Sellers Are Not Required To Pay Both Agents, Let Me Explain.
When selling or buying a home, the question of agent commission can be confusing and complex. This guide will provide you the truth about agent compensation and how it works. Please understand, every real estate transaction is unique so, I can not answer every scenario and every question here in this blog. If you have questions or concerns that I do not address, please feel free to reach out to me directly. Visit www.ListWithLiberty.com or email JGonzalez@LHRLLC.com.
Before we start talking about the money, we first need to talk about representation agreements. Whether you are selling or buying, the Tennessee Real Estate Broker License Act of 1973 (Tenn Code Ann. § 62-13-101) requires real estate agents to get a signed representation agreement before they act to represent you. These representation agreements are employment contracts between you and the agent. Like any legitimate contract, they must have something called consideration. It does not matter if you are working with a listing agent or a buying agent; the contract must be based on some consideration. Without consideration, you do not have a legitimate employment contract.
Consideration is something of legal value offered by the buyer or seller to the agent as an inducement to perform. Every Tennessee Association of Realtors Representation Agreement has consideration language, and that language is all about money. Regardless if you are a seller or a buyer, when you sign a TAR (Tennessee Association of Realtors) Representation Agreement, you promise money, or in other words, compensation in exchange for the promise of services rendered by your agent. In practice, most people understand this process when listing a home but do not understand this when buying a home.
The TN Brokers Act requires all agents (listing agents and buying agents) to obtain an employment contract with you. Remember, agent employment contracts or representation agreements have consideration as legally required to be legitimate. Therefore, when a buyer’s agent tells you their services are “free” or that you “do not pay” for their service, that is not true. For example, if you signed the RF141-Exclusive Buyer Representation Agreement (Designated Agency), I want to draw your attention to page 1, paragraph 3 (Client Duties), sub-paragraph E, lines 38 – 40, which state,
“If a fee is not offered or paid to Broker (Buyers Agent), as could occur, for example, in the purchase of an unlisted property, Client (Buyer) agrees to pay Broker (Buyer Agent) a total of $_________ or _____% compensation based on the total sales price.”
Most buyers do not know this sentence is in their employment contract because most buyer agents do not get these employment contracts signed upfront. In practice, buyer agents typically wait to get their representation agreement signed until they have acted as the buyer’s agent and secured a purchase contract on a property. This way, the buyer agent never has to discuss their compensation with their client because, in practice, most sellers proactively offer to pay both agents. In the rush and hurry of the purchase offer paperwork, buyer agents will stick in their employment contracts and fill in the blank with whatever payment is offered in the property advertisements. When it comes time to get that buyer’s employment agreement signed, they can skip over the compensation section and never raise the issue of their commission. As a result, it looks like the buyer is getting the agent’s services for “free,” but, in reality, they are not. If the buyer agents were following the law, the buyers would be fully aware of their agent’s compensation before the agent ever took them to look at the first home.
I wish that were all that had to be said; however, it is not. This employment contract goes further and stipulates that the buyer will guarantee the buyer agent’s commission. That guarantee happens on lines 41-43 which state,
“In the event that the amount of any cooperating compensation paid by Seller or Seller’s broker is less than the amount listed above, BUYER agrees to pay Broker (Buyer’s Agent) the difference at closing or on the date of possession…”
If you are currently working with a buyer agent, I hope this is not the first time you heard this but, if you are, let me explain why the buyer guarantees their agent’s commission.
When you hire an agent to represent you with an employment contract, that agent becomes your fiduciary. As your fiduciary, your agent owes you specific duties as prescribed by law. One of those duties is loyalty. The fiduciary duty of loyalty requires the agent to place your interest above those of all others, including themselves. This loyalty means the agent can not act out of self-interest during the negotiation of your purchase offer. The agent must negotiate your purchase offer without any regard to how much they will earn in commission. The agent must have no conflict of interest in your purchase offer negotiations, and this is precisely why the buyer, not the seller guarantees the buyer agent commission. It would be a violation of the agents’ fiduciary duty of loyalty to be more interested in his pay than your purchase offer.
Here in the Nashville market, it is common practice for sellers to proactively offer and advertise that they will pay the buyer’s agent commission. In the industry, we call this the co-op or cooperative compensation. The traditional practice for sellers to offer a co-op was used by listing agents to attract buyer agents to their seller’s property. Before the internet and MLS data sharing, when a buyer wanted to buy a home, he was forced to find a local real estate agent. Buyers had no options or choices but to enlist the services of an agent to know what homes were available. This monopoly on data made real estate agents the keeper of the keys to the kingdom. In this restricted environment, it was more advantageous for homeowners to market their properties directly to agents than to the end buyer. Essentially, this is how the co-op compensation was born.
Real estate information technology and multiple listing data sharing are changing the way we sell a home. The days of attracting buyer agents are being replaced with direct buyer advertising through consumer’s cell phones and mobile devices. This direct-to-buyer advertising means the days of the co-op are numbered. Still, many buyers will want their own representation. A high-quality buyer agent acting as a buyer’s fiduciary brings value to the buyer. Nonetheless, the days of the seller’s automatically offering to pay buyer agent compensation is an outdated and antiquated notion that has no place in a modern digital marketplace. Combine the changes technology brings with the fact that buyer agent commission is settled (or at least supposed to be settled) upfront, and I see no advantage to the seller to offer a traditional co-op.
For two years now, I have been showing homeowners how to list, market, and sell their homes with nothing more than a $1.00 co-op. My clients have saved a total of $638,032.11 in agent commissions, based on a prevailing market practice of paying 6%. I would love to talk to you about how you can keep more of your equity, sale for top dollar, in the least amount of time. Give me call, 615-424-0961 or visit www.ListWithLiberty.com