The Basics of Buyer Brokerage Agreements
Many licensees aren’t aware of the differences in the Virginia statute concerning Buyer Brokerage Agreements and the statute which they were previously trained on. Therefore, I wanted to take a moment to review what these agreements are, how they are generally used throughout the country and specifically in Virginia.
Buyer Brokerage Agreements define the relationship between a buyer and a licensee. There are three types of brokerage relationships that may exist in Virginia. They are: The terms and conditions for these three agreements are defined in the Virginia Controlled Forms Regulations. Brokerage agreements are used throughout the country in a variety of situations. The most common use for a Buyer Brokerage Agreement is in the single family residential market which has been the main focus of the legal training above. However, other contract provisions such as those governing commission, recoupment, confidentiality and others may be applicable to commercial, custom construction, raw land development and new home agreements. We will focus, however, on SF residential transactions throughout most of this article . In a typical single family residential real estate transaction, Buyer Brokerage Agreements are entered into at the beginning of the process when a client is interested in identifying a home. Brokers and agents have an initial meeting with the client to assess their needs. A buyer may simply be seeing a listing that is of interest or they may be more serious and come to the meeting with full disclosure of their financial qualifications or preferences. The purpose of the meeting is two-fold. First: to allow the agent to learn about the client’s needs, and second: to create a legally binding agreement to govern the relationship between the agent and the buyer. These agreements help protect all parties involved. The buyer is protected from conflicting loyalties among the parties and allows them to secure exclusivity with their broker. It allows the agent to focus their time and efforts into the sale of the property instead of running from one customer to the next. And it protects the seller that the buyer is represented by an advocate and not someone shopping for the best deal with several different clients.
The Legal Context for Buyer Brokerage Agreements
Buyer brokers and designated agents in Virginia must abide by the new laws that became effective July 1, 2013. These new laws revise and expand the legal "departures" in Virginia Code Section 54.1-2135.1(A). The term "departures" signals that buyer brokers and designated agents will be treated differently than traditional agent teams (sometimes referred to as parent/child teams) or designated agents with single brokerage agreements. As a general rule, the contractual departure provisions apply to all broker/agent relationships unless there is a contractual agreement to the contrary.
There are four specific legal departures that can be effective on any or all representations/exclusive representation of a prospective buyer. Remember that each legal departure must be provided to a prospective buyer by current law and the specific departure must be reflected in the exclusive representation agreement.
The four general departures that can be varied by agreement are:
The Code provisions make clear that if a specific departure is not selected by a buyer in writing, the law presumes that the departure is "no." Presumably that means that buyer brokers may not select an unchosen departure for a buyer, unless the buyer "approves" the specific departure in writing. Similarly, if a buyer elects a departure—unless it is "unintentionally omitted," the departure will be read to be "yes."
Essential Components of a Buyer Agreement
While the Virginia buyer broker agreement is not a statutory requirement, there are essential components that are needed to adequately protect both the broker and the client. These components include the duties of the broker, duration of the agreement, and compensation terms.
First things first, it should be made clear that the broker’s duty is to represent the interests of the client under a buyer brokerage agreement. The receipt of this representation means that the client should not be restricted to only property within the agent’s listing or sales portfolio. Here is a sample of the general duties of the buyer’s broker:
- The broker must exercise reasonable skill and diligence
- Must promote the interest of client with the utmost good faith
- Must disclose all known facts that materially affect the value of the property for sale or lease that are not within the knowledge of the typical buyer of property of the type being offered.
- Must maintain the confidentiality of information from the client, unless such information is required to be disclosed by the Code of Virginia, any state or federal regulation, or a court order.
- Must provide the client with access to all disclosures and other information collected by the broker, including information relating to properties submitted to the broker.
- Must disclose differences between a property’s purchase price and the price the property is listed for in the Multiple Listing Service.
The most common duration for a buyer brokerage agreement is a period of 30 to 90 days, but a time period can be negotiated that is suitable to all parties involved. However, as a broker, you should always avoid a "to be determined" period. Even the U.S. government knows how to put an end date to something. Some sellers do try to end the relationship daily simply by saying "the check is in the mail." It is okay to select a time period, but do not put it in writing if you cannot adhere to that time period.
The methods for compensation of the buyer’s broker are similar to those found in a seller’s listing agreement and may be expressed as a flat fee or percentage of commission given to a selling agent upon a successful purchase. This is usually the alternate and, more uncommon method of compensation in a buyer’s brokerage agreement. A flat fee can be set before the buyer or broker finds a property. If payment is made before the purchase, the buyer must then recoup the funds if no purchase is made. If nothing appears in writing about having either the buyer or seller pay, then the buyer will likely have to pay the commission. It has been discovered after a number of recent sales that many builders were paying agents to sell their products, but did not disclose that to the sellers and thus did not disclose it on the MLS. As a result, there are a number of agents now left holding the bag, because they did not receive payment from the builder and did not receive the payment from the buyers.
