Don’t Work for Free!
One of my students reached out this week with a scenario that is a great teaching moment. I’d like to share it with you.
The agent is working with a buyer who wants to buy new construction. The buyer finds a new build that he likes and while viewing the property, the buyer says tells the agent “I have four friends who would like to buy the remaining four properties left for sale in this subdivision.” SIDEBAR: This is a novice negotiating tactic used by buyers. They use the opportunity of more sales to get a better deal on their purchase. But the buyer went one step further and later in discussions with the actual builder, he mentioned he has four friends who would like the remaining properties.
This is where the story takes a sharp left-hand turn…the builder has a real estate license. The builder could easily cut the agent out of the transaction altogether because the agent made three critical mistakes:
The agent didn’t get a buyer representation agreement signed with the buyer before looking at the property. Without an agreement there is no guarantee he will get paid.
The agent didn’t get the names of the other four potential buyers to set up meetings with them. Whenever someone suggests they have a referral for you, it is up to you to pursue those opportunities. The agent should have met with the four potential buyers and get buyer representation agreements signed, so he is representing them.
The agent didn’t get a letter of introduction and agreement to cooperate signed by the builder that outlined his commission if the buyer purchased the property. It is too difficult to negotiate that after the fact.
This situation was completely preventable, but hindsight is 2020. What should the agent do to ensure he still gets paid?
Let me start by saying the builder and the buyer will likely want to cut the agent out of the transaction because they will both benefit by not paying the agent’s commission. Even if they feel a little guilty about it, they will rationalize their decision. The buyer will say “I got a better deal. I like the agent but let’s be honest, I have to look after my family.” The builder will say “I am a licensed real estate agent and the other agent didn’t get a buyer representation agreement signed. This is an opportunity to maximize my profits and that’s what business is all about.” I’m not saying I agree with those statements. It is just how people justify their decisions. Money often supersedes good choices.
The teaching point here is always to protect yourself.
Don’t work in uncommitted relationships. Good contracts make for good clients. What advice did I give the agent to help him recover after he made these three critical errors? My first suggestion was: learn from this painful situation and don’t make the same mistake again. My second suggestion was: go to the builder and see if he will sign a letter of introduction and agreement to cooperate. If he can convince the builder to sign it then he’s guaranteed to get paid if the buyer buys one of his properties. If the builder refuses to sign it, the agent can still ask the buyer to sign a buyer representation agreement establishing his commission. The agent can then submit an offer to the builder stipulating the builder pay the commission as part of the proceeds of the sale. If the builder refuses to pay the commission, the buyer can submit an offer without it, and the buyer agrees to pay the commission on closing. It is all a matter of negotiations. If both the buyer and the builder refuse to sign the agreements and they decide to work together, there is a very good chance the agent won’t get paid for his work. Not getting buyer representative agreements signed up front is like trying to close the barn door after the horse has already run out.
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