Commission paid and no deal?
What happens when the home you are selling goes unconditional and yet doesn’t settle or the vendor pulls out of the deal at the last minute even though the contract is unconditional and a deposit paid.
This nzherald article got me thinking about the public perception of the job of real estate agents.
Where does the agents job that he/she is contracted to perform end and when should they get paid?
Does it end at the time of an unconditional sale?
Or is the agent legally obliged to be involved until the house settles?
The piece of paper governing the agent’s relationship with the seller is known as a listing / agency agreement or authority to market. For those readers who haven’t seen one of these documents, I have scanned an example here. All agencies will have a similar document that will need to be signed by the homeowners at the time of appointment of the agency.
No similar piece of paper is signed by the purchaser and the agent.
The exception to this would be a scenario where you as a purchaser contract an agent to find you a house and are willing to pay a finders fee. This happens outside of New Zealand but is still very rare here.
Therefore, the agent has no contractual obligation to aid the purchaser, though it can be argued that there is a moral obligation.
The listing agreement sets out among other things, the commission payable and when. As you can see from the example, the agreed commission payable is triggered when the contract for sale and purchase of the homeowners property “becomes unconditional and binding on both parties”.
Reading down further in the Terms and Conditions (section 1a), the signing homeowners authorize the agent “to deduct any fees, commissions and other expenses from the deposit”. This deduction of fees from the deposit is standard industry practice.
Contractually, the real estate agency is engaged to market a property for sale. Once a binding and unconditional contract for the sale and purchase of the property is secured, the contract with the agent ends! Anything further to do with the property and the contract needs to be communicated through the solicitors acting for each party. If a house doesn’t settle because one of the parties pulls out after the agreement becomes unconditional, then the other party has to sue based on the breach of the sale and purchase agreement. Though it has nothing to do with the agent at all, he/she may be called in as a witness to the contract and its breach. I have never been involved in such a situation and am glad that it is rare as it would be expensive, stressful and time consuming for all parties concerned.
However, in actuality, the agent continues to work as a go between communicating verbally between the purchaser and vendor up until and even after settlement and possession have taken place. This is seen by agents as goodwill and relationship building even though they aren’t getting paid for this job. Contrary to public opinion, this is not part of an agents legally contracted job!
It is worth remembering that agents are engaged to market the property for sale and to secure a binding contract. They are not hired by purchasers to be available for pre-settlement inspections, to kick the owners out when moving out takes longer than expected on settlement day, or to physically help the vendors clean and pack up even though the expectation is sometimes there that this is part of their job.
I myself have been involved on numerous settlement days to make sure things go smoothly when one party is moving in on the same day that the previous owners are moving out. As Johnny on the spot, I have often taken the brunt of any venting that takes place when the stress of moving gets too much for one of the parties involved.
I remember one settlement that was delayed as the moving truck for the previous owners had broken down. My phone was ringing hot late into the evening of settlement with the almost deranged purchasers screaming at me to get the previous owners moved out immediately! There was nothing at all I could do in this situation, but the purchasers (who I have no legal relationship with by the way) expected, nay demanded that I be actively involved in getting the vendors out of the house! The sad thing to me is that even though I made myself available to try and keep both parties from throttling each other, including visiting the house on three occasions on the afternoon of settlement with the last time being at 11pm (!) , the buyers finished the day with ill feeling towards me because the vendors weren’t out of the house when expected.
I remember another time when an agent in my office had to spend three hours on a saturday afternoon rummaging underneath a house he had marketed and sold. The previous owners had left the property as they had found it, including a trailer load of wood offcuts and corrugated iron in the basement. The new owner demanded that this refuse be removed from his house. And who did he demand this from? Not the previous owner, but the agent! In order to placate the purchaser and to attempt to build good will to secure repeat business from this person, the agent complied. You may smile at this story, as did the rest of my office when we found out how he had spent his weekend, but it highlights the perception that some members of the public have regarding the role of the agent involved in their house sale/purchase.
Is there a standard size expected for the deposit?
Most agencies and solicitors see a 10% deposit as a fair amount. But in recent times with many young people scratching together all the spare cash they can to get their foot on the property ladder, a 5% deposit has become more common. Even then, coming up with $20k on a $400k house purchase can be a bit of a stretch.
