Law Professor Creates Contract With Buyer Interests in Mind

Law Professor Creates Contract With Buyer Interests in Mind

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A contracts law professor who has criticized new transaction forms created after the National Association of Realtors’ proposed settlement of multiple antitrust suits has released her own sample buyer representation agreement in the hope of pushing the real estate industry to create forms that are fairer to buyers.

“There are hundreds (or maybe thousands) of different versions of these buyer agreements out there,” wrote University of Buffalo contracts law professor Tanya Monestier in commentary accompanying her sample contract.

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“Some are crafted by state regulatory bodies; some by state and local [R]ealtor associations; some by MLSs [multiple listing services]; some by private brokerages. Largely all are drafted with the interests of the broker (not the buyer) in mind.”

Monestier earlier this summer wrote reports for the nonprofit Consumer Federation of America on transaction forms created in the wake of the NAR deal and last month warned that many of the buyer representation agreements so created are largely incomprehensible to the average homebuyer or seller and contain language that seeks to avoid terms of the settlement.

Now, Monestier is essentially putting her money where her mouth is. She has created a sample buyer contract and posted commentary to go with that sample contract, explaining why she chose to include and exclude certain provisions.

“I have released four reports now where I criticize contracts,” Monestier wrote.

“It’s sometimes easy to take shots from the cheap seats, which is why I have attempted to create something that reflects the type of contract I think brokers should consider using.

“My sample contract is an attempt to move the conversation forward in a practical direction. The sample can be a starting point for creating new forms from scratch or modifying existing ones. It also, I think, serves as proof that things do not need to be written in legalese to convey meaning.”

She emphasized that the sample contract is not necessarily meant to be used as-is, in part because brokerages and Realtor associations must make sure that their contracts comply with state law. For instance, she noted that dual agency is not allowed in some states and the contract would need to be modified to reflect that in those states, while other states may require particular statutory language or disclaimers.

“I urge state and local realtor associations, MLSs, state regulators, and private brokerages to do better when it comes to creating fair and understandable contracts for consumers,” Monestier wrote.

“I do not purport to have created the perfect template. And there are certainly scenarios that I may not have sufficiently considered. The point, though, is that we can and should do better.”

Monestier’s commentary thanks several individuals who provided feedback on the sample contract, most of them law professors. Two others are Wendy Gilch, deputy director of Consumer Advocates in American Real Estate (CAARE), which has also criticized new forms after the NAR settlement, and “a real estate attorney with a NAR-affiliated association who wished to remain anonymous.”

Monestier’s sample buyer contract is 2.5 pages long, in 12-point font, and just over 1,000 words.

“By contrast, the New Mexico Association of Realtors’ buyer representation agreement is five times as long—almost 5000 words!” Monestier wrote.

“This would likely take over 40 minutes just to read.”

She avoids the use of legal jargon and said her general audience for the contract is a prospective homebuyer in the U.S. with some high school education. She pointed out that the Realtor Code of Ethics requires transaction forms to be written in “clear and understandable language.”

“Article 9 of the Realtor Code of Ethics provides: [Realtors], for the protection of all parties, shall assure whenever possible that all agreements related to real estate transactions including, but not limited to, listing and representation agreements, purchase contracts, and leases are in writing in clear and understandable language expressing the specific terms, conditions, obligations and commitments of the parties …” Monestier wrote.

“Very few contracts I have seen would satisfy the ‘clear and understandable language’ threshold that the industry itself imposes upon NAR-affiliated participants.”

Making the contract understandable was Monestier’s No. 1 priority.

“Doing so means that a little bit of the precision is lost and that not every permutation of every conceivable scenario is covered. This was a deliberate decision,” Monestier wrote.

“For the one-in-a-thousand scenario where the buyer secretly gets his brother to purchase the property to avoid paying a broker commission, let the courts sort this out (even without a clause in the contract, you have a very good argument that the brother is an agent of your buyer).”

“Some brokers will feel like this contract is too ‘buyer friendly,’” Monestier added. “Perhaps it is. Reasonable minds can differ on where to draw the line.”

