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A contract law professor who criticized the new purchase forms created after the National Association of Realtors’ proposed settlement of multiple antitrust suits released a sample consumer representation agreement in hopes of pushing the real estate industry to create consumer-friendly forms.
“There are hundreds (or maybe thousands) of different types of these consumer agreements out there,” University of Buffalo contract law professor Tanya Monestier wrote in a comment accompanying her sample contract.
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“Some are made by state bodies; others by state and local [R]consumer associations; others are MLS [multiple listing services]; others are independent brokerages. Mostly they are all written with the interests of the seller (not the buyer) in mind.”
Monestier earlier this summer wrote reports for the non-profit organization Consumer Federation of America on purchase forms created after the NAR agreement and last month warned that many of the consumer representation agreements created are not understandable to the average buyer or seller and contain language seeking to avoid the terms of the agreement.
Now, Monestier is actually putting his money where his mouth is. He created a sample consumer contract and posted comments accompanying that sample contract, explaining why he chose to include and exclude certain provisions.
“I have issued four reports now in which I criticize the contracts,” wrote Monestier.
“It’s easy sometimes to get caught in the cheap seats, that’s why I tried to create something that shows the type of contract that I think brokers should consider using.”
“My sample contract is an attempt to move the discussion forward in a practical way. A sample can be a starting point for creating new forms from scratch or modifying existing ones. And, I think, it’s proof that things don’t have to be written in formal language to convey meaning.”
He emphasized that the sample contract is not intended to be used as is, in part because brokerages and Realtor associations must ensure that their contracts comply with state law. For example, note that dual agency is not allowed in some states and the contract will need to be amended to reflect that in those states, while other states may require specific statutory language or a disclaimer.
“I urge state and local broker associations, MLSs, state regulators, and independent brokerages to do better when it comes to creating fair and understandable contracts for buyers,” Monestier wrote.
“I’m not saying I created a perfect template. And there are definitely situations that I may not have considered enough. Well, the point is we can and must do better.”
Monestier’s commentary thanks several people who provided feedback on the sample contract, mostly legal scholars. The other two are Wendy Gilch, deputy director of Consumer Advocates in American Real Estate (CAARE), who also criticized the new forms after the NAR settlement, and “an NAR-affiliated real estate attorney who wishes to remain anonymous.”
Monestier’s sample buyer’s contract is 2.5 pages long, in 12-point font, and just over 1,000 words.
“By contrast, the New Mexico Association of Realtors’ consumer representation agreement is five times longer—almost 5000 words!” Monestier wrote.
This may take more than 40 minutes just to read.”
He avoids the use of legal jargon and says his typical contract audience will buy a home in the US with some high school education. He pointed out that the Realtor Code of Ethics requires that transaction forms be written in “clear and understandable language.”
“Article 9 of the Realtor Code of Ethics provides: [Realtors]for the protection of all parties, he must ensure whenever possible that all agreements related to real estate transactions including, but not limited to, listing and representation agreements, purchase contracts, and lease agreements are written in clear and understandable language that sets forth the specific terms, conditions, obligations and commitments of the parties…” wrote Monestier.
“There are very few contracts that I have seen that would satisfy the ‘plain and understandable language’ requirement that the industry itself imposes on the participants who cooperate with NAR.”
Making the contract understandable was Monestier’s number one priority.
“Doing so means that some precision is lost and that not every permit for every imaginable situation is covered. This was a deliberate decision,” wrote Monestier.
“In the one thousand out of a thousand cases where the buyer secretly gets his brother to buy the property to avoid paying the seller’s commission, let the courts fix this (even without the contract clause, you argue very well. that your brother is your buyer’s agent).”
“Some sellers will feel like this contract is ‘good for the buyer,'” Monestier said. “Maybe so. Common sense can differ on where to draw the line.”
But he encouraged marketers and others considering revising their forms to ask themselves: “Do you really need this arrangement there? Why? How likely is this situation to occur? And how much ‘protection’ will this arrangement really give you?”
On that last point, he noted that anyone can say “not guilty of x, y, and z” but that doesn’t give them full protection. “The court can find you guilty despite your attempts to plead not guilty in writing,” Monestier said.
At the top, placed in a gray box, Monestier’s form says, “Required Notice: Real estate commissions are not imposed by law. They are subject to negotiations between buyers and sellers. ” He deliberately did not say that commissions are “fully negotiable” because that could give buyers the false impression that sellers need to negotiate their fees, which is not the case, according to Monestier.
The form makes it clear that the buyer is entitled to indemnification of the buyer’s broker as long as he successfully closes the transaction: “The buyer agrees to pay the Broker either _____% of the purchase price OR a down payment of $ ________ if the buyer purchases the property covered by this agreement during its term.”
Monestier said he included the option to pay as a percentage of the purchase price despite objections from some consumer advocates that such a payment model represents a conflict of interest between buyer and seller.
“On balance, however, I believe that the simplicity of a fee based on the purchase price outweighs the downside of this model,” he wrote.
For clarity, the form includes a conversion chart of how much a percentage of the purchase price can be added to a home purchased for the average home price in the US: $400,000. This formula says 3% of $400,000 is $12,000, 2% is $8,000 and 1% is $4,000.
The form also sets out two ways in which the buyer’s seller’s compensation can be covered by the seller: by a direct provision of compensation or by contract.
“I am aware that some consumer advocates do not believe that an offer of advance compensation from a seller or seller’s broker is subject to antitrust or antitrust laws,” Monestier wrote.
“However, it seems to me that these promises of compensation are not prohibited from being paid. Indeed, the compensation clearly specifies that the compensation offer can be advertised anywhere, except on the MLS.
“While I would like to see the industry move to a Justice Department-sponsored model (complete separation; the buyer may ask for consent to the offer), we don’t seem to be there yet. So, I wrote this article to show you the current practices. “
He made sure to point out, however, that while the set compensation provisions are not prohibited by the NAR agreement, “[w]whether they are illegal is still an open question.”
The sample form makes it clear that the buying seller cannot collect more compensation than was agreed with the buyer – something most industry forms allow Monestier to charge.
His form says, “The broker will not receive additional compensation from any source that exceeds the amount specified in this agreement. The Broker will not modify this agreement to increase the Seller’s compensation or sign a substitute agreement with the Buyer to obtain a higher compensation amount.”
The Monestier form also makes it clear that prior indemnification from the seller or the seller’s broker will not affect which properties the buyer will show the buyer: “The seller will show the buyer all properties that meet the buyer’s terms regardless of whether the seller or the seller’s broker offers to indemnify the seller.”
In his comments, Monestier added, “Some forms allow the buyer to ‘self-regulate’ – that is, to tell their seller not to show them places where the buyer’s commission cannot be advertised in advance. This approach defeats the entire purpose of settlement.
“NAR has issued guidance that sellers must present all relevant properties to the buyer, regardless of whether the seller offers a commission.”
A sample contract allows the buyer or seller to cancel the agreement in writing at any time unless the buyer has signed a contract to purchase the property. The form requires the seller, within three days of the cancellation or expiration of the agreement, to provide the buyer with a list of properties for which the seller provides sales services so that if the buyer purchases one of the properties within a certain period. period, the buyer will have to pay the agreed commission.
“A broker will only list properties where the Broker’s services are more than minimal,” the form reads.
“For example, a Broker may not place a property in a listing if only the Broker’s service receives and presents the listing to the Buyer for consideration.”
Asked if “presenting a listing” includes showing homes, either in person or virtually, Monestier told Inman that he intended that term to refer to “emailing a listing or having an automated feed that sends items.”
Email Andrea V. Brambila.
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