‘Unreadable’ California Buyer Contract Sparks Debate on Transparency

No one said change would be easy. Many real estate organizations find that to be truer than ever about buyer representation agreements, as some REALTOR® organizations have come under fire for their attempts to abide by incoming policy changes. 

That has been the case for the California Association of REALTORS® (CAR), which was heavily criticized in a newly released report commissioned by the Consumer Federation of America (CFA), which claimed that CAR’s draft of a buyer agent agreement was “anti-consumer.”

The group also indicated that it contacted the U.S. Department of Justice (DOJ) and the offices of unspecified attorneys general about buyer forms it believes are anti-consumer.

“Much confusion abounds over the NAR settlement and the future of real estate contracting in the United States. The proposed Buyer Representation Agreement does little to dispel the confusion,” writes Tanya Monestier, a law professor at the University of Buffalo Faculty of Law, who prepared the report. 

Not long after its release, CAR rebuked the CFA report, calling it “absurd” and “a misguided critique of the forms.”

“Hardworking buyers’ agents are entitled to be compensated by their clients according to the terms of their agreements,” CAR General Counsel Brian Manson said in a statement. “Indeed, that clarity around compensation is the very substance of the NAR settlement. Nearly half the report consists of commentary on punctuation, capitalization and the author’s opinions on design, rather than substantive legal issues.”

CAR previously acknowledged that the DOJ had launched a “formal inquiry” into an unspecified number of forms that were being updated to comply with the NAR settlement, with the association delaying the release of those forms while it conducted a review. It was not clear if the buyer contract was among those forms.

Dissecting the draft

Monestier picks apart CAR’s buyer representation agreement, calling the proposed form “virtually unreadable.” 

“Most homebuyers reading this agreement will not fully appreciate what they are signing and will not understand that they have agreed to pay their agent’s commission,” she wrote. 

The report cites formatting, numbering and lettering scheme, grammar and “complicated and inconsistent language” as factors Monestier thinks would hinder buyer comprehension of the form. 

Monestier also emphasizes that the form is drafted to “disguise the obligation of the buyer to pay his agent” and “underplays that it is the buyer’s obligation—and the buyer’s obligation alone—to pay his broker.”

“This is undoubtedly deliberate,” she writes. “Buyers are generally reluctant to sign agreements that commit them to paying any sum of money on top of what they need to pay to purchase a property.”

According to Manson, the CFA commentary is on an earlier draft of CAR’s agreement. He called the form a “work in progress” that has already been changed to address many of the CFA’s concerns.

“CAR forms are drafted to comply with California law and facilitate California real estate transactions,” Manson said. “The report demonstrates the author’s lack of familiarity with California-specific statutory language required for our real estate contracts. Moreover, consistent forms that cover myriad situations are important so that buyers, sellers and their agents can efficiently manage complex transactions.”

The CFA report also suggests that CAR’s form “plainly broadcasts how REALTORS® are going to create a ‘workaround’ so that the compensation amount agreed to in the Buyer Compensation Agreement does not actually serve as a cap on compensation.”

Her critique also identifies what the CFA characterized as problematic provisions related to dispute resolution, dual agency, commissions owed and buyer cancellation, among other issues.  

Monestier recommends that CAR “jettison the contract in its entirety” and “truly pursue a buyer-friendly agreement that enables home purchasers to understand their rights and obligations.”

Manson, for his part, emphasized that CAR forms are continually revised to create the best possible documents for consumers and the organization’s members.

Besides CAR itself, others in the industry are defending the contract in the face of this sharp criticism. Veteran buyer agent training instructor Ken Kaplan tells RISMedia that the contract draft protects buyers and adheres to the new standards. 

“Change is never going to be easy, and the most important thing that I believe everyone is trying to accomplish is to protect the consumer and to make sure that we’re adhering to the guidelines of the settlement and the new rules,” Kaplan says. 

Having reviewed CAR’s form, Kaplan says the draft “absolutely protects the buyer.”

“It is very, very clear of the steps that have to be taken by the agent to make sure that they are disclosing to a buyer exactly what needs to be signed,” he says. 

Kaplan acknowledges that developing more simplified language in contracts—as the CFA report suggests—could help homebuyers understand the forms, but he also believes that practitioners should be prepared to explain and educate their clients. 

“If you put any contract in all layman’s terms, you’re not probably going to have the protections that you want if it’s not specific enough,” he says. 

Under the microscope

A little less than a month is left before the NAR proposed settlement takes effect. That looming August 17 deadline has spurred renewed focus among industry groups to revamp their buyer representation contracts, which will be required before an agent can even show a homebuyer any listings. 

According to NAR, form agreements “serve as a foundation for clear and open conversations with consumers.” 

“Consumers should always carefully consider and negotiate the terms of these agreements to best meet their unique home-buying or -selling needs,” said an NAR spokesperson in a statement emailed to RISMedia.  

NAR also encouraged members to address form changes early and prepare to educate real estate professionals and consumers about revised forms before August 17.

The spokesperson goes on to state that NAR’s policy does not dictate terms to practitioners about their buyer representation agreements with consumers, adding that “consumers are in the driver’s seat as compensation continues to be negotiable and should always be discussed transparently between real estate professionals and the consumers with whom they work.” 

With no universal template for these agreements, many brokerages and organizations have been creating their own contracts, which Kaplan believes could set a dangerous precedent if it’s done without state or national oversight. 

“I think you fall down a slippery slope if you’re not using the NAR guidelines or whatever your state guidelines are,” he says. “There needs to be a universal form, or at least universal areas that are clarified that hold the place in every single state’s contract.”

The CFA indicated in its June 25 release that it had been evaluating buyer contracts in recent months. While the group states that it identified several revamped draft forms as anti-consumer, CFA also praised eXp Realty’s version of a buyer contract as an example of an agreement that is “understandable and much fairer to everyday buyers.” 

“The contrast between the CAR and eXp contracts could not be sharper,” says Stephen Brobeck, a CFA senior fellow. “The eXp contract is written with the buyer in mind. The CAR contract is written with the interests of the REALTOR® in mind.”

Holly Mabery, VP of Brokerage Operations at eXp Realty, accepted the praise in an emailed statement that said the real estate brokerage’s recently introduced buyer broker agreement forms are “part of our ongoing efforts to simplify the real estate process for both consumers and agents.” 

“We believe in providing clear expectations and straightforward agreements to empower our clients,” Mabery says. “The positive adoption of these agreements by our agents reflects our commitment to facilitating smoother interactions.”

The CFA concluded its release by urging buyers to request buyer contracts at the beginning of their communication with an agent and discuss the terms with them and their lawyers. 

The group also calls for buyers to try to negotiate commissions down from “today’s typical 2.5% to 3% level” and see if the seller will help provide compensation. 

Kaplan agrees with many of CFA’s recommendations, especially those encouraging open communication about buyer representation contracts with consumers early in the process.

“It’s imperative that you do that because no consumer wants to be surprised at the last minute,” he says. “I think the way to go is to present this and what is expected of a buyer upfront. The most important three words in real estate are disclose, disclose, disclose. Disclose it early, and disclose it often.”

Regarding commission negotiations, Kaplan believes it’s essential for buyers to understand what services the agent offers to help them get into a home. 

“A consumer should know that, and an agent should be able to, in a frank conversation, disclose to a buyer what their worth is and then let the buyer decide whether they feel that agent is worth it,” he says.

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