Whose client is it, anyway

Scenario: buyer says that they will be buying in 3 months. You say, perfect, let’s get you pre-approved so you’ll be ready by then. You believe the buyer until they call you 5 days later with the great news that they just bought new construction from a site agent! Aren’t you happy for them? 

But before you get really mad [photopress:mad_face.JPG,thumb,alignright]and start telling your clients they didn’t have representation, consider the following and you’ll see it’s not black and white. 

Most buyer’s agents hate new construction sites, especially those with site registration policies since they could lose their clients to the site agent. A few builders (notably an ex-agent on the Eastside, name will be supplied upon request!) will only pay the buyer agent 1% if the buyer goes to the site the first time without the agent (whether or not the buyer says they are working with said agent). But normally the site agent, if they are getting paid by the builder will be agent friendly and not give you a bad time and if you write it up, you’ll get paid.

The question is, can a site agent adequately represent a buyer?

The answer:  It Depends.  Here are the different models that I know about 

1. Builder can hire an in house team, where the agents work for the builder, sometimes on salary and are generally the listing agent and are privvy to all the deals that have been written.

This is the best scenario for the builder since the agent can not go elsewhere to earn money. The agent isn’t paid if the site doesn’t sell.  This agent is not able to represent a buyer. 

2. Builder can sub-contract to a marketing team, say “company A”, where the listing agent again can not pick up clients and take them off site under any circumstance. If there is a buyer for whom that product does not fit, then the listing agent is encouraged to refer that buyer to one of the team of agents who is associated with Company “A” but not a site agent. The site agent, the builder and “company A” each share in the referral portion of the commission if the referral agent sells the client. These agents are labeled buyers agents and are often on site to meet with buyers, but first the listing agent must be thoroughly convinced that their site is not a fit for this buyer. This can be a great source of buyer clients for the referral agent although there is a stiff referral fee Not as good for the builder, except for his 1/3 share of the referral fee since there’s not any incentive to sell the builder product especially if the client wants to come back to the site, the referral agent will not get the sale.  Can this work for the buyer? I’d say, maybe but there’s the big problem with going back to the original site to buy in which case the referral agent won’t get paid and may try to talk the buyer out of this.

3. Builder can sub-contract to a marketing team, say company “B”.  Here, the listing agent is not the agent that puts in time at the site. The listing agent represents the seller and hires a staff of agents out of company offices that are buyer’s agents. These agents may get a couple hundred per door, but they say they are buyer’s agents and in general are not privy to insider information.  These agents will likely have a sign, “buyer agent” on their desk and should advocate for their buyer in any discussions with the seller.  However, if this agent continues to work the seller for price considerations, etc, you can be pretty sure the builder will ask for the removal of that agent.  So, I still see a conflict of interest here.  If the agent consistently works on one builder’s site, then I’d wonder to whom loyalty is given.

4. Builder can sub-contract to a single listing agent.  In this case, the listing agent is probably too small to have much of a program in place for a team of site agents. They might casually bring other agents in to the site just to pick up buyers and to work when the listing agent doesn’t.  If the site is small, this is often the case. The listing agent in this case is often the agent that brought the builder the land. The buyer’s agent rarely know anything about inside information and are on site simply to help buyers. I call this Site fill in work:  This is a great avenue for prospecting for a buyer but I’ve never understood why a builder would want to have his site full of agents who earn an SOC either off or on site. At the first negative hint that a buyer might not like the builder product, the agent whips out the computer and starts showing buyer other properties. If I were the builder, I would be looking for 2 person listing teams to cover all shifts.  Does this work for the buyer? [photopress:j0400346.jpg,thumb,alignright]If the buyer meets the fill in buyers agent and connects, I believe this is a great situation for a buyer without an agent already, otherwise you’ll be working against the site agent for this client.  The site agent can represent the buyer possibly better than a non site agent because they know the plat and product better and presumably know new construction better. That agent owes no allegiance to the builder and can very well advocate for that buyer.  For instance,understanding how a builder addendum and limited warranty really affects a buyer isn’t something most agents are familiar with. Did you know that one very prominent builder requires the first buyer to hold the builder harmless if there is a sale before 4 years and the second buyer is part of a class action law suit? Would the average agent understand those 12 pages of builder addendum well enough to read this and have their buyer consider the repercussions? and to realize there is often an automatic removal of the financing contingency in 2 weeks?

So before buyers or other agents decide how bad it is for a buyer to choose to work with an agent they met on site, first you have to know the relationship of that agent to the seller and in some instances, I think the site agent makes a very strong buyer’s agent.  So best move is to tell your buyers ahead of time what will happen when they go to a new construction site without you and study those builder contracts.  I used to give out a blue “buyer passport” book that had a spot for my business cards and a place where the buyers could write down each site they visited. That way, you’ve gotten a step ahead of them and it makes a great opening for the “watch out for the site agent” speech. 

14 thoughts on “Whose client is it, anyway

  1. You ask: ” Did you know that one very prominent builder requires the first buyer to hold the builder harmless if there is a sale before 4 years and the second buyer is part of a class action law suit? Would the average agent understand those 12 pages of builder addendum well enough to read this and have their buyer consider the repercussions?” How about this: SHOULD an agent be expected to understand those 12 pages? SHOULD the agent be explaining these 12 pages to the client and insuring that the client understands? If you’re reading non-MLS boilerplate contractual terms and explaining them to your client, doesn’t that constitute the practice of law? The WA State Bar Association certainly thinks so — and well beyond the scope of an agent’s limited authority to practice law. Perhaps its in the client’s best interests — not to mention the agent’s — to refer the client to an attorney under these circumstances.

  2. couldn’t agree with you more, which is exactly what I did. However, don’t you need to understand the repercussions to know that they need an attorney?

  3. All you need to understand is what constitutes the unauthorized practice of law. The agent does not even need to read a 12 page non-MLS addendum. The agent cannot legally discuss or explain the terms of this addendum with the client (and even cannot legally discuss or explain the terms of the MLS forms). Therefore, if the client has ANY questions or concerns at all, referral to an attorney is required.

    The agent should stress to the client that the client needs to read and understand ALL contractual terms, including those in the addendum. But if the agent tries to understand the terms before deciding whether to refer to an attorney, then the agent is making a determination as to what constitutes a “significant” or “important” contractual term. I think this determination is also included in the definition of the “practice of law” and therefore is inappropriate if done by an agent.

    Any agents out there have a different analysis? And if not, how come I don’t get calls from buyers of new construction?

  4. I’ll tell you why you don’t get calls. Most people, buyers and agents, don’t read all of the document to begin with so they don’t realize what they’re missing. We stress reading of ALL documents to our clients, understanding them, and if they have questions to contact an attorney. With companies like Microsoft offering certain legal services benefits to their employees (if they choose to take them) many of our clients there take advantage of it to have documents explained to them. We still suggest this to all of our other clients and we also provide access to our attorney for this purpose – I’ve even sent copies to our attorney for her to review and provide feedback to our clients and I’ll pay the bill for her time. I’d really rather the client know exactly what they’re getting even though sometimes people act like ignorance is bliss and that it’s all sunshine and rainbows when buying property.

    Eileen, I had one small builder on the Eastside who had his own listing agent and this guy tried to tell me the 2-yr warranty his builder offered was actually better than a 10-yr warranty a larger builder had because it “proved” that his builder’s product was better because he didn’t need to warrant it as long. I laughed at him and pointed out to my clients that they really needed to make sure and note all potential problems now and to keep track of them and not miss any deadlines for having construction flaws noted. This client also happened to work at MS and I told him to make sure and have his contract reviewed particularly with the builder’s addendum and warranty and he did, thankfully. Sure enough, a year into ownership a lot of issues with drywall came up and he had to go back after the builder for repairs.

  5. Craig, I agree with Rebecca that you don’t get calls because the agents don’t understand the reality of those addendums. I would recommend buying the new construction and making it contingent on attorney review in 3-5 days. Most builders would go along with that and that way, it doesn’t matter if the agent understands, but the truth is, they don’t know what they don’t know. The trouble with getting the attorney involved before the purchase is that there is often not enough time, especially in a multiple offer situation. Doesn’t the attorney review period suffice for proper recommendation?

    Rebecca, that builder was an idiot. Wonder if it was the same builder that I sold that had 62 items on his inspection report plus had several liens on title! I order a super fast title report on most small builders as they often don’t pay payroll taxes, etc or are in a lawsuit with some sub, etc.

  6. Yes, the attorney review period would be sufficient, although the buyers should have the attorney on board so that the document can be immediately forwarded for review.

    Reba, in terms of your attorney reviewing addenda on behalf of your clients, and you paying for such legal services: this arrangement raises several issues under the WA attorney Rules of Professional Conduct (see RPC 1.8(f) and RPC 4.3 at least). Obviously, these are largely issues for your attorney, not you. However, the bottom line is that this arrangement may not provide your clients with appropriate representation. They are best served by incurring a relatively minimal cost themselves (my flat fee is $595 for a client with an agent) and having their own attorney whose duty runs clearly and exclusively to them.

  7. Craig, if we don’t write any unique language in the form (when I started in real estate, we wrote out “purchase will be from proceeds of conventional type financing in the amount of …….interest rate of…..
    No inspections, no form 17. Now there’s a boilerplate form for everything, so we dont’ have to get into trouble if we know when and where to use them.
    However, those bulder addenda are horrible. Have you seen the Intracorp one? I don’t know why anyone would buy using that addendum, but they tell me most buyers and their agents don’t even know what it says. For instance if you sell a unit before 4 years, you have to present the P&S to the builder! Do you think anyone will remember to do that?

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