Q: We represent Buyers who are interested in buying a Property that is listed by an “Entry Only” Broker. I am not familiar with that type of listing. Is this like a FSBO? What do I need to worry about?
A: Working with a Seller who has used an “Entry Only” Broker is quite comparable to working with a For Sale by Owner (“FSBO”). Entry Only Brokers are authorized to list a Seller’s Property in the MLS (and/or on the internet) and then, at some point in time (depending upon the agreement between the Seller and Listing Broker), the “Entry Only” Broker disavows any further connection with the transaction. Buyers’ Agents are instructed to contact the Sellers directly and the Sellers will then be on their own to handle contract negotiations, disclosure and escrow processes (just like a FSBO).
In consideration of receiving a flat fee, the Entry Only Broker enables the traditional FSBO to access means of advertising property for sale that had previously been reserved for Sellers who list with a REALTOR®. Buyers’ Agents need to treat these type of Sellers as though they are a FSBO and there are two key legal issues that must be properly dealt with, both of which are: Payment of Commission and Agency.
I. PAYMENT OF COMMISSION
When a Seller is represented by a Broker who uses the MLS, the Buyer’s Agent is generally assured of being paid the advertised commission. If it is not paid, the Buyer’s Agent can file an arbitration action against the Listing Agent through the local Association of REALTORS®. The Procuring Cause Guidelines will then be used to determine if the Buyer’s Agent is entitled to the commission, and then the party who will be paying that Buyer’s Agent commission will be the Listing Agent, not the Seller.
Entry Only Brokers may specify in the MLS that the Seller is paying the cooperating broker a commission rather than the Listing Broker. It will then be highly problematic to bring a commission claim against the Entry Only Broker; once these Brokers disconnect from the transaction, their responsibility to pay the Buyer’s Agent a commission may well terminate.
Any Agent compensation that is specified in the Purchase Agreement is not enforceable. The Buyer’s Agent cannot file a breach of contract action against the Seller because the Buyer’s Agent is not a party to that Agreement; Brokers are not even a third-party beneficiary of that contract, notwithstanding the specific language in the contract that the Broker is to be paid a commission at the close of escrow. The commission must be dealt with separately from the Purchase Agreement.
Certain precautionary steps should be taken before presenting an offer to either a FSBO or a Seller who has used an Entry- Only Broker. To be assured that you have an enforceable agreement that the Seller will pay the commission at COE, the Seller needs to sign a separate Compensation Agreement BEFORE the offer is presented. It is recommended that the CAR Single Party Compensation Agreement (“SP” 12/18) form be used.
The Buyer’s Agent should contact the actual property owners to set up a presentation of the Buyer’s offer. Prior to setting up that appointment, the Buyer’s Agent should first check who is actually on title by getting a Property Profile from a Title Company or checking the data in the MLS. Since all of the owners must agree to the terms of the Compensation Agreement as well as the Purchase Contract, it is best to try and get them all together at one time so that the Compensation Agreement can be fully signed before presenting the offer.
The Buyer’s Agent needs to fill out the SP form completely. The names of the Seller(s) must be properly spelled out on the first line (they are designated as the “Principal” in this form). The second line should state the name of the brokerage (“Broker”), not the name of the Agent. Then the full Property address needs to be included.
Directly under the bold face statutory Notice regarding the negotiability of commissions in ¶1, the Agent needs to indicate the commission percentage that the Agent wants to receive. It does not need to be the amount in the MLS; if there was no commission specified in the MLS, or, if it is a FSBO, then enter a reasonable percentage or a flat fee, but not both.
If the Property is being sold, ¶1A(i) needs to be completed with the legal name of the Buyers and the compensation time period. It is best to specify a time frame that lasts significantly longer than the contemplated escrow period so as to cover possible delays in the COE. For this Compensation Agreement to be enforceable, the escrow must close during the compensation period. Note that if the Property is to be leased rather than sold, then ¶1A(ii) needs to be filled in.
Paragraph 2B of the SP needs to specify that the Agent is working exclusively for the Buyer by checking the box in ¶2B(3). If the Sellers can be convinced to have the Buyer’s Agent represent the Sellers’ interests as well as the Buyers’ (dual agency), preferably in consideration for a larger commission, then check the box in ¶2B(1) but you must first provide the Sellers with the statutory Agency Disclosure (“AD”) form (see ¶2A in the SP).
Unless the Seller(s) demand other terms and conditions relating to the payment of commission, nothing needs to be specified in ¶7 of the SP. As a reminder, if there are any terms or conditions specified in that paragraph that are not performed, this could prevent you from getting paid. It is perfectly acceptable to leave these lines blank.
