Who Will Pay the Buyer's Agent

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Home Builder with Retired

Who Will Pay the Buyer's Agent?

I’ve seen a few posts recently counseling buyers not to worry about the cost of hiring a realtor since the seller normally pays the buyer’s agent fee. Historically this is the way it has always been done. A featured post just asked listing agents not to negotiate the fee for the selling agent. We can get away from that.

Shoes

There was a time when a buyer had to go to each real estate office and ask what they had for sale. This is pretty common in commerce. If you didn’t like the shoes that Tom McCann offers, then you were free to go to Nordstrom’s. The public knows this is the case and many people still don’t get the concept of a multiple listing association where realtors in a given location pool their listings and agree to share commissions in cross company sales. According to Wikipedia this sharing of listings and commissions has been going on since the late 1880’s.

In the mid 1990’s a new concept arose and took hold. There was a lot of resistance at first, but today the norm is that buyers are represented by buyers’ agents and sellers are represented by listing agents. Still, the seller is asked to pay the entire cost of getting his home sold. I don’t for the life of me know why that cost is shoved on the seller, other than tradition. Yes, the seller was in a contract to sell a property for a fee and the real estate brokerage took it upon itself to share that fee with cooperating brokers.

Listen to me here. Do you, when you get a call from the phone company that wants you to bundle services for a discount have any doubt about whom the person talking to you is being paid by, and who they represent, and why? Do you, when you buy a new or used car from a dealer have any doubt about whom the salesman is working for when he says, “I’ll see if we (meaning you and the salesperson) can get that?”

The IRS allows for certain costs in selling to be deductible. One of those costs is to pay for the services of the real estate broker. The commission is considered a cost of doing business.

Here is a new concept that banks will one day embrace. Part of the cost of buying a home necessitates hiring a broker to represent the buyer and also the cost of hiring an inspector to inspect the home. We know they already consider the loan financing cost as part of the transaction. When will they open their eyes to the rest of the costs of being a responsible buyer, and consider that to be financeable? At that time we will be able to proceed with buyers paying the agent they want to work with a negotiated fee, and sellers will continue to pay the listing agent of their choice, the fee negotiated for the services offered.

Ravenna bridgeWhat will happen? Fees for buyers’ agents will plummet at first. There are companies already rebating much of that fee. Eventually companies that don’t charge enough will go out of business. But, it won’t be a fixed fee coming from the sellers any more. It will be negotiated. And then buyers will start to learn what a good agent is worth and that fee will become acceptable. I don’t know what it will be. I don’t know if it will be a percentage of the sale price, or a flat fee. But buyers (and sellers) will, after a considerable amount of time, come to realize that there is value in paying for great service.

Using a buyer's agency contract for every buyer makes just as much sense as using a listing contract for every seller. They give us a chance to thoroughly educate each buyer. They make us more professional. Buyer contracts make us wear the shoes we claim to be wearing when we walk a client accross the bridge to home ownership.

Shoe Photo curtesy of Photo Daisy

 

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Glenn Roberts
Retired

 

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Re-Blogged 2 times:

Re-Blogged By Re-Blogged At
  1. Bill Burchard 01/07/2011 12:02 PM
  2. John Axt 01/08/2011 11:09 AM
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Rainer
2,518
Karil M. Lauren - Tulsa Area Real Estate 918-557-0119 www.KarilsHomePlace.com
Keller Williams Realty - Tulsa, OK

Glenn, great feature and interesting comments.  Another food for thought is why buyers pay for inspections to make sure seller's house is fit to buy?  They fill out a property disclosure indicating everything's in normal working order, but inspections can reveal not so 'normal' ... hmmmm

Jan 09, 2011 10:35 AM #117
Rainer
27,473
Diane Schubach
Laffey Fine Homes - Port Washington, NY

See comment 106 by Nancy, she is correct. Buyer agency is not the norm here in NY, but I do discuss it with each buyer I work with. In reality, the buyer pays all the commissions, because the fees are included in the price of the house; and the buyer is buying the house! The idea that if the buyer paid the fee, the house would cost less is absurd when you think about it. If (for example), the seller has agreed on a 6% commission, the seller's agent will get the whole 6% if they bring the buyer. If a buyer's agent brings a buyer, the seller's agent will get paid 3% and the buyer will have to pay 3%, which they will probably finance, but in any case, the house did not cost any less for the buyer. If we go to a system where the buyer pays a commission, then will the seller's agent cut their fee in half? Or will the buyer then be paying 9%?