Buyers Rights and Duties
Buyer Representative agreements define the relationship between real estate agents (or brokers) and the buyers who employ them. In most states, these agreements are entered into for a defined period of time and allow the buyers to be represented by their agent. The listings in the MLS (or "Multiple Listing Service") are shared with the buyer’s agent, and commissions are paid to the agent as long as there is an agreement.
Virginia is a "Buyer Agency" state. Buyer agency relationships are defined in the Virginia Regulations Governing Real Estate Boards. When a buyer enters into a buyer agency relationship, he has the right to expect the following from his agent:
1. Competent and professional services
2. Full disclosure of all material information known to the agent including:
a. Property defects
b. Neighborhood conditions
c. Fees associated with the transaction
d. Financing available
e. Options and remedies upon default
3. Confidentiality including motivation and financial ability to purchase
As the buyer, these are your responsibilities:
In representing a buyer, a real estate agent should:
Remember that not all REAL ESTATE PROFESSIONALS are REALTORS. REALTOR® is a term that identifies real estate professionals as members of the National Association of REALTORS. REALTORS are expected to abide by the REALTOR Code of Ethics, which is based on the Golden Rule. You can find a REALTOR in your area by going to www.Realtor.com.
Your buyer representative agreement should clearly define the responsibilities issued to both parties. If there are home inspections, for example, and the buyer has the right to have the property inspected at his expense, it is also the buyer’s responsibility to have the property inspected in the specified time frame.
Ask questions if you want clarification about the agreement. And remember, every contract is negotiable. You may be able to create a buyer representative agreement that feels balanced to both of you.
An Agent’s Duties to their Buyer
Section 2: Agent Obligations to Buyers
In Virginia, a Real Estate Agent who has entered into a buyer-broker arrangement with a client owes that client a legal duty. Specifically, the Agent must treat the Buyer with "reasonable care and fidelity". The Broker must also comply with the terms of the written agreement.
Duty of Reasonable Care and Good Faith: A licensed agent must treat his buyer-clients with the duty of care that any agent would give to any business client with reasonable assurances that he will use due diligence and professional expertise to help find or purchase the property in question for a fair and reasonable price.
Duty of Loyalty: A buyer-broker has a fiduciary duty of loyalty to the buyer-client and must not place his own best interests above that of his client at any time. And as always , any information learned about the property must be kept in the strictest of client confidence. Further, the broker must disclose all known material defects, liens and/or costs associated with the property during the negotiation of a transaction.
Conflict of Interest: If there is any conflict between the interests of the buyer and the agent (real or perceived) the agent has a duty to disclose all such conflicts. With full understanding by the buyer, the agent can then continue to act in an impartial manner or can turn the client over to another agent with the same company.
Enforcing a Buyer Contract and Resolving Disputes
In the event of a dispute arising from a buyer brokerage agreement, Virginia law provides mechanisms for enforcement. Typically, enforcement of an agreement will occur through the courts, but it is important for buyers and licensed real estate agents to understand the potential remedies available to parties to a dispute involving a buyer brokerage agreement.
If a buyer claims that an agent has violated the agreement, the initial recourse may be for the buyer to close on the property in question. Since a court can grant specific performance of a contract for the sale of real property, unless the buyer closes on the property, the buyer will not be entitled to a remedy. It is generally possible for the buyer to seek a monetary remedy as well as an order of specific performance.
The buyer must be afforded the opportunity to close on the property. Upon learning that the buyer is seeking to enforce the agreement, the real estate agent will almost invariably seek to have the sale closed. If the buyer refuses to close, the court may dismiss all claims and counterclaims.
In a case where the buyer does close on the property and the sale proceeds, the dispute can then proceed on the grounds of breach of the buyer brokerage agreement either in contract or through a claim for promissory estoppel. In a case where the buyer agent fails to fulfill the terms of the agreement, the court must determine what damages have accrued as a result and the buyer may be required to demonstrate how much money has been lost as a result of the breach of contract. The buyer will generally have the burden of proof in establishing the losses as a result of the breach, but where the agreement is for services that have been rendered, the expenses are easily demonstrated. However, damages may be more difficult to determine when services are not rendered by the agent in accordance with the terms of the agreement or when the buyer is induced to rely on the actions of an agent.
If the agent does breach the agreement, the buyer must have relied on this breach to his detriment. If the breach caused the buyer to not hire a different agent, the court may consider this detriment and whether the agent’s solicitation caused the buyer to believe that he was no longer bound by the agreement. However the conflicting duties owed to the buyer and seller may serve as a defense for the agent where ownership is divided by consent of the parties.
If the buyer can establish an entitlement to damages, the court will award a remedy of damages. The court will reward only provable monetary losses.
