Q: I am considering selling my home and then purchasing a new home. Because of the amount of information I can obtain on the internet about selling and buying real property, do I really need a broker who I will have to pay a commission to?
A: It is not uncommon for many sellers and buyers of real property to have misconceived notions about the utility of using a broker to handle the selling and buying of real property, especially if they have not been involved in prior transactions. Some sellers believe that the broker’s function is limited to finding a buyer, and buyers tend to believe that the broker’s role is limited to finding a property. But such limited views do not recognize the many valuable functions that brokers can provide, and the benefit of a broker may not be realized until after serious and negative legal consequences have occurred.
The respective roles of a broker depend upon whether the broker is retained by the seller or buyer. The seller can benefit from a broker’s services by receiving experienced advice regarding the best time to market the property, the best price to list the property in order to encourage offers, the most beneficial marketing strategy to advertise the property (e.g., open houses), applicability of tax considerations such as a tax deferred exchange, the nature and extent of disclosures that should be made, the type of repairs to bring the property into compliance with the law and to improve its appearance and “curb appeal”, whether other professional advice by an attorney or contractors is necessary to resolve issues that could affect the property’s value, the negotiation of offers and counter-offers, and insuring that all of the applicable forms have been prepared in the correct manner for the transaction.
The buyer can benefit from a broker’s services by receiving advice regarding the properties that are available for purchase in the price range and with the characteristics (e.g., location, pool, view, size) that the buyer is seeking, the nature of financing that is available, obtaining and reviewing reports regarding the physical condition of the property (e.g., home inspection and title report), identify and coordinate the use of professionals such as attorneys, surveyors, and appraisers, prepare the offer and negotiate any counter-offers, assist in resolving title problems, review and insure receipt of all of the necessary forms from the seller, and monitor the closing of escrow.
Generally, a buyer should always seek the assistance of a broker because it does not usually cost the buyer anything, because the broker’s commission is paid by the seller. The buyer’s broker receives a percentage of the commission the seller agrees to pay to its broker (normally at least 50%), and buyers rarely directly pay their brokers. Although the impact of the broker’s commission may be reflected in a higher sale price, the seller has normally already committed to paying a commission to its broker that will be shared by the buyer’s broker. Therefore, a buyer who does not retain a broker will not receive any benefit on the purchase price because if there is no buyer’s broker, the seller’s broker will receive the entire commission already agreed upon.
Furthermore, locating a suitable property and negotiating an agreeable price, together with performing the other services described above, requires time, effort, and skill that most buyers are not capable of providing on their own. Access to the multiple listing service that provides basic information about available properties are difficult for novices to use, and their availability is often restricted.
From a seller’s perspective, the idea of not paying a broker’s commission of 3-6% of the sale price may seem attractive at first. But the cost-saving expediency of such a decision depends upon whether the buyer has retained a broker. Brokers representing buyers are not likely to pursue a property for their clients if there is no chance of being paid a portion of a commission. For similar reasons, many buyers will request that their brokers only consider properties where the seller has agreed to pay a commission so that the buyer can avoid paying its broker directly. No one, including brokers, want to work for free.
As described above, a seller receives many benefits from retaining and paying a broker, including exposure of the property by various marketing strategies, such as inclusion in a multiple listing service that is received by all brokers in the geographic area surrounding the property. Selling brokers are motivated and experienced in advertising a property and it is unlikely that a seller acting alone will be able to provide the same exposure for the property that a broker can provide.
Real estate brokerage activities are highly regulated in California and are subject to strict licensing requirements. A broker is a person who, for compensation or in expectation of receiving compensation, does or negotiates to do certain statutorily specified acts on behalf of another. Activities that require a broker’s license include purchase and sale transactions, rental transactions, and certain financing related activities that involve liens on real property or on a business opportunity.
A real estate salesperson or sales agent is a person who for compensation or in expectation of receiving compensation, is employed by a licensed real estate broker to do one or more of the acts for which a real estate broker’s license is required. There must be a written agreement between the broker and salesperson that covers the material aspects of the relationship. A salesperson operates under the employment and supervision of the broker, and brokers who fail to exercise reasonable supervision over the activities of their salesperson are subject to disciplinary action. Only a broker can receive a commission, and the agent is compensated by the broker pursuant to their agreement.
Both the broker and salesperson are subject to the licensing requirements of California law and are subject to discipline by the California Department of Real Estate. No person acting in the capacity of a real estate broker or salesperson can collect compensation for performing licensed acts without proving he or she was a duly licensed broker or agent at the time the activities were performed. Acting or simply advertising one’s self as a real estate broker without being licensed is a public offense subject to a maximum $20,000 fine and/or up to six months imprisonment. Original issuance of a license requires compliance with a statutory threshold of experience and training, fingerprinting, and the passage of a written exam. The licenses are valid for a four-year term, and any renewal is subject to successful completion of a minimum amount of continuing education.
Both sellers and buyers should realize that a broker can not engage in providing legal advice that constitutes the unauthorized practice of law. Only active members of the California State Bar are authorized to practice law in California. Although the “practice of law” in a transaction is sometimes difficult to determine, the giving of legal advice in the preparation of legal instruments or contracts, or the drafting of legal instruments and contracts, will normally be considered practicing law. However, brokers will typically prepare offers and counteroffers and otherwise guide their clients in understanding and completing the many legal forms used in a real estate transaction. Both the client and brokers should remain aware that there are limits to the services of a legal nature that can be provided by brokers, and when in doubt, legal advice from a licensed attorney should be sought.
Therefore, from the buyers perspective, it makes little sense to not retain the services of a broker because the compensation will be paid by the seller, and the buyer can obtain significant benefits during the transaction that will assist the buyer in making an informed decision regarding a purchase at the lowest price. The seller also receives significant practical benefits from retaining a broker, including experienced assistance in obtaining the highest price for the property, and it is unlikely that the avoidance of paying a commission will result in a meaningful savings because of the desire by the buyer’s broker to receive compensation. Attorneys have a saying that “The person who represents himself has a fool for a client”, and the same can be said of a seller or buyer who foregoes retaining a broker in a real estate transaction. Given the complex and extensive legal ramifications that arise from a real estate transaction involving hundreds of thousands of dollars, and the exposure to a lawsuit for many years after the close of escrow, it is seldom prudent to go it alone.
The opinions expressed in this article are those of the author, and they do not create an attorney-client relationship or constitute legal advice. Individual circumstances may vary and professional advice is recommended before making any decisions concerning legal matters.
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