BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Questions have arisen regarding the handling of subdivision sales where a developer does not allow full representation of a buyer by real estate agents but pays a referral fee. The following article addresses the handling of that situation and a form which Broker Risk Management (“BRM”) created for its clients.
In new home subdivisions which are five or more lots, homes or condominiums, the California Department of Real Estate (“DRE”) regulates the subdivision, including reviewing all of the documents provided to a buyer, such as the residential purchase agreement, covenants, conditions, and restrictions, and disclosures. In those instances, while the developer may pay a commission or a “referral fee,” the developer does not allow real estate agents to fully represent their buyers as in normal residential transactions. Notwithstanding, the NAR settlement still requires that real estate agents have a buyer representation agreement. However, the BRBC is not drafted to address new home construction sales. Therefore, BRM has created an amendment to the BRBC for subdivision purchase by buyer. A copy of that proposed amendment is attached to this tip.
PRACTICE TIPS: Related to this situation and the use of this amendment:
- If you are working with a buyer who may be interested in purchasing new construction in a subdivision with five or more lots, homes or condominiums, discuss the issues in the proposed amendment as early as possible. For example, advise the buyer that most subdivision listing agents require that you as buyer’s agent must accompany them on their first visit to the property, at which they will be required to register as a potential buyer. If you do not accompany the buyer at that initial visit, the listing broker most often will state that you have not met their eligibility requirements and deny any compensation to you.
- For this reason, advise your buyer clients that, if they intend to consider a new subdivision home or condominium, they MUST ask you to accompany them on that initial visit if they want you to represent them and receive compensation from the builder/seller. Ask the sales representative for a written statement confirming your right to compensation and the amount, as well as any other criteria to get paid. (Some developers require that the buyer re-register after a designated passage of time.)
- If your buyer intends, or is likely, to purchase in a new home subdivision, add the BRM amendment to your BRBC.
- Advise your buyer that the builder will likely prohibit you from fully representing the buyer in a normal new subdivision. For example, the buyer may be asked to sign documents which are not provided to you. The buyer may be sent documents, copies of which are not sent to you. (If documents are not sent to you, you will not have an opportunity to review them prior to buyer signing them.) The buyer may visit the subdivision or have meetings with the builder/seller or listing agent without your involvement.
- Tell your buyer to contact you with any questions. You want the buyer to know that you are available to answer questions and discuss situations or issues with them.
- Please note that in new home subdivisions, there are generally custom forms and CAR forms are not used. For example, builders will generally create their own custom contract form drafted by attorneys for the builder which favor the builder. Builders will also have custom disclosures.
- Note that in new home subdivisions with DRE approval, no Transfer Disclosure Statement is required or will be provided.
- Advise the builder that you are the buyer’s agent and have a BRBC signed with the buyer. You should also provide the builder with relevant pages from the BRBC establishing your relationship and entitlement to compensation.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is an attorney-client privileged communication for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management LLP. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices