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CRES Risk Management Webinar: The Dangers of Unrepresented Buyers

In this webinar, Dave Miller, Regional Vice President with Fidelity National Home Warranty, and Kathryn Holbert, a Nevada-based real estate attorney, talk about the challenges of working with unrepresented buyers.

Claims from unrepresented buyers are on the rise. This is due to the recent class action lawsuits about how commissions are paid in the real estate industry. 

This informative webinar covers:

  • Unrepresented buyers and the Buyer Broker AgreementQuestions listing agents must ask to navigate the risks
  • Unrepresented buyers from the sellers perspective
  • Why listing agents shouldn’t print out or help buyers complete offer forms 
  • Potential dual agency issues to watch out for
  • Ways to handle the buyers’ commission

To find out more, watch the full webinar here:

Dave Miller:

Welcome, everybody. Dave Miller, Fidelity National Home Warranty. I’m joined today by Kathryn Holbert, attorney in the state of Nevada.

On behalf of CRES Insurance with their flagship real estate E&O Insurance, and Fidelity National Home Warranty, we’d like to welcome you today for another risk management update.

Kathryn, you’re always on the pulse of what’s going on and you called me last week and said, “We probably need to do an update because we’re having some claims with unrepresented buyers.” Explain to us why suddenly this is an issue. I’m assuming it has something to do with the NAR settlement, but why is this different now than before? And what exactly is an unrepresented buyer?

(We’ll cover new issues with unrepresented buyers that real estate licensees in all states need to be aware of, but we will also address how to handle the situation if you are in Nevada as an example.)

Unrepresented Buyers Now Require a Buyer Broker Agreement

Kathryn Holbert:

It is becoming more and more of an issue now, and it’s directly related to the lawsuits, the class action lawsuits on how commissions are paid in the real estate industry. Changes are coming about because of the settlement that the National Association of Realtors® is finalizing.

Traditionally, the seller has paid both sides of the commission.

As a seller, you sign a listing agreement with, say, a 5, 4, or 6% commission, and part of that is shared with whomever represents the buyer. So, it was very easy for buyers to obtain representation and in fact, a lot of buyers’ agents would advertise “at no cost to you.” And to many consumers, they were never really certain how that all worked. And that was the reason for the lawsuit.

The sellers argued, “We don’t want to pay this anymore.” So now:

  • Part of the settlement actually requires that any real estate licensee that is going to represent a buyer does so under a written buyer broker’s agreement.

Buyer broker agreements have existed forever in various forms, but they have been very underutilized. And I would say probably 90% of the licensees working in Nevada have never used a buyer broker agreement before. But that’s going to be required because the payment is going to be required from the buyer. And so, the buyers of course are saying, “I don’t want to pay you. I can’t pay you. I’m just going to do this myself.”

So, an unrepresented buyer is a buyer that approaches the listing agent who is representing the seller. The buyer is not working with a real estate licensee of their own.

Questions Listing Agents Must Get Answered by Buyers

For listing agents contacted by a buyer, the agents now have to ask the buyer, “Are you represented by a real estate agent?” Because consumers don’t understand how things have changed, especially first-time home buyers.

So, a listing agent may get a call from a buyer saying, “Hey, I want to see the property.” And the listing agent responds, “Are you working with an agent?”

“Well, not really.”

“Are you being represented by an agent? Tell me what exactly is going on.” So that’s a conversation that you now need to have when you just get a call from somebody that says, “Hey, I want to see your property.”

So sellers’ agents now have to try to figure out if the buyer is truly unrepresented, or are they working with an agent and just don’t want to sign the agreement yet with them and want to see this house? What is actually going on is just your first step when you are the listing agent and get a call from a buyer.

Services Unrepresented Buyers Don’t Realize They Need from a Real Estate Licensee

Dave Miller:

You’re mentioning a big increase in unrepresented buyers. Is it mainly because they just want to avoid paying commissions, and they want to try to do it themselves? That sounds very dangerous.

Kathryn Holbert:

It’s very dangerous. Part of the big problem is they just do not understand how dangerous that is.

  • Being unrepresented makes it harder to write an offer. Buyers don’t have access to the various forms.

