and 3) Buyer Representation Agreement-Exclusive.

The Buyer Representation Agreement-Non Exclusive-Not for Compensation is an excellent form to use when working with buyers. It explains the rights and duties of the buyer and the agent and, as the title indicates, it has no provision for compensation to be paid by the buyer.

The second form, Buyer Representation Agreement-Non Exclusive, has a provision for the payment of commission from buyer to broker in those situations where the agent introduces the buyer to a specific property or acts on buyer’s behalf with regard to a specific property, and the buyer then purchases that property. There is also a provision in this version of the Buyer Representation Agreement that credits the buyer with any sum paid to the broker by another source (usually the Seller). This form is appropriate to use with buyers as it protects agents who show properties to a buyer and do not have the opportunity to follow up and represent the buyer in the transaction for various reasons.

The third form, Buyer Representation Agreement-Exclusive is the form that requires extreme caution for both buyers and agents. This form states that the agent may be entitled to receive a commission from the buyer for a property the buyer purchases during the term of the agreement, whether or not the agent introduces the buyer to the specific property in question and whether or not the agent has anything at all to do with the purchased property. This form was designed by C.A.R. for usage in a limited set of circumstances. It was anticipated that this form might be used by an agent who is spending a great deal of time with a buyer for a relatively short period of time. An appropriate usage of this form might include a two week or perhaps a thirty day agreement period during which the buyer is obligated to the agent if the buyer purchases a property during that specific period of time. In addition to being limited to a modest period of time, this agreement should set forth the type of property that is being covered by this agreement. A good example of this might be:  Any property located in the San Fernando Valley with a sale price between $400,000 and $600,000. It would not be advisable to put unreasonably large spectrums of price or location.

The problem with the Exclusive Representation Agreement is that it has been abused by certain agents. For example, I can think of absolutely no reason why a buyer should be asked to sign a six month or one year Exclusive Representation Agreement. Yet there are many such agreements in existence. This could very well lead to a claim that the agent has breached their fiduciary duty by failing to explain the exact nature of this agreement and the circumstances under which the buyer would be obligated to pay the agent a commission.

There are examples of agents who have had prospective buyers sign long term Exclusive Representation Agreements and then gone for many months without showing that buyer any properties. Then, upon discovering that the buyer purchased a property during the term of the Exclusive Agreement they have demanded payment of the commission referenced in the agreement. Very often this may be the first moment in time that the buyer realizes the nature of the Exclusive Representation Agreement they signed with that agent. It would be a rare instance indeed, where the buyer in such a situation would simply hand over the commission to the agent without protest. More likely, the buyer would demand that the Agreement be terminated and if this did not happen, the buyer would possibly seek the advice of an attorney. That attorney would likely file a claim which could very well prevail on the theory the contract was unconscionable and a breach of fiduciary duty. Even if it was not a successful claim, the time and cost of defending the claim would be significant. This is really a lose-lose situation. The broker would be placed in a position to have to file a legal action to collect under the terms of the agreement and also face the potential of this claim.

It is suggested that the agent start out with a modest time period for the agreement. The agreement could then be extended for a similar time period, if necessary. If the agent is genuinely working hard to assist a particular buyer, then the protection this Agreement provides is appropriate.

In conclusion, the longer the term of the Exclusive Buyer Representation Agreement and the less specific the agreement is as to the type of property being covered by the agreement, the more likely the agreement will be open to attack as unenforceable.

While there are situations where buyers have not been loyal and have gone off with another broker and purchased a property, the solution to this problem is NOT having buyers sign long term Exclusive Buyer Representation Agreements. Proper usage of the forms referenced above will ensure that all parties are treated fairly and will ensure that the broker has an enforceable agreement with the buyer.

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