Real Estate Agency fees usually sit in the 3-4% range so a 5% deposit will usually be enough to cover the real estate commission at the very least and this is why agents want to collect at least this percentage in deposit.
There are some solicitors operating in the conveyancing field that tell their clients not to pay any deposit which throws a bit of a spanner in the works on the odd occasion. I always come back to these solicitors and ask them what they would say if they were on the other side of the transaction, working for the home seller. At this point the answer is usually, “Please collect a 10% deposit!”.
It depends on your point of view.
Lessons I have learned regarding deposits…
As an agent, I am obliged to collect a deposit. I try to make sure the deposit is high enough to cover the commission payable at least. If a buyer won’t pay the deposit amount that was agreed on in the sale and purchase agreement, I need to inform the vendor and/or the vendor’s solicitor as soon as I am aware there is an issue.
As a purchaser, there is little that you can do to protect yourself that I am aware of unless you want to try and pay no deposit at all. I have encountered this only a handful of times and it is usually from buyers who have gone through a get rich quick course or have a solicitor who has told them they don’t need to pay a deposit. In reality, your offer will be looked at with suspicion by a vendor if you put up no deposit and could result in you losing the chance to buy the house if you stick to your guns. Minimize the amount of deposit payable as much as possible. If the agent insists on 10% of the purchase price, tell them you’ll only pay 5%. This is usually enough to cover the commission so he/she will be pacified at this point in most cases. If you want to make sure that your deposit is secure. You could talk to your solicitor about notifying the vendors solicitor that you don’t want the deposit released until settlement takes place. I haven’t heard of this from a purchaser personally, but I guess you could always try.
As a vendor, you need to make sure that the deposit is high enough to more than cover the agents commission in case there are issues, but contrary to public opinion, you can’t just help yourself to the deposit if the buyers pull out of an unconditional deal. You have to go through the courts and sue for damages based on the remedies outlined in the sale and purchase agreement you have signed with the other party. Aim for as high a deposit as possible from the purchasers but understand that some well intentioned buyers don’t have the facility to pay a huge wad of cash before settlement.
If you as a vendor are uncomfortable with the deposit being released to pay commissions and other fees (including solicitors fees in some cases too), you need to talk with your solicitor and tell them not to allow the agent to deduct their fees until settlement. Conversely, you can ask that your solicitor holds the deposit in their trust account. Of course, the agent will be uncomfortable with this!
The opportunity for vendors to reneg on paying agency commissions is greater when the vendor’s solicitor holds the funds. And if you don’t think this happens, I can tell you that I personally am still owed $3500 in commission from the sale of a property well over two years ago. The vendor wanted a huge deposit because the settlement was at least 6 months after the unconditional sale date, and he wanted the deposit held by his solicitor. On settlement, my agency sent an invoice to the vendor’s solicitor for the commission payable. Unfortunately for us, the solicitor released all of the monies on settlement to the vendor and told him to pay our invoice. The owner had purchased another home and so informed us that he had no funds to pay us the commission owed. He is still drip feeding small amounts into our company account monthly but my chance of getting the full amount owed to me is minimal at this point… So for me, it is deal made and no commission!
August 27 2009 02:50 pm | General Real Estate and Home Buyers and Home Sellers
Sharon James, AREINZ Business Broker on 28 Aug 2009 at 6:32 am #
David, interesting article. Unfortunately perception and reality can be quite different matters.
One can empathize with the party that feels they have been wronged; no-one wants to lose money under any circumstances and no-one wants to see someone frustrated by circumstances beyond their control.
Greig Metcalfe on 28 Aug 2009 at 4:07 pm #
Yes also agree this article is interesting although as an agent for the vendor I would recommend always trying to get 10% of purchase price as a deposit. This leaves about half normally for the vendor if ‘god’ help us the purchaser defaults.
On a default you will find your vendor is very crumpy if your fee takes all the deposit and he the vendor has no cash from that deposit at all.
I sympathies with the $3500 you are owed but just to cheer you up a little I have a similar case where I am owed $82,000 – in this case the sueing for payment has now gone on for 15 months.
Anyway great article!!!!!!!!