NYC Homebuyers are often waylaid into working with expensive agents who do not add enough value, and are unable to switch easily, if at all. We break down how real estate agent commissions are handled in NYC, and point out some of the pitfalls that affect buyers.

NYC Homebuyers are often waylaid into working with expensive agents who do not add enough value, and are unable to switch easily, if at all. We break down how real estate agent commissions are handled in NYC, and point out some of the pitfalls that affect buyers.

In New York City, the Real Estate Board of New York (REBNY) oversees the activities of brokers and the Residential Listings Service (“RLS”), NYC’s substitute for an MLS. REBNY provides two key agreements that govern the terms under which a broker becomes entitled to a commission on a purchase or sale of residential real estate: the Universal Co-Brokerage Agreement (UCBA) and the Residential Universal New Development Brokerage Agreement (RUNDBA). The UCBA governs brokers’ rules of engagement for both buyers’ brokers and sellers’ brokers on resale listings (properties that have been owned before), and the RUNDBA governs rules for new development listings.

Understanding these two documents is critical for home buyers and sellers in NYC to understand how their agent gets paid and when the agent becomes entitled to a commission. This is a process that is often opaque to the buyer. Theoretically neither the UCBA nor the RUNDBA is confidential, yet information about them is rarely made available to the public. That’s why I wanted to dedicate our first blog post to illuminating these rules for the consumer.

At Bluesidy we believe that pulling back the curtain and ensuring transparency around these for homebuyers is critical to protecting buyers’ financial interests. Both the UCBA and RUNDBA have meaningful financial consequences for home buyers who are ambivalent about working with an agent (or working with a particular agent) and want to preserve their ability to self-represent.

UCBA:

Resale sales and purchases in NYC are governed by the UCBA. Under the UCBA, a ‘direct offer’ (from the seller to a buyer’s broker), if any, of commission for a buyer’s broker must be posted in the RLS, where it is made visible only to licensed agents and brokers. Any buyer’s agent/broker who logs in to the RLS will be able to see how much commission is offered for bringing a buyer to a particular property.

A buyer’s broker becomes eligible for commission by:

Reaching out to the seller’s broker and requesting to bring a buyer to a property If a buyer has already visited the property with a different broker, the seller’s broker must inform the buyer’s broker of this.
The buyer’s broker must (upon request) provide your name (the buyer’s name) to the seller’s broker. The seller’s broker will record your name on a list.
The text of the UCBA is silent on exactly how a buyer’s broker goes from this initial tour to garnering commission on a purchase, but in industry practice generally if a resulting home purchase closes, the buyer’s broker will get the commission posted in the direct offer of commission on the RLS.

In resale, you as a buyer can change brokers (as long as you have not signed an exclusive representation agreement with a broker). If you are dissatisfied with your initial broker and want to re-visit a particular resale property with a new buyer’s broker after your initial visit, this is within your rights. Your new broker may request a written statement from you to this effect, as they are required to send this to the seller’s broker. The new broker can then re-tour the property with you and represent you in the purchase.

However, the original broker who represented you can still bring a dispute over the commission to REBNY, and REBNY would provide arbitration between the two buyer’s brokers to determine who had earned the commission. In practice, disputes over commission are rare, but this is probably because the threat of bringing a dispute before REBNY incentivizes buyers brokers who have a dispute, to settle with each other. The fact that the original broker may bring a dispute has a cooling effect on the market for buyers broker services – a new broker is unlikely to be willing to represent you if they may be forced into arbitration with another broker over the commission. This is good for brokers but bad for buyers.

RUNDBA:

The RUNDBA governs the rules of engagement for brokers on new development properties in NYC. Under the RUNDBA, commission is earned by a buyer’s broker when the below requirements are met:

The buyer’s broker first brings the buyer to the property, The buyer’s broker accompanies the buyer to their first visit to the property, The buyer’s broker registers the buyer with the seller’s agent in advance of the tour, The buyer’s broker is listed on the sign-in sheet at the property when the buyer tours the property, The buyer has not been previously registered at the property with another broker, nor they have they visited the sales office on their own, The above actions result in a buyer signing and submitting an agreement to purchase a specific unit in the new development within 60 days, and The buyer actually closes (completes) the home purchase.
What is missing from the above equation? Most glaringly, the buyer’s consent to being represented by the buyer’s broker and the buyer’s voluntary entrance into a representation agreement. REBNY does not currently require either of these for a buyer’s broker to introduce a buyer to a new development, or for them to become entitled to a commission.

Per the RUNDBA, a buyer’s broker is entitled to a commission if they meet the above requirements. If you as a prospective buyer allow an agent/broker to “introduce” you to a property using the above process, they become entitled to a commission on your purchase of this property. At market rates for new development properties in NYC, a buyer’s broker commission can be anywhere from 3-6% of the total net purchase price of your property – not including the seller’s broker commission. (Buyers brokers’ commissions tend to be higher for new development purchases than for resale purchases, another fact which is concealed from the buyer until after the broker has put the above process in motion.)

Of course, most consumers are not aware that they have “allowed” an agent to do this at all, since most of the process occurs behind their back, without their knowledge or consent.

Many buyers find out too late (or not at all) that due to the high buyer’s broker commission on their purchase, the seller (called a Sponsor) of the new development is willing to offer them fewer concessions and/or is more rigid about the top-line purchase price, as Sponsors generally look at the net purchase price they will yield on a given sale. A buyer in this position may begin to question whether the convenience of being represented was worth the substantial financial tradeoffs. Or a buyer may simply feel that they didn’t know this agent very well (or at all) before touring the new development with this agent, and they’d prefer to work with a different broker, or go unrepresented …unfortunately, it is too late. This agent has already become entitled to a commission on your purchase in the new development property you toured together.

A buyer finding themselves in this unfortunate position can only dislodge their agent from the purchase by sending a letter to the exclusive sales agent of the new development stating that they believe they have been abandoned by their broker, or that the buyer reasonably believes they have not been effectively represented by their broker, and providing a basis for this belief. And few brokers will abandon a client when they see a substantial commission check on the horizon.

At this point the hapless buyer is stuck with this agent if they go forward with a purchase in this new development property. I say ‘stuck’ because while buyers always have a right to be represented by an agent of their choice, a new agent in the situation described above will not be eligible for a commission on the purchase resulting from the initial tour – the original agent is still entitled to the commission. This makes it exceedingly difficult for buyers in this situation to attract a new agent, since the new agent will not get paid. Additionally, the original agent is still entitled to the commission even if the buyer wants to self-represent.

This is a tragedy for consumers. They become responsible for tens of thousands of dollars in commissions without their consent, or even knowledge of the process. While it is true that buyer’s broker commissions are currently paid directly to the buyer’s broker from the seller, the seller is paying with the proceeds of the sale! Therefore, this all comes out of your, the buyer’s, pocket – be very way of anyone who tries to tell you otherwise.

Similar consumer tragedies have played out across the country for far too long – this was one of the key reasons for the many lawsuits against NAR, and the landmark settlement we will discuss in a subsequent blog post. However, REBNY is not a member of NAR, and operates based on its own rules, which remain unchanged as of today.

There are more intricacies to the UCBA, RUNDBA and industry practices here in NYC, which will be the subjects of additional blog posts. I hope this gives you, potential NYC homebuyer, a primer on reasons to proceed with caution and intention before touring a home with an agent.

– Elizabeth