With the news coming out after the NAR court case, I’ve heard some questions from my sellers who ask me, “Why should I consider including Buyer Broker Compensation when I sell my house?” Here are some great reasons why having a well-represented buyer is a benefit to the seller.
By Annie Fitzsimmons, WR’s Legal Hotline Lawyer
It is pretty common for lawyers to groan, internally if not out loud, upon discovery that “the other side” is unrepresented. When a person represents him or herself in litigation or in a contract negotiation with a professional lawyer on the other side, the lawyer knows that the case is going to be more challenging. The lawyer knows they will spend more time explaining basic concepts and procedures than they would if the other party was represented. The unrepresented party’s lack of familiarity with the practice of law makes the job for the one lawyer in the case harder.
For different but similar reasons, the same is true when one party in a real estate transaction is unrepresented. The job of the one broker is challenging and the liabilities for both the broker and their client increase. This article will focus on some, but certainly not all, potential impacts to a seller when the buyer is unrepresented. There will be similar impacts to a buyer when the seller is unrepresented and there are unmistakable impacts to the one broker in the transaction, but all of those challenges will be left to another day.
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WHAT CAN HAPPEN IF A BUYER IS UNREPRESENTED?
AN INCREASED LIKELIHOOD OF SALE FAILURE
IS SELLER’S HOUSE THE RIGHT HOUSE FOR BUYER?
This seems like a basic question but ultimately, it is the most important question to the success of every real estate transaction. Has the buyer seen enough of the market to know that seller’s house is really, truly, the home for buyer? Buyer brokers know the value in having a buyer who knows the market and appreciates the value they see in seller’s home. When a buyer has seen enough of the market to know that seller’s home is the home they want, buyer is more likely to stick. When challenges arise in a transaction, and challenges always arise in a transaction, the buyer who knows they really want seller’s home is far more likely to apply the grit it takes to see the transaction all the way through to closing. A buyer cannot typically appreciate the value of seller’s property without first being exposed to enough of the market to know what buyer does not want and how special it is that buyer has found something they do want. If a buyer contacts listing broker and says: “I am unrepresented and I want to buy your listing” then listing broker writes the offer. But has buyer seen other properties? Does buyer appreciate the value of seller’s home? Does buyer know how important it will be to make the transaction work because there is nothing else buyer would rather purchase? Listing broker cannot show other homes to buyer to test buyer’s mettle regarding seller’s home. Seller would not like that. So listing broker must simply write the offer and hope that the buyer has sticking power in the transaction.
IS THE BUYER QUALIFIED?
A competently represented buyer is typically pre-approved by a competent lender before the buyer makes an offer to purchase seller’s property. The buyer’s financial resources are confirmed so that when buyer enters a purchase agreement with seller, buyer’s qualifications to purchase the property are confirmed. Buyer’s offer should make clear to seller, the type and scope of loan buyer must obtain, if any, in order to purchase seller’s property allowing seller to evaluate that against other potential buyers or against the option of waiting for a more qualified buyer.
Moreover, the competently represented buyer is likely working with a lender who has a reputation within the community for being able to successfully close transactions. Is the lender known to the listing broker? Will the lender respond to the listing broker when the listing broker seeks confirmation regarding buyer’s purchasing power and the status of buyer’s loan? Does the lender have proven ability to solve problems?
There are so many moving parts involved in a home purchase and buyer’s lender controls many of them. Selection of a good lender is the first critical decision every buyer will make. When an unrepresented buyer wants to purchase seller’s property, and approaches seller with a lender letter in hand, all that seller’s broker can do is describe broker’s experience, if any, with the lender. Listing broker is in no position to counsel buyer as to the wisdom of getting a second opinion from another lender. Seller’s transaction will depend upon the competency of a lender selected by a buyer who likely has no familiarity with lenders and no experience that leads to an understanding of the importance of a competent, communicative lender.
CAN BUYER COORDINATE THE BASIC REQUIREMENTS OF THE TRANSACTION?
To close a transaction, buyer must successfully navigate the maze of demands stemming from financing, escrow and title. Each presents its own challenges and transactional success demands coordination of all three in a time sensitive, stress-filled environment. The unrepresented buyer is likely unfamiliar with the logistical requirements of each industry partner and has no experience serving as the coordinator who brings all three together. That is the role of the buyer broker.