It's a complicate issue, and I wish NY would go to a system where buyer agency is required for the buyer. It would simplify things greatly. As it is now, buyers think they will get a deal if they go directly to the listing agent, but it's not the case. They are paying the same and not getting representation.

 

Jan 09, 2011 11:18 AM #118
Anonymous
Anonymous
LaDawn Westbrook

Glen:

 

Great discussion.   In Colorado we have buyers contracts.  But I have to agree with Judith in that if the buyer could not finance this fee they would not have the money.  Most buyers have difficulties coming up with rheir 3 1/2% down payments.

I have had one situation where I negotiated that the buyer and seller each pay 1/2 of my commission based on the sale's price of the house which worked out well. I had another situation where the buyer paid the full fee because it was a creative financing deal and the seller had zero money and was loosing their house.

So if all parties understand the transaction, you can get the buyers to pay part or all of the commission.  I have even started writing into my buyer agreements a fee if they pull out of the market for any other reason than financing I can at least cover cost of gas and time.

Where in time did it become the seller's responsibility to pay both parties?  Another totally different discussion is who ever came up an amoritized loan product for purchasing a home vs a simple interest loan.  Had to be a banker!!!  Since when it is far to pay double for a home if you actually keep your home for 30 years and make the payments every month for 30 years.

Here is to a great 2011!!

 

LaDawn Westbrook

Exit Realty DTC

Jan 09, 2011 11:23 AM #119
Rainer
78,078
Mark Stuart
Berkshire Hathaway HomeServices California Properties - La Jolla, CA

I love it, and fully concur.  It will probably take federal intervention and a major, I mean major, lawsuit to bring it about however.  There is simply an inherent conflict when the other party is essentially paying for services provided by the other side of a negotiation/contract.

Jan 09, 2011 11:47 AM #120
Anonymous
Anonymous
jill lubinski

Calling in from the Toronto Real Estate market!  In Ontario, the Buyer Representation Agreement is mandatory.  It is usually signed by the buyer before the search begins.  It MUST be signed off by the time you submit an offer.  It is a detailed document with 10 keys areas of information. (I covers such areas as Representation, Multiple Representation, Indemnification, Finders Fee, Conflict or Discrepancy etc etc.) On Commission it basically states that "the Buyer agrees to pay commission to the Brokerage as follows:

If during the currency of this Agreement, the Buyer enters into an agreement to purchase a real property of general description above, the Buyer agrees the Brokerage is entitiled to receive and retain any commission offered by a listing brokerage or by the seller.  The Buyer understands that the amount of commission offered may be greater, or less than the commission stated below.  The Buyer understands that the Brokerage will inform the Buyer of the amount of commission to be paid to the Brokerage by the listing brokerage or the seller at the earliest opportunity.......

If during the currency of the Agreement, the Buyer enters into an agreement to purchase any property of the general description described above, the Buyerj agrees that the Brokerage is entitled to be paid a commission of -----------------% of the sale price of the property or ------------------------ (the co op broker is most commonly offered 2.5% on an MLS listing....the other option above could be a flat fee, for example)

The Buyer agrees to pay any deficiency between this amount and the amount, if any to be paid to the brokerage by the listing broker or the seller. The buyer understands that if the Brokerage is not to be paid any commission by a listing brokerage or by the seller, the Buyer will pay the Brokerage the full amount of commission indicated above. (there is also a Holdover Period clause..usually 90 days, same as APS...and there is a clause that says the Buyer will still pay the commission if he does not complete a firm deal due to neglect or default.)

I have not given an exact quote...but this is the gist of the commission section....

We in Ontario are used to the Buyer Agency set up and frankly it acknowledges that the Buyer (who is partner to every seller and 50% of every transaction and $ generated by the industry) deserves the same protection and fiduciary duties as the almighty seller.

Re: SPIS...they are not "required" in Toronto...though in other provinces they are mandatory.

RE: Home Inspections...we often do a pre list inspection...paid for by the seller or by the seller's agent (it varies)...then the buyer can either decide to "trust" the company who did the inspection, have them come back at a much reduced fee to go through the house again, or the buyer orders his own independant inspection at his cost...