As the lawsuit was going on, there was a lot of media coverage saying no other country has such an expensive commission. And that is true. However, in most other countries, there is only one agent involved, just the seller. And if you want to buy a house, you approach the seller’s agent and say, “I want to buy this house,” and they write the offer and say, “Sign this offer.”  And that’s it.

There’s no negotiation. So generally, the house prices are higher in those other countries, and the process is harder. There’s nobody to help the buyer through all the steps. Really, if you’re looking at a transaction, the seller doesn’t have to do very much. They list their home, maybe do some repairs, some disclosures. That’s it.

  • The bulk of what has to be done in a transaction is done by the buyer, and they have to be able to communicate with home inspectors, appraisers, loan people, etc.

They just really don’t even know what they don’t know. That’s the scary thing with unrepresented buyers.

Challenges with Dual Agency

Dave Miller:

Do you think listing agents are picking up buyers by asking that, “Hey, you’re unrepresented, I can represent you as well”? I mean, we know dual agency is dangerous, but are you seeing that pattern?

Kathryn Holbert:

Yes, and actually, dual agency is allowed in Nevada. It’s not allowed everywhere. So, make sure you check your state’s regulations. There are a couple of different types of dual agency:

  • Pure dual agency: when exactly the same licensee represents both the buyer and the seller.
  • Dual agency but with different licensees: If you have two licensees that have the same broker, that is still technically dual agency because both the buyer and the seller are represented by the same brokerage, but they have different licensees.

I am very comfortable with the dual agency with different licensees under the same broker. That I don’t think is problematic on any level.

However, if you’ve got the same licensee representing the buyer and the seller, it becomes very problematic because it’s almost impossible to resolve those conflicts of interest.

And it really is not a good idea if the buyer is a first-time home buyer. They just don’t have enough experience to make an informed consent to dual representation. Dual agency works better and better, the more experienced the buyer and the seller are. If you’ve got very experienced people that have done this before and are familiar with the process and know the documents they’re reading, the burdens on the licensee to educate people is much less. But with a first-time home buyer, they just need so much specialized individual representation. The dual agency will always be problematic.

Dave Miller:

And your recommendation is always to have two separate licensees each working with buyer and seller. One licensee might refer the situation to another one, “Hey, can you handle that side so that I’m not putting it in a position?”

Kathryn Holbert:

Exactly. So, if you are a listing agent and you get truly an unrepresented buyer who is interested in the property you’re selling, your first thing to tell the buyer is: “you really should have representation. I can help you with that. I know there’s somebody else in my office.”  Probably the best way to simply say it is:

  • Most real estate errors and omissions insurance will not insure a pure dual agency transaction.

Most real estate offices don’t allow licensees to do that. You can just say, “I’m not allowed to represent you because I represent the seller. However, I know there’s somebody within my office that will be glad to help you. Would you like me to put you in touch with someone who can represent you?” Now, of course, they may say, “No, I am not interested in having anybody represent me at all. I’m going to represent myself in this.” That is harder for you, but since you’re representing the seller, you can’t turn away a potential buyer just because you don’t want to represent them.

Unrepresented Buyers from the Sellers’ Perspective

Dave Miller:

If I’m a seller and have two offers or two bids for my home, and I know that one is an unrepresented buyer, should I not accept that one because there might be more troubles? Should I go with the one that’s represented by a licensee?

Kathryn Holbert:

Well, it doesn’t really make a difference to the seller. It makes a difference to the real estate licensee. And the licensee should not push the one offer ahead of the other offer just because one is unrepresented. Sellers should just consider both offers for whatever they are and try to make an apples-to-apples comparison as best as they can. The listing agent can help the seller decide which offer they should take, totally ignoring the fact that one is submitted by an unrepresented buyer.

How Does an Unrepresented Buyer Write Up an Offer?

Now, where I’m very concerned about issues coming into play is when the potential buyer says, “Absolutely, I don’t want any representation at all.” And the listing agent says, “That’s fine.” But then the potential buyer says, “I want to submit an offer. I don’t have a form.”

  • If you just give the buyer the form and help them out, especially if it’s a first-time home buyer, in their mind you are representing them.

You just put on that hat. And of course, in Nevada, you can’t print out those forms without your name being on the bottom of it. So, it’s clear who gave the buyers the form.