But she encouraged brokers and others considering revising their forms to ask themselves: “Do you really need this provision in there? Why? How likely is this scenario to happen? And how much ‘protection’ will this provision really give you?”

On that last point, she noted that anyone can say in a form that they are “not liable for x, y, and z” but that doesn’t give them full protection. “A court can find you liable despite your attempt to insulate yourself from liability in writing,” Monestier said.

At the top, set off in a gray box, Monestier’s form says, “Required Notice: Real estate commissions are not set by law. They are subject to negotiation between buyers and brokers.” She deliberately did not say commissions are “fully negotiable” because that could give buyers the false impression that brokers are required to negotiate their fees, which they are not, according to Monestier.

The form makes clear that the buyer is on the hook for buyer broker compensation so long as they successfully close a transaction: “Buyer agrees to pay Broker either _____% of the purchase price OR a flat fee of $ __________ if Buyer purchases property covered by this agreement during its term.”

Monestier said she included the option to pay as a percentage of the purchase price despite some consumer advocates’ objections that such a payment model represents a conflict of interest between the buyer and the buyer broker.

“On balance, however, I believe that the simplicity of a percentage fee based on the purchase price outweighs the downsides to this model,” she wrote.

For clarity, the form includes a conversion chart of how much a percentage of the purchase price would add up to for a home bought at the average home price in the U.S.: $400,000. The form says notes that 3 percent of $400,000 is $12,000, 2 percent is $8,000 and 1 percent is $4,000.

The form also lays out two ways in the which buyer broker compensation may be covered by the seller: through a direct offer of compensation or through a concession.

“I am aware that some consumer advocates do not believe that advance offers of compensation from a seller or a seller’s broker are consistent with either the settlement or antitrust laws,” Monestier wrote.

“It appears to me, however, that these offers of compensation are not prohibited by the settlement. Indeed, the settlement clearly spells out that offers of compensation can be advertised anywhere, except in the MLS.

“While I would prefer that the industry move to the model espoused by the Department of Justice (full decoupling; buyer may ask for a concession in the offer), we don’t seem to be there yet. As such, I have drafted the document to reflect current practices.”

She made sure to point out, however, that while pre-set offers of compensation are not forbidden by the NAR deal, “[w]hether they are unlawful remains an open question.”

The sample form makes clear that the buyer broker would not be able to collect more compensation than agreed-to with the buyer — something many industry forms currently allow that Monestier has called out.

Her form says, “Broker will not receive additional compensation from any source that exceeds the amount specified in this agreement. Broker will not modify this agreement to increase Broker’s compensation or sign a superseding agreement with Buyer for a higher amount of compensation.”

Monestier’s form also makes clear that pre-emptive offers of compensation from the seller or the seller’s broker will not impact which properties the buyer broker will show the buyer: “Broker will show Buyer all properties that fit Buyer’s criteria regardless of whether the seller or the seller’s broker is offering to compensate Broker.”

In her commentary, Monestier added, “Some forms allow the buyer to ‘self-steer’ – meaning to tell their broker not to show them properties where broker commission is not advertised in advance. This approach is contrary to the entire intent of the settlement.

“NAR has issued guidance to the effect that brokers must present all relevant properties to the buyer, irrespective of whether the seller is offering commission.”

The sample contract allows either the buyer or the broker to cancel the agreement in writing anytime unless the buyer has signed a contract to purchase a property. The form requires the broker to then, within three days of the cancellation or expiration of the agreement, provide the buyer with a list of properties for which the broker provided brokerage services so that if the buyer buys one of the properties within a certain period of time, the buyer will be required to pay the agreed-upon commission.

“Broker will only put properties on this list where Broker’s services were more than minimal,” the form reads.

“For example, Broker will not put a property on the list if Broker’s only service was locating and presenting the listing to the Buyer to consider.”

Asked whether “presenting the listing” includes showing homes, either in person or virtually, Monestier told Inman she intended that provision to refer to “just emailing a listing or having an automated feed that sends stuff out.”

Email Andrea V. Brambila.

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