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Financing. When a sale is financed, the buyer must make timely loan application, submit all documentation required for loan processing, evaluate and respond to demands from lender, approve ordering of the appraisal and communicate with escrow, seller and the title company so that loan funds arrive in coordination with the other closing requirements. That is a lot even when everything goes smoothly. When the lender requires a document regarding buyer’s employment from a decade ago, unanticipated government records or information regarding seller’s ownership of the property, buyer often needs assistance. When an appraisal is late because no appraiser accepts the assignment or comes in low because of a misunderstanding regarding comparable sales or requires the completion of work orders on seller’s property, few buyers will know how to respond or have the expertise and resources to address the problem. When the lender says that loan funds will not make it to closing on time because buyer’s loan is stuck in the pipeline, an effective buyer broker knows how to squeeze the pipeline. The unrepresented buyer, who has no personal relationship with the lender and no understanding of the pressure points in the lending process, has no ability to anticipate, prevent and solve the myriad problems that will go wrong in the lending process.
Title. A title company typically requires little input from a buyer. In most transactions, the preliminary commitment for title is ordered when the property is listed and it is up to seller, with the assistance of listing broker, to ensure that all title insurance issues are addressed as they relate to seller’s ownership of the property. But what about the transaction where buyer’s name or marital status triggers a concern for the title company? Will an unrepresented buyer know how to get the information necessary to address allegations that buyer has judgments or other debts buyer denies? Will buyer understand the importance of disclosing to lender that buyer is married, even if purchasing in buyer’s separate estate, so that when the title company discloses that buyer has a spouse, that information does not derail the transaction? A competent buyer broker should anticipate and prevent many problems of this nature but when problems inevitably arise, buyer broker is typically the person relied upon by the parties, lender, title and escrow as the problem solver. If the only broker in the transaction represents the seller, seller’s broker will be called upon to solve problems associated with the buyer’s side of the transaction. To the extent seller’s broker can accomplish the required outcome without infringing on broker’s duty of loyalty and confidentiality to the seller, listing broker will do so. Resolution of some problems, however, requires an advocate for buyer. Listing broker cannot become buyer’s advocate.
“Will an unrepresented buyer know how to get the information necessary to address allegations that buyer has judgments or other debts buyer denies?”
Escrow. Every transaction requires coordination through escrow of all lending, title and contract performance issues. An escrow offcer typically requires communication with buyer throughout the transaction to learn details such as the identity of buyer’s lender, the manner in which buyer will hold title, how buyer will sign documents, the amount of funds required from buyer and how those funds will be delivered along with other important details. Without a buyer broker in the transaction, escrow will be dependent upon receiving accurate, timely information directly from buyer.
INCREASED LIKELIHOOD OF LIABILITY IF SOMETHING GOES WRONG
WHAT HAPPENS WHEN THE BUYER DOESN’T BELIEVES THEY GOT A FAIR DEAL?
In almost every transaction where a residential buyer is unrepresented, seller’s broker will draft the purchase agreement. Buyer will identify the terms that are important to buyer but seller’s broker, with duties of loyalty owing exclusively to seller, will draft the purchase agreement. In this scenario, an unrepresented buyer may not include contingencies for inspection, financing, title review, homeowner association status and other aspects of the transaction that would be important to most buyers. If buyer does not ask to include transaction terms benefitting buyer, seller’s broker cannot prompt buyer to include them. To do so would be contrary to broker’s duty of loyalty to seller. If buyer ultimately forfeits earnest money because buyer did not include basic contingencies in the transaction, that will increase the likelihood that seller is sued by buyer for recovery of the earnest money. Although seller may have done nothing wrong, if seller takes thousands of dollars of earnest money because the purchase agreement lacked provisions considered basic to any represented buyer, there is an increased chance of seller being sued by buyer for recovery of those funds.
If an unrepresented buyer pays a purchase price that buyer later regrets, is there an increased likelihood of buyer suing seller? Buyer may argue that seller’s agent, acting on behalf of seller, misrepresented the value or condition of the property and that buyer relied on seller and seller’s agent in agreeing to the price demanded by seller. Buyer’s reliance may not be justified, but without a broker representing buyer in the transaction, seller cannot defend by arguing that buyer actually relied on buyer’s broker for advice regarding value.
