Report finds buyer agency agreements are “incomprehensible,” look to avoid NAR settlement terms

Many state Realtor associations’ new forms—such as buyer representation agreements—are largely incomprehensible to the average homebuyer or seller and have language that seeks to avoid the terms of the National Association of Realtors‘ (NAR) nationwide commission lawsuit settlement agreement, according to a report released earlier this month.

The report was written and prepared by Tanya Monestier, a contracts law professor at the University of Buffalo. Monestier previously worked with the Consumer Federation of America on the new buyer agency agreement and listing agreement promulgated by the California Association of Realtors earlier this summer. This latest report is not affiliated with the CFA.

“You should not need to hire a lawyer to understand a listing agreement or buyer representation agreement,” Monestier wrote. “These forms do not need to be this complicated. Lawyers and [R]ealtor groups have made them this complicated. They then claim that it’s the buyer’s or the seller’s responsibility to read the forms and that consumers are fully capable of figuring out the terms. Assertions like this fly in the face of common sense and everything we know about consumer contracting.”

In the report, Monestier singles out forms from 19 state and local Realtor associations, identifying issues with all except those distributed by the Realtor associations in hode Island, Massachusetts and Utah. In addition to those three states, Monestier also analyzed forms distributed by CAR, Texas Realtors, Florida Realtors, North Carolina Realtors, New Mexico Association of Realtors, Northwest MLS, Colorado Real Estate Commission, Tenessee Association of Realtors, Western New York REIS, Georgia Association of Realtors, Oklahoma Association of Realtors, Pennsylvania Association of Realtors, Minnesota Realtors, Oregon Real Estate Forms, Northern Virginia Association of Realtors, and South Carolina Realtors. The report did not touch on forms created by individual brokerages.

“I do not claim that the forms are a representative sample of all the forms out there — but have reviewed enough of them to be able to identify patterns and problems. I have reviewed several dozen of these new forms,” Monestier wrote. “By and large, they are all very complicated and will not be understood by the average buyer and seller. Many of these contain terms that would come as a surprise to a buyer or seller, and terms that signal how [R]ealtors plan to circumvent the NAR Settlement.”

Due to the terms of the NAR settlement, buyer’s agents are now required to have a signed buyer representation agreement prior to going on the first house tour with their homebuying client. Due to this brokerages and Realtors associations across the country have had to create and distribute forms for their agents and members to use in order to comply with the terms of the settlement.

According to the report many of the buyer representation agreement allow buyer’s  agents to collect more compensation than they agreed to with their buyer, in violation of the settlement agreement. Additionally, the report claims that many of the terms outlined in the agreements are confusing or appear to be designed to “scare” buyers to behave a certain way.

Monestier also noted that asking buyers to modify their existing buyer agency agreement so that the agent can be paid more is in violation of the settlement, and the buyers may feel pressured to agree to the modifications and they may not understand the implications of what they are agreeing to. She also notes that these modified agreements are an example of the agent putting his or her financial interests ahead of their buyer’s.

“In almost all cases, a buyer will be all too happy to sign a modified agreement after a guarantee of payment for the buyer’s agent has been secured,” Monestier wrote. “After all, it’s: a) not his money; and b) failing to sign a modification could lead to an awkward or acrimonious relationship with the agent going forward. With respect to (b), it’s important to realize that the agent’s request for a modification to the compensation comes at the same time the agent is submitting and negotiating an offer for the buyer. Why would a buyer want to alienate his agent at this pivotal moment in the process? If an extra 1 percent is on the table, why should that money go to the agent?”

Overall the report highlights 10 terms in contracts buyers should be aware of.

These terms include provisions that:

• Require buyers to pay compensation to their agent if a transaction does not close due to the buyer’s breach
• Potentially allow for buyers and their agents to modify the compensation amount upward
• Allow agents to collect “bonuses” from sellers
• Charge an extra fee if the seller is unrepresented
• Create a range of compensation or that allow for the buyer’s agent to collect “whatever is being offered by the seller’s agent,”
• Allow the buyer’s agents not to credit the amount sought from the seller to the amount of compensation owed by the buyer
• Are challenging for the buyer to understand or are designed to scare buyers
• Typically are not included in buyer agreements, like those that the agent may or will receive compensation for referrals to third-party service providers

Monestier has also created buyer’s guide to signing a buyer rep agreement and a seller’s guide to signing a listing agreement. “I would ask regulators and those drafting these forms: Do you think your mother or father would understand this?” Monestier wrote. “Would you want your son or daughter to sign these forms? If the answer to either of these questions is no, then it is time for a do-over.”