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Markers in Time

Markers In Time - Legal Hotline

Every adult can pinpoint moments in time when their life made a shift. It may have been for the better and it may have been for the worse but it was an event so consequential that no matter the years that pass, the moment remains tall among a lifetime of memories and following that event, life was never the same again.

The person, affected by the event, also changes. The change may be in response to a change in surrounding people, locations or comforts. More fundamentally, however, change in outward factors mark a significant change within the person. 

As dramatic as it seems, the Washington real estate community is evolving through two industry-changing events. Someday, timeline references will find industry members saying “I was selling before buyer brokers used agency agreements” and that will sound as foreign as if a broker today said, “I never use a listing agreement when I represent sellers.” The future will also find new brokers saying “really, you used to give sellers a copy of buyer’s inspection report? Why would you ever do that?” In the future, industry members will look back and remember when our industry culture shifted and use of buyer agency agreements became common place and proper utilization of inspection contingencies became routine.

Recognizing the enormity of both changes to folks who form the foundation of our industry today, I am heartened to remember that in my tenure within the industry, I have already witnessed REALTORS® embrace change and evolve to produce better outcomes for consumers and themselves. On a single day in 1997, Washington real estate agents transitioned from representing sellers exclusively to representing buyers and sellers alike and in some cases, both. This required education, industry-cultural shifts and a change in the words and actions delivered by real estate agents. REALTORS® made the necessary changes and now, when I teach agency, I often begin class with a phrase like “back in the olden days, when all real estate agents represented the seller exclusively and every buyer was without representation...” the statement sounds odd because, notwithstanding it was the way it had always been, it was wrong and the industry needed to evolve.

Similarly, in 2007, the Washington real estate industry chose to shed real estate forms unique and familiar to real estate agents in isolated communities for the benefit of embracing a single set of statewide forms. This enabled an industry, built on cooperation, to cooperate across the state, to draw from resources contributed by members in every market, to produce a single set of forms that reduce liability for all industry members and create better contracts for consumers. The process was brutal in 2007 as long-time industry members grappled with changes not only in the forms but also with fears of what this meant to local control and decision-making. But today, we have forms that industry members use competently to create contracts that cover important issues and create binding agreements, treating both parties fairly.

Just like they did with both of these industry-changing events, REALTORS® will confront changes in rules surrounding selling office compensation and changing practices associated with buyer inspections. They will evolve through “education, industry-cultural shifts and a change in the words and actions delivered by real estate agents”. On the other end, we will be an industry that delivers improved services to consumers and reduces risk to industry members who no longer “work for free” or draft contract language describing unknown activities.

Why Buyer Agency Agreements Will Become Commonplace

Like it or not, industry norms relating to disclosure of selling office compensation are changing. In some parts of the state and in some franchises, the changes are occurring more rapidly than in others. The changes will, however, drive a change that has been needed within our industry for generations. The change demands that brokers begin utilizing buyer agency agreements in their formation of agency and working relationships with buyers.

The transition we are witnessing will create transparency for consumers as to who pays compensation to real estate brokers and the amount of compensation paid. Although you can still visit the doctor or hire a stock broker without the slightest clue as to the debt you are incurring, most industries reveal their own price tag so a consumer can shop for the product they desire. With that, car manufacturers, for example, are able to sell affordable entry level cars and outrageously expensive luxury vehicles. Similarly, lawyers come in a wide range of hourly rates and billing practices and a consumer should select a lawyer based on quality of service as compared to the rates charged. Plumbers, electricians and contractors bid work they hope to perform so the consumer can evaluate cost versus benefit in hiring essential services. Similarly, real estate consumers will begin to have information available to them on the front end of a transaction that allows them to evaluate whether a particular home is affordable to them based not only on the price tag of the home but also, based on the closing costs the buyer will encounter to complete the purchase.

In the foreseeable future, consumers will be shown, in writing, the compensation a seller offers to pay a buyer’s broker for the service of bringing a ready, willing and able buyer to the seller. Sellers will be given the opportunity to reward that service handsomely or not at all, in seller’s discretion. The offering will indicate to buyers whether the property is available to buyer based on the costs buyer will encounter to purchase the property versus the assistance buyer will receive throughout the process of purchasing. If a seller offers little to no compensation to a buyer broker, chances are good, buyer brokers will be instructed by their clients not to show the property. Why and how will this happen?

Washington law requires a buyer broker to show buyer any property suitable to buyer for which there is a written compensation agreement, unless the parties agree otherwise. This means two things. First, it means that a real estate broker is not required to introduce buyer to any property for which seller makes no offer of compensation. Second, it means that buyer and buyer broker may negotiate the minimum compensation for which buyer’s broker will work and if a seller offers less compensation, buyer and buyer’s broker can agree that broker will not show seller’s property. Those negotiations should occur within the context of completing a buyer agency agreement.

