What to watch for when the mode of sale changes

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BUYING a property is rarely straightforward, which is no surprise given that it’s the biggest financial commitment most people ever make. When you combine big sums of money and a considerable level of emotional investment, even the simplest transaction can be stressful. We hear a lot about the need for buyers to do their homework, but there are plenty of reasons for sellers to be careful too.

If you’re selling a property with a real estate agent, you must sign an agency agreement that sets out all the terms and conditions of your contract with them, including how much commission they will earn from the sale and how the property will be marketed. That’s why it’s so important to get legal advice before you sign an agency agreement. If it’s a standard agreement, you usually retain the right to sell the property privately but it’s a good idea to check this. If you have signed an agreement with an agency but decide for whatever reason to opt for a DIY private sale, you should double and triple-check whether the agency agreement requires you to pay commission to the real estate agent or agency.

Most agencies use the Real Estate Authority (REA) standard clauses in agency agreements, which set out certain terms and conditions for the contract and the payment of commission. According to the standard clauses, commission is payable if the property is sold within the active term of the agreement (normally 90 days) or if it is sold privately within six months after the end of the term to a buyer that the agent had earlier introduced to the property. In other words, if the buyer visits an open home run by the real estate agent, and then enters into a private sale with the seller within six months after the end of the agreement, the seller is still obliged to pay commission to the agent. This can vary depending on whether it is a sole or general agreement – talk to your lawyer before you sign up.

Both sole agency agreements and general agency agreements provide for commission payments after the agreed period ends.  If a seller enters into a sale within six months of the agency agreement ending with a buyer who was introduced by the real estate agent (or the agent facilitated the sale), then the seller must pay the agent commission just as they would have done when the agreement was still current. So, if the agent brings a potential buyer to a property in March, the agency agreement expires in April, and the seller and purchaser enter into a private sale agreement in May, the seller will have to pay the agent commission. The sale must become unconditional (which is when all the conditions of the sale and purchase agreement have been met), but it doesn’t matter whether it goes unconditional during or after the agency period, or during or after the six months following expiry, so long as the sale and purchase agreement is entered into within those timeframes. So, before you sign an agency agreement, ask the agency if it uses standard REA clauses. If it doesn’t you may be exposed to more complicated commission risks and you should seek legal advice.

Generally, any issues arising from the agency agreement/arrangements between the seller and the real estate agent won’t have a direct effect on the separate sale and purchase agreement between the seller and the buyer. However, the wrangling involved may create headaches or delays that you as a buyer wouldn’t want to be troubled with.

If you do decide that you’re really keen on a property in this situation, seek legal advice before getting involved (and especially before signing anything). Remember too that the REA can help you with questions and complaints about sales involving licensed real estate agents, but it’s unable to step in if you have a problem with a private and unlicensed seller.

For independent advice on buying or selling property, check out settled.govt.nz.

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