So just don’t do it. Just say, “If you’re determined to represent yourself, that’s fine. You can do that, but I can’t help you represent yourself. You either need to do it yourself, or you need to go find an agent to help you, and I strongly recommend you go find an agent to help you.”

So whatever form they pull off the internet might play into the fact as you’re comparing those offers apples to apples. It may be very difficult to do that because you may get a form from the unrepresented buyer that is not in compliance with the state of Nevada. And so those offers will be much more likely to be put aside by the seller, which is another disadvantage of being an unrepresented buyer.

Dave Miller:

You’ve told me in the past that the state forms for Northern Nevada are different from Southern Nevada, so that even adds another level of trickiness.

Kathryn Holbert:

Yes. In Nevada, the majority of the forms are not produced by the Nevada Division of Real Estate. They are put out by the individual MLS associations. And of course, the MLS is very protective of their forms, and you’ve got to be a member of the MLS to get them.

Dave Miller:

So, if an unrepresented buyer really wants to save that commission and represent themselves, would you advise them to at least seek counsel from a real estate attorney to help guide them through that transaction?

Kathryn Holbert:

Yes. And it’s very common on the East Coast to use attorneys instead of title companies and even instead of real estate agents. In the West, we use title companies. I have gotten a lot of those calls as an attorney since this NAR settlement announcement came out.

And for buyers who call me and say, “Will you represent me in my real estate transaction?”  I’ll say, “I’ll look at your documents, but I am not calling the appraiser. I am not talking to the home inspector. I am not talking to your loan officer.”

And I basically have convinced every one of them to go hire a real estate licensee because there is so much that a real estate licensee will do for them. Maybe they can find an attorney who will do all of that, but I’m too busy being an attorney to be a real estate agent. (Also, real estate attorneys bill hourly for our time. If I take on all the duties of a real estate licensee, the buyer needs to compare my estimated total fee to a licensee’s commission.)

Dave Miller:

And real estate licensees (should) have errors and emissions insurance, which protects them for errors and emissions that occur with the transaction.

What about suggesting an attorney to the unrepresented buyer?

Kathryn Holbert:

If you’re the listing agent, you can definitely say, “You should at least…” Especially if they say, “I don’t have a form,” then say, “Well, if you’re not going to hire a real estate agent, you should go talk to an attorney about helping you draft an offer.”

Dave Miller:

You suggested a secondary form that the unrepresented buyer signs in addition to the state required forms. I think you called it a Duties Owed form. What language does this form contain, and how does it help keep the parties out of real estate litigation?

Kathryn Holbert:

The Duties Owed form is put out by the Nevada Division of Real Estate, and everybody involved in a real estate transaction has to sign it. It’s a list of duties a real estate licensee owes the client, and it starts with a section of duties owed to everyone, such as the duty to be truthful, the duty to disclose, the duty to be a good agent and meet statutory duties, etc.

Then there’s a bottom section that lists the duties that the licensee owes only to his or her own clients. This secondary form highlights and reiterates those things the licensee won’t do, because the licensee doesn’t owe the client these duties because “I don’t represent you and you have chosen to be unrepresented.”

It advises unrepresented clients they don’t have anybody that’s going to help them with all these things, and they are responsible for getting things done and meeting deadlines on their own. If your loan doesn’t close because you didn’t get an appraisal, that’s on you. And so that’s the purpose of that secondary form to educate buyers, but really also strongly encourage them and educate them about their need to have their own licensee. Really, everybody should be represented. Nobody should be trying to do this themselves.

I recently bought a house myself. I used a real estate agent. I’m not talking to the appraiser. I’m not talking to the inspectors. I just want to see the reports at the end of the day.

Everybody should have representation when they buy and sell a house. And if somebody is just absolutely determined that they are not going to have their own licensee and want to do this themselves, the listing agent needs to educate them as much as possible. Ensure they understand the risk they’re taking by making that decision and what they’re going to have to do on their own to get this transaction closed.

How to Handle Buyer’s Commission

Dave Miller:

Is this going away anytime soon or is it only going to get worse?

Kathryn Holbert:

I think that all of this is going to continue to evolve and there are still sellers paying part of your commission. Even if the seller is not advertising that they’ll pay part of the buyer’s commission, a buyer can always ask for it just like they’ve always asked for closing costs.

