What is an Agency Agreement? (and why do I need one?)

Last week I laid out my best advice for choosing a Buyer’s Agent. It’s shopping season again, I hope you’ve applied those lessons and have been interviewing agents. In this article, I will go into the actual Agency Agreement and what it is and what it isn’t.

Signing an agency agreement with a Realtor is kind of like getting married. You are now legally bound together and stepping outside of that relationship is going to land you in pretty hot water. There are ways out of the contract if you haven’t made a purchase yet, but for the most part, you’ll be dancing with the one that brought you: choose your agent carefully.

This is because of how Realtors are paid. An overwhelming portion of the active agents out there are paid a commission and nothing more. If they do all the hard work, find you a house and you run off to write a contract with another agent (who was then paid the commission the first agent earned), that would be a really unfair situation.

Types of Residential Agency

Residential real estate is somewhat straightforward when it comes to Agency Agreements. There are essentially three types that you’re likely to encounter: Buyer’s Agency, Seller’s Agency and Transaction Brokerage. A few archaic relationship types pop up really rarely, but unless you get into commercial real estate, it’s unlikely that you’ll ever see them.

  • Buyer’s agents tend to exclusively represent buyers. Their responsibility is to their buyer, and anything the buyer says in relation to the home buying process must be kept in the strictest confidence. It’s very rare that a true Buyer’s Agent will have any listings, they typically work with a Seller’s Agent and help the Buyers who call in.
  • Seller’s agents are the opposite side of the coin. Also known as “listing agents,” seller’s agents are the people on the yard signs you’ll soon see popping up like so many summer weeds. Their responsibility is to the Seller.
  • Transaction brokers (aka. dual agents, limited agents or facilitators) only represent the transaction. Essentially, they’re meant to be a neutral arbitrator between a buyer and a seller. Except in real life, these people were probably Seller’s agents to begin with, so they’re going to be slightly biased unless they’re robots. Bring your own Buyer’s Agent.

What Agency Agreements Mean to You

Agency Agreements have different meanings depending on whether you’re buying or selling, but they all carefully spell out what protections you have, as well as what you owe the Realtor(s) involved.

Buyer’s Agency 101

A Buyer’s Agency Agreement is between a buyer or multiple people buying a property together and their real estate agent. They’re typically only used in residential transactions.

You get:

  • A legally binding agreement with a real estate specialist who will represent you during your purchase.
  • A guarantee that your Buyer’s Agent is putting your interests above their own.
  • Guidance through the home buying process, from loan procurement to the closing table.
  • Advice on writing offers that will get accepted, even in a superheated market.

Your agent gets:

  • A legally binding agreement that ensures they will be paid if they help you find the right home and get you all the way to the closing table.
  • Protection against other agents who may try to (unethically) poach clients unfamiliar with the buying process.
  • A plainly laid out process for challenging the behavior of other members of local associations that avoid court.

Other important points:

Although a Buyer’s Agent is unlikely to save you money on your purchase, they will save you time and can help prevent problems before they happen. Not only are Buyer’s Agents experienced in the market’s expectations, they often also know how to keep the ship sailing during the 30 to 45 day window between your contract signing and closing.

How About Seller’s Agency?

A Seller’s Agency Agreement is between a seller or multiple people selling a property together and their real estate agent.

You get:

  • A legally binding agreement with a real estate specialist who will represent you during your sale.
  • A guarantee that your Seller’s Agent is putting your interests above their own.
  • The same kind of protection a lawyer affords their clients when it comes to your financial status. They are still legally required to make certain disclosures about the property, however.
  • A trusted guide to help you through the selling process, including helping you evaluate different offers.

The two most valuable services they provide, in my opinion, are shielding you from excessive repair requests and helping you to evaluate multiple offers.

First, the excessive repairs: no home is perfect, not even a new one, so buyers are likely to want something fixed — but if you don’t have much experience in this area, what sounds completely reasonable can become a financial catastrophe. Your agent can prepare you for what is involved in the request and you’ll be able to decide if you truly want that Buyer.

For example, when I sold my first personal home in 1999, the buyer wanted me to pay for a structural engineer. I did not want to pay for a structural engineer, especially after the home inspector gave my house two thumbs up. But they insisted and finally I gave in. What I didn’t know at the time was that it could have opened up a whole new can of worms had he found anything that caused a raised eyebrow. Fortunately, he didn’t, but had he tried to hold my 100-year-old house up to modern construction standards, I would have been in deep financial trouble.

