What You Should Know About The ‘Wild West’ of Broker Agreements

The role of brokers in New York City is changing quickly – and while many argue these changes will benefit New Yorkers, it’s still vital to be a smart consumer. We’ve already discussed what the City Council’s recent passage of the FARE Act means for renters (an end to footing the bill for broker’s fees – with some caveats), but we’d like to take a closer look at what the new reality of broker’s agreements mean for home buyers.

Why You’re Suddenly Hearing About Broker Agreements

The National Association of Realtors’ (NAR) recent $418 million antitrust settlement mandates greater transparency around how brokers are paid. The trade group that represents New York’s brokers, REBNY, was not named in the suit but has proactively agreed to abide by these new guidelines.

So what does this have to do with signing agreements? As part of the settlements, firms must create buyer contracts that inform clients that their fees are negotiable and educate buyers on how much the broker will be paid. Until January of this year, sellers typically paid a fee of 5-6% of the purchase price that was split between buyers’ and sellers’ agents to compensate them for their work.

Now, those fees are decoupled, meaning sellers will pay one fee to the buyer’s agent and one to their agent. Because this is negotiable, though, the seller can choose to offer up to 3% to the buyer’s broker but they won’t legally have to offer anything at all. All of that sets you up for potentially being on the hook for paying the difference to your broker. That possibility, and guidelines around it, are what is outlined in these new broker agreements.

What This Means for Buyers

Brick Underground recently spoke to an agent who referred to the piecemeal way firms are approaching these highly unstandardized contracts as “the Wild West.” Without the industry adopting codified uniform contracts, buyers are often left to fend for themselves when it comes to vetting these agreements, but there are some basic guidelines you should follow.

First, you should anticipate that these documents will be complex and potentially confusing. Even if it’s not a firm’s intention to be misleading, the fact that they haven’t been given a roadmap for how to create these documents means the language is not standardized – so don’t assume any of it can be glossed over.

As with any business relationship, you do need to honor your instincts. If your potential broker is putting the pressure on you to trust them implicitly or assume the language is boilerplate that can be initialed without a second thought, they do not have your best interests at heart. Reputable, experienced agents and firms anticipate that clients will want to take their time with this and ask questions. If they can’t answer those questions, it’s best to keep looking.

What To Look For Within These Agreements

A few aspects of the agreements crucial to consider include clauses on commission fee overages, dual agency, and cancellation rights.

When it comes to commission fees, buyers should know what their options are should a seller agree to pay more than requested. A professional with whom Brick Underground spoke suggested asking that such overages be given to the buyer, pointing out that even if the sellers refuse, the money will still go toward either the buyer or seller and not the agent.

Dual Agency refers to a broker representing both buyer and seller in a transaction and, while rare, sometimes happens. Much of the wording around this aspect of the settlement is unclear – with some legalese suggesting even viewing a property under dual agreement constitutes a buyer’s agreement with the fee structure. So it’s something you want to make sure you’re clear about before signing.

Finally, when it comes to cancellation rights, know that some firms have opted to lock buyers into a representation agreement for a set period of time without the option to cancel services they may be unhappy with. It’s generally in your best interests to keep your options open rather than being locked in.

Whether you opt to sign a broker agreement is ultimately up to you but buying without representation is often a risky proposition that can lead to you paying much more money (rather for your property or for your representation) than is fair. It’s crucial to find an experienced agent whom you can trust to shepherd you through one of the biggest financial transactions of your life.

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If you’re interested in learning more about the buying process, download our free Buying Into Brooklyn Ebook. We share a ton of valuable resources to demystify the buying process and help you become a Brooklyn home-owner.