Note: If the Property is owned by a Trust, a legal entity such as a company or LLC, or is a part of an estate or conservatorship, or the owner has given a power of attorney to someone to sign for them, then the box in ¶8 for Representative Capacity needs to be checked and the RCSD-S must be used.
Once the SP form is signed by all of the owners, the Buyer’s Agent is then in a position to safely present the Buyer’s offer. If that offer is Accepted, then the Purchase Agreement and the Compensation Agreement should be deposited with the escrow holder to effectuate the irrevocable assignment of commission provision.
II. AGENCY
A. Confirming Agency Relationships: When an Entry Only Broker has indicated that Buyers’ Agents can contact the Seller directly (since that Agent will not be further involved in the sale, they are establishing that the Seller is not represented by anyone. In those situations, the Seller is essentially a FSBO and the Agency Confirmation Section of the Purchase Contract should specify that the Buyer’s Agent is exclusively representing the Buyer. The Confirmation Section of the Agreement should also note that “no one” is representing the Seller. Unfortunately, properly completing the Agency Confirmation Section is not the final word on the subject of Agency.
The SP form specifies in ¶2B(3) that:
“Principal agrees and understands that all acts of Broker, even those that assist Principal in performing or completing any of Principal’s contractual or legal obligations, are intended for the benefit of Buyer/Tenant exclusively. Principal is advised to seek real estate, legal, tax, insurance and all other desired assistance from other appropriate professionals.”
B. Acting Only as the Buyer’s Agent: Notwithstanding what is stated in the SP, Buyers’ Agents need to make sure that their words and actions do not unwittingly create an agency relationship with the unrepresented Seller. Doing so could result in the creation of an undisclosed dual agency which can be a basis to rescind the transaction, nullify any right to commission and could affect the Agent’s licensing status. Thus, it is very important that Buyers’ Agents not say anything or do anything which might lead the unrepresented Seller to believe that that Agent is acting on behalf of the Seller.
The following is a partial list of the major categories of words and actions that should be avoided when Agents are working with a FSBO or an Entry Only Seller:
- Drafting contract documents (Counter Offers or Addenda) on behalf of the Seller;
- Recommending contract language, negotiation strategies or options to the Seller;
- Providing any assistance to the Seller in the completion of disclosure documents (however, since the responsibility for securing those disclosures rests with the Buyer’s Agent, providing the blank disclosure forms to the Seller and collecting the completed forms from the Seller for delivery to the Buyer are perfectly acceptable);
- Recommending that Sellers use any particular third-party vendors, such as repair people, to handle the repairs or responsibilities that the Seller has agreed to perform in the Purchase Agreement;
- Providing any of the services that the Listing Agent might normally perform including, but not limited to, setting up appointments for the Seller with the escrow officer or driving the Seller to appointments; and
- Indicating to the Seller that the Buyer’s Agent will “take care of” anything for the Seller or “protect” any or all of the Seller’s interests.
C. Documenting Your Limited Responsibilities: The best practice is to add language to the Purchase Agreement in either the Additional Terms Section or on Addendum included with the Buyer’s Offer that clarifies the Buyer’s Agent’s position to help avoid undisclosed dual agency.
“The Parties understand that Seller is not represented in this transaction by a licensed real estate agent and that [insert name of Brokerage] is exclusively the Agent for the Buyer. As the Exclusive Agent for the Buyer, [insert name of Brokerage] cannot and will not perform any of the functions that would normally be performed by the agent for the Seller. It is the responsibility of the Seller to comply with the terms of the Agreement and to perform all of the functions that would normally be performed by their real estate agent. Seller is strongly advised to retain the services of another broker and/or review this matter with their own qualified California real estate attorney before proceeding.”
PRACTICE TIPS:
- When dealing with FSBOs and Sellers represented by Entry Only Brokers, make certain that you refrain from presenting your Buyer’s Offer until after you have received a Single Party Compensation Agreement that has been properly prepared and fully signed by all owners of record.
- Make certain that the Agency Confirmation Section of the Purchase Agreement specifies that you and your Broker exclusively represent the Buyer (unless the Seller has agreed to have your brokerage serve as a dual agent) and that “no one” is representing the Seller.
- Include in the Buyer’s Offer the language in Section II-C above so that both Seller and Buyer better understand the limits of your responsibilities.
- Make sure that you say and do nothing that might lead the Seller to believe that you are representing the Seller’s interests.
- Whenever you are sending documents to the Seller, the email should specify that “The Buyer has instructed me to send the attached ________.”
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