DOES THE BUYER KNOW HOW TO EXECUTE THE REQUIREMENTS OF THE PURCHASE AGREEMENT?
Computation of time. The purchase agreement establishes the manner in which time periods created by the contract are calculated. There is language establishing the first day of each time period, whether the period includes calendar days or business days only and how the final day and time of each time period is determined. The “computation of time” provision is complicated and not intuitive. An unrepresented buyer must be able to interpret and apply the contract provision. If time periods are counted improperly by buyer, deadlines will likely be missed, resulting in waiver or expiration of contingencies and even, breach of contract. If a buyer is sophisticated enough to know they need help, the unrepresented buyer will likely look to seller’s broker for assistance. Even if seller wanted seller’s agent to assist buyer so as to keep buyer on track for closing, seller’s agent is limited in the help that can be offered. Seller’s agent cannot give the unrepresented buyer advice that would be adverse or detrimental to seller’s interests in the transaction. If seller’s broker tries to help but cannot actually advocate for buyer, that likely creates a greater risk for seller’s agent and by extension, seller. If a buyer breaches a contract and forfeits earnest money because buyer did not understand, for example, the difference between counting a five versus six day period, the unhappy buyer will be more likely to cast rather than accept blame. If seller’s agent was trying to help buyer in some limited way, buyer is more likely to argue that seller and seller’s agent caused buyer’s problem.
Importance of inspections, contractor bids and re-inspections. When an inspection contingency is included using the statewide forms, a buyer is given the opportunity to exercise due diligence as it relates to the condition of seller’s property. However, buyer must understand the importance of conducting due diligence and must know how to conduct timely due diligence or the contract terms will be meaningless. For example, a whole home inspection is typically only one step in buyer’s due diligence investigation. Buyer may also need to bring in specialists to investigate the roof, the plumbing or the electrical systems. Buyer may need to have a contractor visit seller’s property to provide a bid for correction of problems. Buyer may need to conduct research with the local permitting authority. When all of these tasks become overwhelming to the unrepresented buyer who is unfamiliar with local contractors and resources, what will the buyer do? Will the buyer give up and terminate the transaction? Will buyer give up and simply close the transaction, leaving discovery of important information regarding the condition of the property to happen after buyer owns the property and has only the recourse of litigation to address concerns? Will buyer again have an expectation that seller’s agent can give buyer the assistance buyer needs? Any of these outcomes would be undesirable to most sellers.
SELLER’S AGENT WILL BE EXPOSED TO THE UNREPRESENTED BUYER’S INSPECTION REPORT
It is important to understand the nature of a home inspection. While buyers undoubtedly benefit from learning a qualified inspector’s opinion regarding seller’s home, it should be clearly understood that an inspection report is just that. It is one inspector’s opinion of the condition of seller’s home. Moreover, while a good inspector’s purpose is to educate the buyer, every inspector has an overriding concern for protecting the inspector’s potential liability. This means that the typical inspection report includes the inspector’s opinions regarding seller’s home, written so that any potential problem is described as expansively as possible. Depending on the inspector, many warnings may given to buyer, even if the warnings are not accurate with respect to seller’s property. For this reason, the standardized forms used in Washington State prohibit delivery of buyer’s inspection report to seller unless seller consents to delivery. If buyer is unrepresented, however, who is going to open the home and be on-site with the inspector and buyer during the inspection(s)? In almost every case, it will be seller’s agent. Seller’s agent will be exposed to the findings, conclusions and opinions of buyer’s inspector. This means, effectively, that seller is exposed to those findings. If the sale should fail, seller will have to consider how to handle new information regarding the condition of seller’s home learned by exposure to the sale failed buyer’s inspector and inspection report.
If a buyer is intent upon being unrepresented and seller wants to sell to the buyer, there is likely nothing seller can do about buyer’s lack of representation. This article is not an exhaustive list of all the vulnerabilities that exist for a seller when seller’s buyer is unrepresented. Seller should consider these risks, however, and the potential costs associated with doing business with a buyer who is unrepresented as seller considers how to proceed.
As you can see, the risks and costs of working with an unrepresented buyer are myriad. A seller should think long and hard about whether they want to consider working with an unrepresented buyer.
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