Buyer Broker Agreements: What you need to know
The traditional way of purchasing a home is changing. The National Association of Realtors recently settled a class action suit brought about by home sellers who claimed they were forced pay commissions to buyer's brokers. At the heart of this suit was the claim that sales commissions weren't negotiable in some areas of the country and the amount listing agents shared with buyer's brokers was either fixed at 3.0% or could not be zero when input into some MLSs. The Department of Justice agreed with the plaintiffs (a class of home sellers) and sought to decouple buyer's broker's commissions and exclude them from being advertised in MLSs. This is a national change and all buyer's agents will now have to have a Buyer Broker Agreement signed prior to showing properties. The California Association of Realtors (C.A.R.) has drafted a standardized form called the Buyer Representation and Broker Compensation Agreement (BBRC) for transactions in California. Below is a step-by-step guide to this form to help explain it and hopefully alleviate any unease about it.
Page 1 - The Parties, The Period, The Property
The first page of the BBRC defines the parties in the agreement, the time period the agreement if valid, whether the agreement is non-exclusive or exclusive, and the specifics (type, location, exclusions) of the properties the buyer is looking for, which can be on C.A.R. form BIPP. For non-exclusive agreements, a buyer can work with multiple agents in his or her search for the right property. An exclusive agreement restricts the buyer from working with any other agents.
Page 1 - The Second Half: The Meat Of The Agreement
The second half of the first page of the BBRC is really the most important part. This section defines the amount of commission the buyer's broker will be paid, who might pay for the commission, how long the agreement is valid after the time period of the agreement ends, and what the cancellation rights are based on whether the agreement is an exclusive or non-exclusive agreement. Commissions have always been and still are negotiable. However, it was not always clear to the buyer how much commission the buyer's broker was collecting from the listing broker. This new form makes it clear the amount of commission the buyer's broker will collect upon the completion of any resulting transaction in which the buyer's broker was materially involved. Additionally, this form relieves the buyer of the obligation for paying the buyer's broker's commission if that commission is being paid by the seller or the listing broker in a traditional commission split. The buyer is also obligated to provide the buyer's broker financial information showing their ability to purchase the property sought, which can be provided on C.A.R. form BFPI. Finally, the buyer is given the option to indicate whether he or she has the funds necessary to pay the broker or whether the loan product he or she is using disallows the buyer to pay the buyer's broker's commission.
Page 2 - The Fine Print
Page 2 of the BBRC begins with paragraph 3 (not shown in pic below) where any additional forms to be incorporated in the agreement can be listed and then starts to explain the terms on page 1. Paragraph 4 explains the broker's right to compensation, the time period after the expiration of the agreement the buyer's broker can collect commission, the identification of properties the broker was involved with indicated on C.A.R. for NBIP, when the compensation should be paid, how the compensation will be paid, and limits the buyer's obligation to that negotiated on page 1. You may ask why a buyer should be obligated to pay compensation after the expiration of the agreement. This is to protect the buyer's broker in the event the buyer completes a transaction in which the buyer's broker was materially involved (worked on).
Page 2 and 3 - How To Cancel, Agency, Excluded Properties
The end of page 2 and the first half of page 3 deal with the cancellation rights of either the buyer or the broker and how the buyer might be obligated to pay the broker's commission if he or she completes a transaction in which the broker was materially involved in the acquisition. This is mainly to protect the broker from a buyer using the services of a buyer broker and then going to, say, the listing agent to purchase the property. Page 3 goes on the define the scope of agency between the buyer and the buyer's broker. This is further outlined on C.A.R. form AD (Agency Disclosure). The first half of page 3 concludes with definitions on properties excluded from the agreement on page 1 and what, if any, broker involvement there will be with such properties.
Page 3 - Broker Obligations
The middle section of page 3 outlines the obligations of the broker in the agreement. These obligations include assisting the buyer in locating a suitable property, drafting an offer, scheduling inspections and/or ordering reports, and providing the buyer with references to service providers like home inspectors and lenders. Furthermore, the broker is obligated to perform a visual inspection of the property and inform the buyer of any facts observed or learned from other sources.
Page 3 and 4 - Buyer Obligations
The broker is not the only one with obligations in the BBRC. The buyer is obligated to act in good faith, to provide his or her broker with financial information on the ability to complete a transaction, to agree to asking the seller to pay the buyer's broker's compensation if the buyer is unable to pay the broker's compensation or the loan product being used prevents the buyer from compensating his or her broker, to perform his or her due diligence in reviewing all documents provided, to pay for investigations performed, to disclose to broker any material issues he or she might be interested in a particular property, and, finally, to hold the broker harmless if the buyer supplied any incorrect information.
Page 4 - Recourse
Page 4 of the BBRC outlines what happens in the event of a dispute between the buyer and the buyer's broker. Each party agrees to pay their own attorney fees, to seek mediation to resolve any issues prior to resorting to arbitration, and to exclude from mediation matters of foreclosure, unlawful retainer, mechanic's liens, and those matters within the jurisdiction of a probate, small claims or bankruptcy court. Finally, this section defines the contract as the sole agreement between the parties. Any prior agreements, whether written or oral, are unenforceable and any changes to the agreement must be agreed by both parties.
Page 5 - Exclusive Representation
Page 5 begins with an important box on exclusive representation. Per page 1 of the BBRC, the agreement is either exclusive or non-exclusive, with the latter being the default. If the agreement is exclusive, this must be confirmed in this box with the buyer's initials. Exclusive representation obligates the buyer to pay commission to the buyer broker should the buyer complete a transaction with another broker. Furthermore, cancellation of an exclusive representation agreement must be in writing and is effective 30 days after receipt.
Page 5 - Confirmation Of Compensation And Buyer/Broker information
The final section of the BBRC confirms the amount of compensation indicated on page 1 and defines the buyer and broker in the agreement. This section is also where entity buyers can define the details of their trust or corporation.
I hope this explanation helps in understanding the new Buyer Broker Agreement. Please don't hesitate to contact me if you have any questions about this form or any others.