I think a lot of buyers have been scared by the media like, “Oh my gosh, I’m now going to have to pay this commission.” Not necessarily. There are still ways around that. FHA just passed new rules, allowing the buyers to pay their own commission. The reality is any buyer that is financing has always financed the commissions, all of the commissions, because it’s been built into the purchase price.

If the lenders start telling the buyers, “you can finance this,” theoretically, the house prices would come down instead of having that 4% -6% included in the purchase price. But it’s going to be a much more open negotiation than it has ever been before, which I personally think is a good thing.

And so, when the buyers sit down with a buyer broker, there should be a conversation, “How am I going to pay for this house? How am I going to pay for your commission? How are you going to get paid?” Because If the buyers don’t have enough to buy the house and pay the licensee, you run the risk of getting deep into the transaction and realizing the only way this transaction is going to close is if the licensee gives up most of the commission.

Have those conversations right up front. Figure out if we can only look at houses where the seller is going to pay your buyer’s commission, only look at those houses. If you need to ask in your offer for contribution to commissions, ask for it.

Buyers should not be interpreting any of these new revisions as “I can’t have representation anymore,” because that is not the reality. And everybody still should have representation. There are ways to make it work and figure it out.

The Buyer Broker Agreement

Dave Miller:

It seems like now it’s even harder to get buyers to commit to you and to say that they’re going to be represented by a licensee. I think it’s going to be a challenge for our licensees to get buyers to sign the Buyer Broker Agreement.

Kathryn Holbert:

And I have seen so many different Buyer Broker Agreements. The NAR wants the rule to be that you can’t show a house without a Buyer Broker Agreement.

I’ve seen Buyer Broker Agreements that are basically for one showing of one house on a flat fee like, “I’ll show you this one property for a hundred bucks.”  So, there is the gamut of Buyer Broker Agreements, and you can reach an agreement with whomever you want to represent you for whatever terms you want.

All of that is negotiable and should be discussed. And ask the buyers, “what is it that you need?” If you’re only interested in one property, just sign a Buyer-Broker Agreement related to that one property. If you have no idea what you want to buy and you need a licensee’s expertise to help you find the right property for you, that’s a different Buyer-Broker Agreement that you’re signing because your needs are different.

Dave Miller:

So, the terms can change. You could say, “This is for 30 days. This is for 45 days. After that, I’m off.”

Kathryn Holbert:

Yes, absolutely. It’s absolutely a negotiable contract. And buyers should be shopping for the right agent for them, and they should be talking to more than one. I hope it gets as competitive for the buyer’s agents as it’s always been for the selling agents. And they are going to have to prove their worth to these potential buyers and convince them of the value they’re bringing to the table for the commission they’re going to get.

Dave Miller:

Do those forms stand up in court if I were to breach my contract or my agreement with my buyer’s agent and go with somebody else just before the deadline? What would happen in that case?

Kathryn Holbert:

Traditionally, a lot of those agreements have been enforced at the MLS level, and it’s just a fight between the two brokers. That is probably going to go away, and it will be more of the broker would have to sue the actual former client, the former buyer.

But yes, they’re enforceable contracts that a court is absolutely going to look at and enforce to the extent possible.

Dave Miller:

Well, bottom line, should brokers and licensees work with unrepresented buyers or not work with unrepresented buyers?

Kathryn Holbert:

They should always encourage the buyers to get representation. If the buyer flat out refuses to get representation, they should work with that buyer. But always be aware that their cooperation and working with the buyer never ever crosses the line into actually representing the buyer.

They’re going to have to communicate and work with them, but:

  • Licensees shouldn’t give them forms.
  • They shouldn’t help them fill out the forms

That’s the worst case scenario: you are doing both the work and you’re only getting paid once. And now you’ve tripled your exposure, your liability. And doubled your work and not increased your income at all. So don’t do it.

Dave Miller:

So, your answer is if you do it, just do so with extreme caution?

Kathryn Holbert:

Extreme caution, absolutely.

Dave Miller:

I’m sure we’ll be back in a couple months with another hot topic on behalf of CRES Insurance and all their E&O clients and all of our Fidelity National Home Warranty and CRES Advantage clients.

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