I only submit this to let you know that the sky does not fall in when these procedures become mandatory...and as you well know, Canada has very strict governance on pre qualifying and frankly I'm so proud of that...we have these rules and regs to PROTECT OURSELVES FROM OURSELVES...if you can't afford to buy a house, we'll encourage you save until you can!!

Sorry for the 'epistle"!!

 

 

Jan 09, 2011 11:51 AM #121
Rainmaker
194,622
Sandy McAlpine
McAlpine Properties - Cornelius, NC
Search Lake Norman Homes For Sale - Lake Norman NC

You made some really great points and I like how you put commissions as a cost of doing business

Jan 09, 2011 03:47 PM #122
Rainmaker
191,803
Jirius Isaac
Isaac Real Estate &TriStar Mortgage - Kenmore, WA
Real Estate & loans in Kenmore, WA

Invisible money?  Dishonesty & confusion would be more accurate.  Until we are totally open about who is paying & what, we are just like Congress & the corporations they get money from.  We need to be upfront & disclose everything.  Then have conversations about what our time is worth.

Jan 09, 2011 04:04 PM #123
Rainmaker
311,259
Glenn Roberts
Retired - Seattle, WA

Judith - Invisible money doesn't work for me. And I'm not asking anyone to pay up front, unless that is their business model. Sellers are less than committed in that they don't have to sell during a listing and many listings are canceled and released or they just expire. Buyers would pretty much have the same option. But, like in a listings, it's well discussed up front about who is paying who much to whom.

Jamie - See post #122. It does work. Make it the norm and homes will still get sold.

Karil - I for one wouldn't recommend to a buyer to accept the sellers inspection. There is no consistency in inspection depending on who does it and how he or she feels that day. Buyer should be responsible for their own inspection and pay for it too.

Diane - Not as complicated as you make it. The listing agent agrees to market the house and will get paid if it closes. The coop fee goes away, because buyers are paying their own agents. Listings will be less than they are now because there is no split. The mls will have to make a major adjustment, but that's life. 

LeDawn - Again, see #122. It does work and buyers do come up with the money they need and the rest is financed. If all are in the same boat, there will be no decrease in the # of sales.

Mark - As more and more agents use buyer agreements and buyers pay it will become the norm.

Jill - Thank you. Loved the epistle and you have made a strong point for making the switch. It works. While the buyer and the seller are working toward the same goal, they are adversaries. Let's not commingle their funds and do things like provide inspections for the other party.

Sandy - Thanks

Jirius - Exactly!!

 

Jan 09, 2011 05:55 PM #124
Rainer
37,858
Spring Haigler
Seaside Realty Company - Myrtle Beach, SC
CRS, GRI, RSPS

Great discussion, Glenn! I concur with you.

Unfortunately, it will be a long process to change nationally especially with state laws on agency representation and compensation differing so much from state to state, not to mention the consumer is already confused (and a lot of agents too). I've read every comment made on your post so far and it seems that some agents aren't aware that these laws can differ greatly from one state to the next. Some speak as if what they are saying applies across the board for all states just because their MLS' and state organizations are members of NAR. Not true. State laws supersede NAR rules if there is a conflict.

It looks like this discussion didn't get very far in the NAR group on LinkedIn. I suppose they were not pleased with a discussion with comments disclosing actual commission rates even though they are theoretical. The discussion appears to have been deleted after only a few comments had been made.

Anyway, thanks for writing about a subject I've pondered for quite a while myself! I would welcome the change, furthermore, I am willing and can afford to take the heat in getting it started!

Jan 09, 2011 06:02 PM #125
Rainer
37,858
Spring Haigler
Seaside Realty Company - Myrtle Beach, SC
CRS, GRI, RSPS

Glenn, did they give you a reason why the discussion was deleted on LinkedIn? I'm disappointed, but not surprised.

Jan 09, 2011 06:13 PM #126
Rainmaker
311,259
Glenn Roberts
Retired - Seattle, WA

Spring - I've been out hiking all day and didn't realize the LinkedIn discussion got deleted. I've tried to stay away from actual figures but see that several here don't seem to care. It may take states two or three years to change once they know which way the wind blows. Thanks for reading.

LinkedIn didn't notify me.