Common Misconceptions
Common misunderstandings with Virginia’s Buyer Brokerage Agreement Law
Common Misunderstanding #1 – All buyers are required to sign a buyer agreement. Not true. Buyers are not required to enter into a buyer agreement with a licensee in Virginia. Under Virginia law, no residential property may be shown to a customer unless there is a written agreement between the person showing the property and the person requesting the showing, designating the licensee as the buyer’s agent. The showing requirement applies only to residential property and only to real estate licensees ("All individuals, sole proprietorships, partnerships, limited liability companies, corporations, registered trade names, and any other entity licensed by the Real Estate Board.") Common Misunderstanding #2 – Buyer agreements must contain an unfettered right to terminate. Under Virginia’s broker-client relationship law, the written buyer agreement must contain the terms of the contract including when the agreement is to begin and end. Thus, the buyer must sign a written agreement, and the agreement must specify the start and end dates of the parties’ relationship. However, the contract is terminable by either party without prejudice on the date stated in the agreement. The Broker-Client Relationship law is not concerned with the efficiency of our real estate industry. The contract law in Virginia includes the "freedom to contract." In other words, parties are able to negotiate the terms of their contract. Parties can negotiate the amount and type of consideration paid to a broker and the duration of the relationship. Virginia’s broker-client relationship law does not require a "free look". Buyers are encouraged to use their special skills in negotiations with the broker. The standard practice is not to sign the contract if you do not want to be obligated to work with that particular broker for a particular length of time. Common Misunderstanding #3 – My Buyer Handout is a Buyer Agreement Not necessarily. A purchaser "handout" is not a written buyer agreement because it does not contain terms setting out the beginning and ending dates of the relationship. The purchaser must have signed a written agreement with the licensee setting out the dates of the respective obligations. The handout does not establish the relationship as required by Virginia law. In such a case, the purchaser has given no consideration to the licensee, showing the property could get interesting. For example, what happens if a purchase offer is presented by someone else first? Common Misunderstanding #4 – I cannot represent a buyer unless they sign a buyer agreement Not true. A broker can show property to customers who have not chosen to employ them, however, the employment of a real estate broker by the customer must take place prior to the presentation of an offer of purchase and sale. Therefore, the presentation of the offer must be anticipated and the buyer must have employed the broker prior to the presentation. Once the offer is presented, as a matter of law, the buyer must have employed an agent. Common Misunderstanding #5 – The realtor contract law is designed to protect the broker rather than the owner. This law is designed to protect the parties to a contractual agreement. The law works equally for buyers and sellers who will become clients of the broker when they have entered into an employment agreement. The law does not say anything about protecting the clients from bad sales practices. Existing laws and regulations govern that matter.
New Developments and Trends
In recent years, Virginia has experienced a growing trend of redefining the traditional roles of the real estate broker and the duties owed by the broker to both the principal and the agent. This trend is evident in legislation enacted by the Virginia General Assembly, as well as through land use policies that encourage the practice of "unbundling," which allows buyers to select individual services from a variety of providers.
Virginia’s General Assembly has moved toward limiting compensation to real estate agents who are working with a buyer only. For example, in 2017 the SBA weakened the definition of "cooperating broker" in the Commission Rule 1.4 (Comparison to the previous definition) ("Rule 1.4") at § 18 VAC 135-20-190. The old definition required the cooperating broker to "have competed effectively with other owner-brokers to procure the person with whom the intermediary cooperated" and amended the definition to eliminate these requirements. Id. This change made it easier for an agent in the MLS to function without acting as the cooperating broker in terms of procuring the buyer for the listing. Thereafter, in 2018 the SBA eliminated the line in Rule 1.4 that would otherwise have required that the cooperating broker to actually have competed for the buyer.
New Rule 1.4 provides that a cooperating broker cooperates with the listing broker "for compensation or the expectation of compensation through an argued-to-be cooperative agreement of compensation between a property owner-broker and the listing broker." In another words, the cooperating broker does not have to actively compete for a buyer. Rather, the prospective buyer can simply select any, and perhaps each , agent he/she finds on the MLS via the internet. For the listing broker, this change may mean a reduction in commission when the seller engages an agent willing to discount the listing commission. On the other hand, these changes also assure good representation for the buyer.
The change to Rule 1.4 was certainly influenced by the growth in technology, in particular the pervasive presence of internet based platforms like Zillow and Trulia. These two platforms offer information about listings to various consumers and agents. They also serve as search engines where prospective buyers can search for agents in their area. The results of the search identify agents based on parameters set by the search engine, while other online directories list a wider range of agents. In most cases, the search is based only on the number of transactions that were closed during a specified period. This is not necessarily a measure of competency.
Home buyers increasingly find agents outside their geographic area through search engines. In its article titled "Platform Competition in Real Estate," the real estate technology company, Redfin, purportedly opines that these changes will encourage a shift towards an unbundled model of real estate brokerage. Redfin argues that this model will help buyers save money. But it is doubtful that this analysis takes into account the potential liability consequences under the UPC for failing to adequately supervise agents in other jurisdictions.
One thing is clear; the manner in which homes are bought and sold in Virginia has changed dramatically over the years. The trend towards limiting the duty of agents associated with the sale of real estate means that, as always, buyers need to conduct their own due diligence.