Sign a "Buyer Agency Agreement"? Why?

Realtors often ask potential new buyers to sign an “Exclusive Buyer Agency Agreements” prior to showing them homes. Naturally, most people are thinking: “there is no way I’m signing something with a Realtor I just met.” And it’s ok. Some surveys rank Realtors below used car salesmen when it comes it trust and honesty, so of course you are going to be skeptical. However, you should know that signing a Buyer Agency Agreement can be beneficial to you. But, before you sign, you should definitely be comfortable with the agent before signing an agreement with him or her. The following outlines how a buyer agency agreement can help you:

• First, it doesn’t cost you a thing. You pay nothing, yet you get professional advice on how to go about purchasing your home. Remember, the Realtor is to serve as your agent, meaning they should act and help you make decisions as if the Realtor is you and protect you to ensure you don’t go into any agreement that hurts you, at the same time find ways protect you. However, you could argue that you are indirectly paying for the buyer agent’s fees since you’re “writing” a check for the house. You could even extend that argument that you can save 3% on the house by bypassing you as the buyer agent and get that 3% discount. Sounds great, but that’s not how it really works. Buyer agents are not technically paid by the seller, but the listing Realtor. Meaning that before a house is on the market, the seller has already has agreed on a listing agreement with the listing Realtor set at a certain % of the sales price, typically 6%. If you have a buyer agent, then the listing broker pays the buying broker 3% of the 6% to secure a deal. Listing agents love it when you purchase a home directly through them. Why? Because the listing agent gets the full 6% commission AND he doesn’t represent you. Meaning that his job is just to have you sign the necessary paperwork but won’t have to protect you in any way since he is already serving as an agent of the seller. That means the selling agent doesn’t have to tell you that the foundation could be sinking, or that water damage in the basement could be serious. You can have a dual agency agreement, meaning the Realtor represents both the seller and the buyer, but is that really protecting you? Listing agents will even pretend to give you a 3% discount by not having a buyer’s agent, but this discount would have occurred regardless whether you had an agent or not. In fact, if the seller is so eager to quickly give you a 3% discount off the listing price, then buyer agents should be able to get you a bigger discount.

• Technically, agents aren’t representing you w/o a buyer agency agreement. This means that, by law, if you are visiting homes with an agent w/o a buyer agency agreement then the agent technically represent the seller and doesn’t have to protect you, the buyer. Of course this is not how the industry works. However, remember the possible problems I’ve identified in the previous bullet-point? Yes, the same thing could occur.

• You’re not hiring a chauffeur; you’re hiring a buyer agent to look out for your best interest. You’re hiring him for his knowledge, his experience, and his expertise. An analogy I’d like to make takes us back to the first time we used a computer. For most of us, a computer was a big, heavy, black & white machine that was considered “delicate.” During your normal usage, the computer would do funny things where it would just “freeze” or just stop working. The first time this occurred, you didn’t know what to do so you called someone for help and he told you to re-start your computer. Second time this happened, you didn’t know what to do and again you called for help to got the same advice. After a while, you’ve experienced these problems enough to know that you just need to re-start your computer to fix most of the problems. This sort of experiences is what buyer agents can help you with, except that it’s much more important because you don’t want to make a $700K mistake. You may only purchase and sell a handful of homes in your lifetime, but Realtors do this much more frequently and are experienced to help you sort through potential dangers. My belief is that an intelligent Realtor can make up for experience, and experienced Realtor can make up for lack of intelligence, but just make sure you don’t get caught in with a double-negative.

• Price – everything is about price. Every house has a price. You may hate the house, but I’m pretty sure that you will buy that house if the seller sold you that house for a $1. So, that’s what a buyer agent is here to do – or should do. Let’s say you have two homes, home A and home B. Both single-family homes A & B are in the same good neighborhood, has four bedrooms, three full baths, and the structure and floor plans are identical. However, home A has a new kitchen, new bathrooms, new hardwood floors, and a finished basement, but comes at the cost of $50k more than B. Well, $50,000 is a lot of money, so I’m definitely going to purchase B. It’s cheaper and therefore it has to be a better value; the houses are almost identical. Well is it? Possible, but not necessarily. What I like to do is take home B and add in costs for upgrades and then compare. For example. A new kitchen that has new cabinets, new gourmet stainless steel appliances, new tiles, and new granite countertop will cost $20,000. The new hardwood floors will cost another $8,000, new bathrooms will cost $3,000 each and $6,000 for the master bath. So far, that’s additional $40,000 required to make home B look like home A. We then add another $15,000 to finish the basement, which puts the price of home B higher than home A. Then, since home B isn’t updated, the owner did nothing to take care of the house to do the everyday maintenance such as caulking, paint touch-ups, and proper winterization, servicing, which means the house can break down much faster. So, it looks like $50,000 discount doesn’t seem like a good deal. While the Realtor can’t tell you exact pricing to make the homes identical, Realtors can give you ball-park figures to ensure that you’re not excessively overpaying for the house. But then you have to answer the question: do you want a home, or a house? A home is your home, as in “there’s no place like home.” A house is an investment, a value proposition. Understanding what you want will save your significant amount of time.

• Price II – negotiations. As I mentioned in the first bullet-point, if the seller is eager to give you a 3% discount very quickly then buyer agents should be able to do better. Realtors are experienced in negotiating on the price and can help you negotiate the best price for the house. We have all the previous sales data and use that to argue your position. And in some cases, we can even predict whether the buyer has room to negotiate at all with you.

• Further, buyer agents will help you identify different things to help you better understand the houses you visit. For example, how to identify the overall quality of construction by checking the quality cabinets, hardwood floors – wide plank or standard, type of faucets they used. Additionally, I help my buyers better stand what could be occurring behind the walls. I try to leverage my two engineering degrees and my experiences as a developer to point out potential problems, such as the existence of polybutylene piping – which some insurance companies will not insure homes with polybutylene piping because of high failure rates. My goal here is to help you look at a house in a different light that can help you make an informed decision.
  

• Buyer agents also need to do the work to help understand YOU. After spending some time with the buyers, the agent should have a general understanding of what you are looking for. The agent may have new ideas that may help you, or help you eliminate existing ideas. I try to go even further. Once the buying agent understands what you are looking for, you’re desire to see homes go down significantly. It’s just part of the learning curve that occurs and you know what you don’t want in a home. At this point, let’s say you saw a home that looks very interesting but there are no photos of the property? In this case, I will drive to the house, take multiple photos of the place, and even put up a quick video on Youtube.com to help you get a better understanding of the property. Most of the time, that’s enough for my clients to know whether they want to visit the property or not.

So, after such a long thread about buyer agency agreements, when should you sign? First, a quick meeting or a discussion over the phone about what you’re looking for and how the agent’s experience can help you with this. Then, maybe go out and see a couple of places and see if the agent is someone you can trust and truly look out for your best interest. After a few times out, you should know if you’re ready to move forward with the agent. Besides, you can always part ways if you decide you don’t want to work with the agent.