The Agency Disclosure Process Properly Documented:
As part of integrating a system to monitor the agents properly performing the agency disclosure process, a broker may want to consider incorporating certain form in their policy manual. This section of the manual should include copies of the AAR Real Estate Agency Disclosure & Election form (READE) and the AAR Consent to Limited Representation form as well. The broker will want to include specific instructions on how they want the agents to execute these forms with the buyer and seller prospects. It is advisable that a broker offers continuous training on how to properly use these forms.
The Agency Disclosure Process:
Disclosure: In this first of three steps in agency disclosure, the agent will advise the real estate consumer of their intent in terms of the level of service that they wish to offer to the consumer. This is most effectively done using the ARIZONA ASSOCIATION OF REALTORS® REAL ESTATE AGENCY DISCLOSURE AND ELECTIONForm (READE). When an agent begins their discussion on how they want to work with the consumer, it will be very important to determine what level of service the agent will want to provide this consumer in terms of whether they prefer to treat them as a “customer” or “client”. To assist the agent in making this determination, they will want to ask the potential client some questions at the initial interview. One effective way for the agent to get some insight is to inquire about the consumer’s previous experiences with real estate transactions. Once the agent has made their decision, it will be time to take the form and review it with the potential client. A broker should be prepared to offer input in this area to the agent. One area where the broker will need to have a policy is when a buyer/client is being advised that the salesperson or the brokerage may represent more than one buyer who may have a competing interest in the same properties as the buyer. A broker will need to formulate a policy in this event. Whatever the broker’s policy on this is, the agent should review it with the broker and disclose it to the buyer.
Election: In the second step, the agent will need to review the “Election” section of the READE form and check the appropriate boxes with the prospect. It will be critically important for the sales associate to not only be familiar with the brokerage agency representation office policy but also be able to properly explain the options on this form. This becomes especially important when there is a limited (dual) agency. Once this form is completed, the agent has performed both the Disclosure and Election phases. The broker will need to emphasized that these phases should be done at the INCEPTION of the relationship. Many agents wait until they write an offer and this is most often too late to make this disclosure meaningful and defensible to the prospect.
Confirmation: The confirmation phase of the Agency Disclosure process is done in the AAR RESIDENTIAL RESALE REAL ESTATE PURCHASE CONTRACT. The boxes checked on the contract should be consistent with those checked on the READE form, whether for the buyer or seller.
The READE form acknowledges that if the broker is representing both the seller/landlord and buyer/tenant, that the consent of the other party will be required and that this consent should be acknowledged in a separate writing. This separate writing is known as THE CONSENT TO LIMITED REPRESENTATION (“CONSENT”) Form. This form acknowledges the “limitations” that will be imposed on the agent in representing both the seller and buyer. The broker should be very careful about instructing the sales people on how to properly use this form. This form is signed ONLY when this limited agency is IMMINENT. It would be signed by the buyer when they decide they will be making an offer on the property and signed by the seller before this offer is presented to them. Under absolutely no circumstances should this form be signed by either party before the agent knows they’re a limited agent or not. A broker will need to be emphatic about this. If an agent has either party sign this form before this status is determined, it is regarded as “uninformed consent” and a violation of ARS 32-2153 which requires that an agent can only represent both parties with “informed consent”.
DOCUMENTING COMPENSATION & BUYER-BROKER EXCLUSIVE EMPLOYMENT AGREEMENT:
It will be important for both the agent and the buyer/client to reach an understanding about how the agent and brokerage are to be compensated. Compensation is not a factor in determining whether an agent has a fiduciary duty to the client or not. Again, the duty of “Loyalty” means that an agent must promote, protect and advance their client’s interests even above their own interests including those of the broker and the sales associate. It is also important for the buyer to understand that the broker does expect to be compensated and how they are to be compensated so they can properly educate them on how best they can serve the buyer’s interests in these transactions. It is important to remember that a broker can set his or her minimum expectations on compensation with any client as long as this is done so within the company. If the broker was to decide with another broker the fees that they would charge, this would be a Federal Trade Commission (FTC) violation called price-fixing. Even seemingly innocuous remarks such as “we charge this because it’s what other companies charge” can cause an allegation of price-fixing to occur.
There are three steps to follow in explaining this to the buyer which include the following:
- Explain to the buyer how the agent is compensated. In most cases, a broker is compensated either through the listing broker who is being compensated by the seller, the seller directly (i.e. For Sale by Owner), a builder or a lender on an REO transaction. This should be explained very clearly to the buyer.
- Explain how much compensation the agent expects to receive. It is important to acknowledge and explain to the buyer that commissions are always negotiable by law. However, an agent (broker) can negotiate the fees and explain how much they feel the value of their services is worth or what fees the broker has set. What they don’t want to do is suggest that other brokers have set similar or the same fees. This would be a violation of the FTC law and is price-fixing. The agent will want to assure them that each broker independently sets their fees and commissions. A broker may want to consider a printed disclosure here.
- Identify expectations and reach an agreement. This is where the agent would ask the buyer that if they are not able to be compensated the minimal amount they expect to receive, are the buyers willing to make up the difference. The buyers will often answer that they are not willing to do this. If the buyer indicates they are willing to make up the difference, the agent may want to consider having them enter into a Buyer-Broker Exclusive Employment Agreement with the approval of the broker. The broker should give this matter serious consideration as there are some major legal concerns. However, if they do indicate that they are not willing to compensate the difference to the agent, the agent may want to suggest that they need to agree that the agent will only show those properties to them where the agent and broker are assured of being compensated the minimum stated amount. The agent will then want to ask them if this is acceptable to them. If their answer is that this is not acceptable, they may be telling the agent that they might expect the agent to work for free in which case the agent and broker might want to reconsider whether they really want to represent them or not. The agent and broker will want to be sure to deal with this issue before they commit themselves to representing them. The caution here is that if the agent has already indicated his or her intent to represent the buyer by action and/or words, he or she may have already created an obligation to represent them and may not be able to contravene this obligation whether the buyers agree they should be compensated fairly or not.