To Sign or Not To Sign – 6 Questions About Agency Agreements

Madison Commercial Real Estate

Madison Commercial Real Estate

You’re all geared up to find a property to buy or lease and then your broker shoves a contract in your face and asks you to sign it.  The contract asks you to commit to your broker for a year and to be responsible for making sure she gets paid after you decide on a property.  It’s a little intimidating.  And naturally, it poses some questions.  Some of which you might not exactly feel like asking your broker.  Good thing you don’t have to.  We’ve got answers to 6 common questions for you right here:

1. What is the difference between a customer and client?

“Customer” and “Client” have distinct meanings in the real estate world.  In short, a client is someone who has signed an agency agreement and a customer is someone who hasn’t.  Real estate brokers have certain duties to everyone they work with in order to ensure consumer protection, but they can only act as your agent if they have a signed agency agreement.  As we’ll see below, agency makes a big difference.

2. I want to keep my options open.  Won’t a commitment tie me down?

Actually, the opposite is true.  If your broker doesn’t have agency with you, then he is legally the sub-agent for the property owner and it is illegal for him to negotiate on your behalf.  This means that without agency, your broker is powerless to do or say anything that would favor your best interest.  If you work with a broker and then essentially command him to represent the other side’s best interest instead of yours, you may be shooting yourself in the foot.  The other side may get the best of you without anyone being able to warn you.

3. Could I save money by cutting out the middleman?

The idea here is that as a buyer or tenant, you could just keep the money that would have otherwise gone to your broker.  There are a few problems with this idea though, the first being that it is illegal for a buyer or tenant to be paid commission money.   You could ask for a discount on the purchase price equal to what would have been paid to your broker, but it’s highly unlikely that this will save you any money either.  This is because the property owner still has to pay the full commission agreed to in their own contract with their listing broker.  Since you’re not a party to that contract, you have no power to cut the listing broker’s commission in half.  It’s also in your best interest to act with integrity.  Do you expect any assistance from a broker?  If not, then handle the work yourself and don’t lead a broker on in the first place.  And if so, don’t expect your broker to provide her time and energy as a charitable donation to you.  Your broker will likely still get paid for having procured you and you’ll have given yourself a bad name in the process for trying to go behind her back.  As a tenant or buyer, using a broker is a no-brainer in economic terms, because there is rarely any cost to you.

4. Doesn’t my broker just want me to sign this so that they get paid?

Getting paid for his work is absolutely one of your broker’s motivations.  You wouldn’t want to expend significant time and resources toward a project, achieve a successful outcome, and then not get paid.  Your broker doesn’t either.  More importantly though, your broker wants to give you top-notch service, but this is impossible to do when he is not allowed to represent your best interest.

5. Won’t I get more results if I open my project up to multiple brokers?

As nice it may sound to have every broker out there working for you, it’s not realistic.  A good broker will always put their client’s needs first.  But until you sign an agency agreement, you’re a customer in an ocean of customers, not a client.  The broker that you think should be working for you actually should be spending time working for their clients first, all of whom need to be prioritized above a customer.  In reality, you have either one broker promoting your cause or none.

6. What if I decide I want to switch brokers in the future?

If you’ve signed an agency agreement with your broker and you’re not getting the results you want, ask for an amendment to terminate your contract.  This might be a difficult conversation to initiate, but at least you’re keeping things above board and treating everyone fairly.  Be aware that if you choose a property that was under consideration while working with your broker, you may still be responsible for ensuring she gets paid.  Signing an agency agreement is a commitment and should be seen as such since you are employing the time and resources of a professional.  But in the event things aren’t working out, amend the contract and agree to move on.

About the Author

David Haug is a Madison, WI based real estate entrepreneur. He is passionate about helping clients, customers, and friends succeed in both commercial and residential real estate. He is also a raging Badger fan. #OnWisconsin Baby! Connect with David on LinkedIn: