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New York Real Estate Broker Agreements- The Essentials

realtor-300x199Now that the fall real estate market has ended, parties to real estate transactions are starting to prepare for the busy spring market.  Some sellers make the decision to forego the services of a professional real estate agent.  Other parties determine that using a real estate agent is essential to achieving the optimal high price and favorable terms sought.  This post will address the process involved in engaging a real estate agent.

This author  has found that over a period of decades, sellers prefer to work with an agent whose office is close to their home.  Such an agent may also live in the same neighborhood and would be very familiar with issues that are of concern to buyers.  Information on school registration, recreational facilities nearby and even medical providers will make a buyer feel at home and more comfortable selecting a particular house.  Agents in close proximity provide convenience in showings as often as needed and monitoring of property conditions.  As such, it is not unusual for a seller to ask neighbors for a referral.

The agent located will visit the home, provide suggestions for repairs and staging that may facilitate a quick sale and a recommended listing price.  Whether the agent owns her own brokerage or works for another brokerage, the seller will be presented with an agreement to sign and other disclosures such as lead paint and COVID disclosures, before photos of the home are taken and the property is listed on the Multiple Listing Service, allowing for exposure of the real estate listing to all buyers searching for a new home.  As an explanation, an agent may work for a brokerage with which he has an arrangement for shared compensation.

Particularly if the real estate agent works for one of the major brokerages, the proposed agreement will be highly technical and contain terms that have been ironed out over the course of many transactions.  Such an agreement is initially favorable to the brokerage, so it is helpful to have experienced attorneys  review the proposed agreement before signing it.  While some of the terms are not particularly negotiable, one of the most important tasks is to make sure that all of the blanks in the document are filled in.  Should there be a disagreement in the future or the seller wants to use another brokerage, the information in the blank spaces may determine the outcome.

The brokerage agreement needs to be dated as to the start and expiration dates, so that it is clear when it terminates and for how long an obligation to pay commission continues.  The listing price and percentage of commission to the broker and potential co-brokers needs to be completed, as well as whether the co-broker gets a portion of the broker’s commission or such payment is to be in addition to the broker’s commission.  The seller will want to encourage the broker to work hard by paying a generous commission, while also encouraging participation of co-brokers for maximum exposure of the listing.  The document should be clear that the commission is not due until and unless title passes to the buyer, meaning that the closing actually occurs.  If a buyer is in contract, but does not close for any reason, the seller would not be responsible for the commission.

As an example, let’s say that the seller has discussed selling the house to a neighbor and such discussions did not result in a deal.  The seller then decided to list the property with an agent.  It would be prudent for such a seller to request an exclusion in the agreement to provide that a sale to the particular neighbor named would not result in a commission being due, in case the neighbor shows renewed interest in the property.  Likewise, an agreement may be exclusive or non-exclusive.  An exclusive agreement means that the commission is due if there is a closing during the term of the agreement, even if the agent did not introduce the parties to the transaction.  Non-exclusive agreements are more favorable to the seller, in that they provide that the agent needs to actually locate the buyer before receiving the commission at closing.

Another important term to consider is the potential extended term of the agreement.  For instance, the agreement is to terminate in six months.  The agent may request an “extended term” of three months.  This means that the initial agreement proceeds for six months and that the commission would be due for three months afterwards if a contract is entered or a sale is consummated with a buyer who was introduced to the property by the agent.  We  suggest that the initial term be lengthy enough that the agent has time to see the fruits of her labors in preparing and staging the property and for promotional materials to be effective.  However, we recommend that extended terms be of short duration, since at that point the seller found the agent to be ineffective and needs to market the property in another manner, so being tied to the agent and being obligated to pay commission would not be optimal.

In order to be fair to both parties in interpreting whether a commission would be due during the extended term, records should be kept of all persons who looked at the property during the initial term of the agreement.  Your attorney may need to advise whether an interaction with an agent qualifies for a commission during the extended term.  Such advice will be specific to the facts involved.  Perhaps all that happened was someone toured the property and did not make an offer or negotiate terms.  On the other hand, another buyer may have seen the property, had numerous discussions with the agent and a contract may have been in the process of negotiation.  In order to earn the commission, the agent may need to show that she introduced the parties and was the proximate cause of coordinating deal terms.

It is best for our firm to advise sellers as to the contents of broker agreements before they are signed, so that the terms are best suited to a seller’s goals and concerns.  That way, disputes may be avoided in the future and sellers can proceed with having contracts prepared and selling the property.

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