Washington, D.C. – The Consumer Federation of America (CFA) released a report that identifies unfair provisions in buyer agency contracts that an increasing number of home buyers are being asked to sign.  The report also advises home buyers whether to sign these contracts and how to negotiate them.

“Buyer agency contracts have the potential to protect home buyers but the way most are written, protect only agents and their brokers,” said Stephen Brobeck, a CFA senior fellow and author of the report.  “If buyer brokers refuse to improve unfair contract provisions, buyers should consider hiring an attorney and working directly with listing agents,” he added.

The research examined 43 contracts from 37 states, most of which were issued by state Realtor associations.  It discovered a number of unfair practices, including:

• charging unreasonable fees, many of which are not credited to commissions,
• requiring acceptance of dual agency or transaction brokerage,
• not explaining how conflicts of interest involving other buyer clients are resolved, and
• limiting remedies for buyers with complaints, including prohibiting litigation and limiting awards to the amount of the agent’s compensation.

However, the most troubling provision, included in almost all recent contracts, protects agents and brokers from uncoupled commissions, the subject of many class action lawsuits.  To preserve 5-6 percent commissions, contracts now allow buyer agents to collect commissions both from their buyer clients and from sellers.  The industry fears that if commissions are uncoupled, buyers will succeed in negotiating rates down from the 2.5-3.0 percent rate they are currently paid.  So, the industry has included a contract provision that allows buyer agents to contact listing agents and seek additional compensation.  Consumers would be harmed because:

• Buyer agents will continue to be tempted to steer buyers to properties listed by agents willing to provide this compensation.
• Listing agents will cooperate because almost all have buyer clients and want to make sales in order to be compensated.
• Agents and their brokers will be able to continue colluding to maintain existing commission rate levels.

Article 7 of the National Association of Realtors Code of Ethics recognizes the unethical nature of buyer agent compensation from both buyers and sellers but gives Realtors the option of seeking buyer consent for this practice.  “It will be fairly easy for buyer agents to obtain consent from buyers for an additional seller payment if in fact buyers are even aware that this provision is in their contract,” noted CFA’s Brobeck.

The CFA report offered a number of suggestions to buyers who are given these contracts to sign.

• Insist that the buyer agent provide this contract early in the relationship so that buyers have time to read, evaluate, and negotiate its terms.
• Negotiate the buyer agent commission and question any additional fees.
• Refuse to agree to dual agency or transaction brokerage unless there is a specific property a buyer wants to purchase that is also listed by their buyer agent.
• Ask for an explanation about how the agent will resolve conflicts of interest involving other buyer clients.
• Refuse to sign a contract that prohibits buyers from seeking court remedies to resolve complaints.

“The class action lawsuits have persuaded industry leaders that buyer agency contracts are needed to protect the industry from future litigation,” said CFA’s Brobeck.  “Regulators including state attorneys general should review these contracts to ensure that consumers, as well as agents and brokers, are protected by them,” he added.