As for the second item, evaluating multiple offers: It’s looking like we may be going back into a hot market this year, or at least one that’s short on inventory and long on buyers. Either way, this means we’re likely to see an uptick in multiple offers on the same house at the same time. When you get three offers at full price, it can be hard to know which one to accept. Do you choose the FHA buyer going through US Bank? How about the conventional buyer with Bob’s Backyard Mortgage Co.?

Your agent will know what to expect from each of these programs and can recommend actions based on their experience. Some banks are easier to deal with than others, some lenders are better closers than others.

Your agent gets:

  • A legally binding agreement that ensures they will be paid if they help you sell your real estate.
  • Peace of mind that they will be the only agent listing your property for sale (in a residential setting).
  • A plainly laid out process for challenging the behavior of other members of local associations that avoid court.

Other important points:

Your Seller’s Agent can turn around and become your Buyer’s Agent on your next home, but you’ll need a new agreement. Since you’re now a buyer, the deal is different. If you’re concerned about having your Seller’s Agent doing double duty, ask that they bring a dedicated Buyer’s Agent along for the ride. This will help reduce the workload for your original agent and give you the peace of mind of having an expert on your side.

Transaction Brokerage: The Basics

As noted above, a Transaction Broker is nothing more than a arbitrator between two parties in a real estate transaction. They’re meant to have no emotional input and to simply do the paperwork necessary to close a deal. There are whole real estate franchises built on the concept of Transaction Brokerage, but whether you’re the Buyer or the Seller, you’re generally getting a raw deal. Part of what makes a Realtor so valuable is their experience in the market, turning to a Transaction Broker seriously limits your access to those insights.

When Good Agency Agreements Go Bad

You’re not always going to get on with the Realtor you’ve chosen. Sometimes this is because of personality conflicts, sometimes you just simply see the world very differently. Either way, it’s important to know the consequences of your actions, should you choose to break your Agency Agreement.

Always check your actual documentation to verify, since local and state laws can vary wildly. But, in general, here’s what to expect in these common scenarios:

Using a different Agent while your original Agency Agreement is in place. Hopefully, you disclosed that you were formerly working with a different agent before you picked up the one you’re about to close with. If you didn’t, you’re headed for a bad place. Your new agent may lose out on their commission (it was their duty to ask, so if you lied to them, it’s even more complicated) and may have to go through arbitration. You will be held in violation, which can also cost out the nose.

Waiting for a listing to expire so you can make an offer directly to a homeowner or buyer you met because of a Realtor. This is kind of the worst thing you can do to your Realtor, and frankly, that of the other party. The civil penalties can be stiff, especially because of the amount of money that you will owe those agents who spent all their free cash advertising, escorting people to your home and so on. Don’t be that guy, that guy now has both legal and financial problems.

Deciding that you’re not ready to buy or you’re not getting on with your Realtor. When you can directly say to your agent that you’re just not clicking or that you had only recently found out that you’re about to have a major life change, you’ve earned the respect of everyone involved. Asking to be released from your contract is a simple process. Just submit a request in writing, call your Realtor and tell them what’s up and come back around when it is really time to buy — if you want.

Letting your Agency Agreement expire. Agency Agreements do not typically auto-renew, so once it’s expired, it’s expired and you’re free to move on with your life. Again, if you were to decide to purchase a house your Realtor showed you while you were under the terms of the agreement, you may owe them a commission. Check your paperwork to be 100 percent sure, but in most cases, you’re free to be.

Remember that Realtors are a type of salesperson and they regularly deal with rejection. They will be ok if you break up with them. But you need to do this in writing and, preferably, in person. This way they can provide you with additional documentation that proves the two of you just weren’t meant to be. 

I’ve had a few that just weren’t that much into me. It’s ok. I’m not for everybody. If someone came to me and wanted out of their Agency Agreement, I made it happen. Simple as that. I even got a few referrals from that kind. People can surprise you.

The Bottom Line: Agency Agreements Are Really Important

I’m not here to preach the gospel of Agency Agreements, but I am saying that you need an agent in your corner, if only to protect yourself from other agents. Mostly, Realtors are really ok people, but like anybody with specialized training, there will be a few rotten eggs that are constantly pushing the limits and trying to game the system.

Get yourself an agent you really click with, lock them in with an Agency Agreement and appreciate the things they do for you behind the curtain. You never have to know that your loan was almost cancelled or there was a title problem because your Realtor has your back and can fix some of that stuff on your behalf.

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