This question comes up often. I’ve never found a consumer who understood it and the vast majority of real estate agents and brokers I’ve spoken to don’t really understand it either.
After years of teaching it in homebuyer classes, I’ve found that diagrams make it much easier to understand.
The other thing to understand is that a consumer’s legal relationship is always with the broker or brokerage, never with the salesperson directly. In fact, it is illegal for a salesperson to take compensation directly from a consumer. The relationship is with the brokerage and any compensation must be paid to the brokerage.
Here is a diagram of Buyer Agency:
Note the buyer is blue, and everybody in the real estate office is also blue. They all represent the buyers and have requirements of loyalty and full disclosure to the buyers.
Here is Designated Buyer Agency:
Note how most of the people in the office are no longer agents of the buyers? In fact, they may know something that would be very important to the buyer to learn, but they have no obligation to tell the buyer since they are not agents of the buyer.
But note that this is only one of five different forms that designated agency can take. The other four forms are often much worse for the buyer than this one.
But, how about a real-life example:
A home seller had their home listed with a brokerage and had a purchase contract but after the home inspection showed major problems with the construction so the buyer backed out.
That company lost the listing and a different company listed it. The seller didn’t tell the new listing agent about the defects. Now a different agent from the first company brought in a buyer. Should the buyer be told about this major defect? Yes if the company is a buyer’s agent, no if it is a designated agency.
The second buyer’s inspection was not thorough and they missed these defects. These defects cost $50,000+ to repair, the buyer had to move out of the home and it eventually went into foreclosure.
In court, the first real estate company, where some agents knew about the major defects when they helped the buyer buy the home, was not found liable. The buyer signed a Designated Buyer Agency contract with them when they started looking and it protected the brokerage.
If that company had been a Buyer Agency and they neglected to tell the buyer about these defects, the outcome would probably have been much different.
Designated Buyer Agency is complicated and not at all intuitive. Because of that, the law required Designated Buyer Agency agreements to be in writing.
Buyer Agency is simple and intuitive. Buyer Agency contracts are not required to be in writing.
More on the different forms of designated buyer agency in the next post…
Jon Boyd Broker/Manager
The Home Buyer’s Agent of Ann Arbor, Inc
1905 Pauline Blvd. Suite 1
Ann Arbor, MI 48103
We serve the Ann Arbor – Brighton – Plymouth – Novi – Canton – Ypsilanti – Saline – Chelsea – Dexter – Novi – Northville areas in Southeastern Michigan.