Statewide Form 41A is the buyer agency agreement utilized most often in Washington. It allows brokers and buyers to form a written agency relationship that allows both buyer and broker to terminate the relationship if the relationship is not working although it preserves compensation to the broker if buyer attempts to terminate after broker has already delivered the services required of broker.* It also allows buyer and broker to agree to the compensation that broker will receive in exchange for providing Real Estate Brokerage Services to buyer.

Paragraph 8 of Form 41A is the compensation provision. The boiler plate language of paragraph 8(c) says that any compensation paid by seller, to buyer’s broker, will reduce the compensation owed by buyer. Blank lines provided in paragraph 8 allow buyer and buyer’s broker to agree to the amount of compensation broker will receive in exchange for assisting buyer and also provide space for buyer and buyer broker to agree that broker will not show properties if seller offers less than the agreed amount of compensation. This agreement may be essential to buyers who do not have the cash resources to pay for the services they require in completing a real estate transaction. There is no point in broker showing property to a buyer that buyer cannot afford to purchase because buyer will owe buyer’s broker more than buyer can pay. Statistics show that most buyers value the services offered by real estate professionals and choose representation over savings that may be found in a do-it-yourself real estate purchase. 

While that is true, it is equally true that traditional real estate lenders will not allow a buyer to pay compensation to a buyer’s broker from the proceeds of buyer’s loan meaning that the only way a buyer can “purchase” the real estate services buyer requires is if seller builds that compensation into the purchase price and pays buyer’s broker from seller’s proceeds.

This dynamic is unlikely to change any time soon, even though transparency associated with buyer broker compensation is evolving. This means that buyer brokers must start educating buyers and ensuring compensation, from their first meeting, by utilizing buyer agency agreements. Brokers would not consider helping a seller sell a home without first obtaining a listing agreement. A buyer broker’s services to a buyer are equally valuable and should not be given away until buyer has expressed, in writing, a commitment to paying for those services. Without that agreement, buyer broker is not only offering to work for free, buyer broker is offering to pay buyer to let broker work with buyer because broker will be contributing his/her time, gas, intellectual resources and energy to buyer’s purchase efforts.

With the buyer agency agreement in place, buyer and broker can establish parameters around the properties that broker will introduce to buyer and buyer can proceed boldly into negotiations with seller seeking closing costs sufficient to pay buyer’s obligations to buyer broker. While I am confident this transition will ultimately yield better outcomes for buyers and brokers alike, I am equally aware that the industry faces this transition with trepidation. Use of buyer agency agreements is not something we, as an industry, have historically embraced. Use of buyer agency agreements, however, is about to become a practical necessity. Because of that, brokers will get education around how to use the form and industry practices will adapt so that conversation around and execution of buyer agency agreements becomes as common as conversation and execution of listing agreements. In both cases, brokers are contracting for the services they will provide in exchange for the compensation they will receive. This industry shift is long overdue.

Proper Handling Of Buyer Inspections and Requests for Seller Concessions.

Recently, the statewide Form 35 (the Inspection Addendum) was modified to prohibit buyer (or buyer’s broker) from delivering buyer’s inspection report or any of its pages to seller without seller permission. This is another long overdue change in industry practices. While some brokers believe this practice enables sellers to conceal known defects, the law requiring seller disclosure has not changed. Sellers are still required, as they have always been, to disclose known material defects based on both common law and statutory law, starting with the Seller Disclosure Act.

What this forms change actually corrects, is the ill-conceived practice of taking a seller granted privilege allowing buyer to inspect seller’s home and weaponizing it against seller. When a buyer obtains a report from a buyer’s inspector, that inspection report is a collection of opinions held by the inspector regarding the condition of seller’s home and potential changes buyer could make to improve seller’s home. It behooves inspectors, in delivering these reports, to identify any potential issue that could be associated with seller’s home so as to reduce liability to inspector, after closing. Consequently, inspection reports are often useful in identifying some issues in need of immediate attention and “educational” only, and even hyperbolic, with respect to others. But, when a seller receives one of these inspection reports, it has the effect of hindering seller’s ability to sell to a future buyer without encountering expense in refuting erroneous or hyperbolic conclusions or alternatively, reducing the value of seller’s home in light of the inspector’s conclusions regarding the condition of seller’s property. It is because of those negative consequences to seller that so many buyer brokers have encouraged buyers to deliver the inspector’s report to seller with the accompanying argument that seller can yield to buyer’s inspection contingency demands or face the daunting task of finding another buyer while shackled with buyer’s inspection report.

