Home Buying 101 -- Buyer Agency

I received an email the other day from a dear reader in Chicago who's getting ready to buy a house and wanted to know some of the ins and outs of working with a buyer's agent. She also suggested that instead of just responding to her, I should respond on the blog so that others may benefit from these little nuggets of wisdom. (Does mild sarcasm come through on your average blog post?) At any rate, it seemed like a good idea. So here goes:

I'll never forget when I bought my first home, in Arizona. I was driving around with the random real estate agent fate had somehow dealt me. (I seriously don't at all remember how I found him or how he wound up representing me.) As we were chatting, he offhandedly mentioned, "Oh, and you should keep in mind that I work for the seller, not you."

Excuse me? Hadn't he been driving around trying to help me me find my best home? Hadn't I told him all about what I wanted, and what I could afford? Hadn't he been the one to recommend a lender to me? How could he not work for me?

'Cause Arizona law said so. The agent working for the buyer was paid by the seller, so he or she owed allegiance to them that was signing the check. What were the implications? Was the agent expected to tell the seller how much the buyer was willing to pay? I never asked. I don't think I wanted to know. The property I bought was a new house in a hot (literally and figuratively) market, so there wasn't a lot of negotiating involved. Just a list price and a contract. If we had been been in a negotiating situation, I can't imagine how compromised it would have been by this "my agent works for the other side" mentality.

Fortunately, Colorado law is different. We have buyer's agency laws that specify clearly -- the buyer's agent works for the buyer, and owes loyalty and fiduciary responsibility to the buyer. So legally, when you tell your buyer's agent how high you're willing to go in a negotiation, that information stays with the agent and doesn't meander its way over to the other side.

There was another "blip" in the law that Colorado has remedied -- dual agency. In many states, an agent working for both the buyer and the seller is legally allowed to represent and advise them both. For instance, if I'm representing sellers who are selling their house, and a buyer comes to me without being represented by an agent, I can represent them both in the negotiations.

There are obvious ethical implications to this. I already know how low the sellers are willing to go, because I've been working with them for a while. Now the buyer has told me how high he's willing to go. And I get to advise both sides. "Hold out for more. I know he can afford it." Or "don't offer than much. They'll go lower."

Colorado corrected this situation by instituting "transaction brokerage." There are two ways an agent can work with a client in Colorado. One way is agency, in which the agent advises and advocates on behalf of the client. The other is transaction brokerage, in which the agent moves the transaction forward, but doesn't advise or advocate. A transaction broker draws up forms, sees to it that everything is signed and official and legal, but doesn't stick his or her two cents on on what the buyer or seller should do.

If an agent is handling both sides of a single transaction, he or she must operate as a transaction broker. In other words, that agent can't advise either side, nor can that agent disclose what he or she knows about the other side. Agent has to say "sign here" and nod a lot. Can't say "go higher" or "go lower." Just put on the poker face and say "What would you like to do now?"

If you're buying a home anywhere but Colorado, one of the first questions I'd ask the agent is how buyer's agency works in your state. To whom does the agent owe allegiance? Will your confidential information stay confidential?