Jan 09, 2011 06:14 PM #127
Rainmaker
235,183
Jenny Durling
L.A. Property Solutions - Los Angeles, CA
For Los Angeles real estate help 213-215-4758

Interesting post and love all the comments.  I've often wondered if the whole system shouldn't change from commission by percentage of sale price to some sort of flat fee. Seriously, is there that much difference in the amount of work an agent does from a $300K deal to a $3,000,000 deal?  Why such a big difference in the compensation and why are sellers willing to pay that much?

Jan 10, 2011 10:32 AM #128
Rainmaker
311,259
Glenn Roberts
Retired - Seattle, WA

Jenny - There is a huge amount of difference from one transaction to the next on either the buyer side or the seller side. It doesn't have anything to do with the value of the house most of the time. That said, we've all seen markets where high end isn't selling, or where there is no low or middle inventory. These are factors to consider case by case. Being able to negotiate either side should be the agent-client decision and not some arbitrary figure assigned by the listing side. Those days are past in essence if not in reality yet.

Jan 10, 2011 10:58 AM #129
Rainmaker
333,351
Ty Lacroix
Envelope Real Estate Brokerage Inc - London, ON

Glen: Interesting concept which has merit & may help clean up some issues.

Ty

Jan 10, 2011 03:28 PM #130
Rainmaker
311,259
Glenn Roberts
Retired - Seattle, WA

Ty - I hope so...someday.

Jan 10, 2011 04:02 PM #131
Rainer
370,054
Tish Lloyd
BlueCoast Realty Corporation - Wilmington, NC
Broker - Wilmington NC and Surrounding Beaches

Glenn ~  Not only am I late to the party -- I missed it completely.  This is a matter near and dear to my heart and, Brother, you have nailed it!!!

"The IRS allows for certain costs in selling to be deductible. One of those costs is to pay for the services of the real estate broker. The commission is considered a cost of doing business."

Cost of doing business in a fully disclosed and professional manner -- can't spell out our fiduciary responsibility any clearer.  Here's hoping and looking to the future . . .

 

Jan 11, 2011 11:28 AM #132
Rainer
71,878
Peter Van Deusen
Riverview Properties - Chattanooga, TN

Glenn,

 Five or six years ago, Fannie Mae was working on a loan platform to include an amount in the loan to pay for buyer agent sevices - supposedly ready to go. Unfortunately, my source retired, leaving me with no updates. I have no idea why this has not been rolled out, but would welcome it heartily! Any serious buyer should expect to pay for service, and many (particularly first-timers) ask what they will pay for my help. It would be just as easy to say "Your loan will take care of me" as it is to point to the seller.

Jan 11, 2011 11:45 AM #133
Rainmaker
311,259
Glenn Roberts
Retired - Seattle, WA

Tish - It's been fun. Thanks for stopping by. Peter's comment #134 has some information and some lenders have mentioned it in passing. There's hope.

Peter - I'm glad there's been a start. Perhaps we can get the ball rolling again here on AR.

Jan 11, 2011 12:11 PM #134
Rainmaker
217,417
Patricia Beck
RE/MAX Properties, Inc., GRI, CDPE - Colorado Springs, CO
Colorado Springs Realty

Interesting post and discussion here Glenn.  In Colorado we are required to use the Buyer Agency with clients but I see your point about sellers having to pay both agents.  Things will probably change some day.  Broker Bryant's comment was interesting, I haven't thought of that.

Jan 13, 2011 11:59 PM #135
Rainmaker
129,388
Matt Robinson
Professional Investors Guild - Pensacola, FL
www.professionalinvestorsguild.com

I would say that in nearly 99.9% of all transactions, the buyer's agent commission is paid for by the seller.  So, I don't see any problem in agents writing blogs for their local market explaining that buyers should not hesitate to contact an agent to represent them, because it doesn't cost them anything.  I have had numerous buyers ask me how much it costs for me to help them, and the answer is nothing.  In nine years, I've never had a buyer pay me one red cent for my services.

Until your new fangled world of real estate occurs, when buyer's agents are paid by buyers (whether that fee is financed or brought to closing) I would think the blog posts regarding how realtors get paid is completely relevant.  (In full disclosure, I've never written such a post, and so I am not trying to defend or rationalize my own actions).

Aug 22, 2011 12:47 PM #136
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Rainmaker
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