While this change is necessary to preserve sellers’ willingness to allow buyer inspections, the change will force brokers to alter past practices in drafting buyer requests for seller concessions. This consequence dramatically improves the industry for brokers and consumers alike! 

Historically, buyer brokers have drafted buyer requests for repairs (Form 35R) by attaching a page or two from the inspector’s report identifying a problem that inspector noted and then instructing seller to hire further investigation and correction of the issue. When a seller agrees, seller is then vested with full authority to select the expert who will conduct further investigations and determine needed corrections, if any. The result of this is that too often, seller delivers by hiring a specialist who reaches conclusions that do not conform to buyer’s expectations based on the urgency and crisis created in buyer’s mind by discussions with buyer’s inspector. The reason inspection requests are drafted in this way is because real estate brokers are not specialists with respect to the problem or the solution identified by inspector. Since brokers cannot diagnose the problem or the solution, their suggestion to buyer is that buyer surrender the issue to a specialist. That is appropriate. The problem is that our industry has fallen into the habit of surrendering buyer’s inspection contingency to a seller-selected specialist who naturally places immediate cost savings over long-term sustainability. That is the disconnect between buyer expectations and seller deliveries.

Rather than surrendering buyer’s inspection contingency to seller-selected specialists, buyer brokers should be assisting buyers to consult a buyer-selected specialist to determine the work and costs associated with the work, necessary to correct problems identified by buyer’s inspector. This means that during the inspection contingency, buyers should be bringing contractors into seller’s home who can diagnose problems identified by the inspector and suggest repairs, along with associated costs, sufficient to resolve the problem for buyer’s long-term use. Armed with knowledge provided by buyer’s chosen specialist, buyer can then negotiate either a price concession or seller payment of buyer closing costs in the amount of the repair so that buyer ends up with that sum following closing and can hire the contractor to make the repair. In the alternative, buyer can ask seller, via the Form 35R, to hire the identified contractor to make the repairs identified on the contractor’s bid. Either way, broker is removed from the task of identifying the solution to a problem buyer’s inspector identified and buyer is empowered to control the solution to the problem. Seller is equally advantaged by the ability to apply a purely economic analysis to the request buyer makes, free from stressful calculations associated with finding a contractor they can hire to make a repair they may or may not agree is needed.

The nuts and bolts of the inspection contingency addendum (Form 35) make all of this background work possible although brokers may need to develop their understanding of the form and shift the time periods associated with completion of the form. The initial inspection period (ten days by default) requires buyer’s conformity to the Home Inspector statute. The statute allows buyer to personally conduct an inspection or buyer may hire a licensed, whole home inspector only to conduct the inspection of seller’s home. Additionally, during this period, buyer may bring a licensed electrician, plumber and engineer into seller’s home to inspect the electrical, plumbing and structural components of seller’s home. Then, during the “Additional Inspections” period (five days by default) buyer may bring a “specialist” into seller’s home to diagnose problems and suggest solutions. During the Additional Inspections period, buyer may, without additional seller consent, bring contractors into seller’s home to propose solutions to the problems identified by buyer’s inspector. Buyer must trigger the Additional Inspections period by timely claiming the additional time and providing the inspector’s recommendation for additional investigation.

What may change, within the industry, is the time devoted to each of these distinct inspection periods. Rather than allowing ten days for the whole home inspection and five days for the Additional Inspection period, brokers may suggest to buyers that they reduce the initial inspection period and increase the Additional Inspections period so as to allow greater time to get contractors into seller’s home, responsive to the conditions identified by buyer’s inspector. Moreover, the total time devoted to the inspection contingency may increase, particularly within local markets, depending on the availability of inspectors and contractors.

Change is never easy and there is no way that these two major changes within our industry will be easy. Nevertheless, we will emerge, as an industry, better for both of these difficult transitions. Seek education around both issues. Discuss in office meetings, presentation skills for introduction of a buyer agency agreement and lists of contractors who are responsive to requests for bids. On both sides of a transaction, display grace as the other broker works through the challenges associated with learning new skills and providing more competent service to consumers. Soon enough, these changes will be behind us and our industry, strong and resilient, will be ready to embrace the expected, unexpected, and adapt to future needs and demands of our clients.

*Although any real estate agency agreement is actually a contract between a consumer and a firm, this article describes the buyer agency agreement as a contract between buyer and buyer broker for ease of conversation. In fact, a buyer agency agreement is a contract between a buyer and a real estate firm in which the firm typically appoints a sub-agent to represent the buyer. The same is true of all listing agreement relationships between sellers and real estate firms/brokers.