Buyer Representation ~ Compensating the Buyer Agent ~ Myths vs. Reality

By
Real Estate Agent with Westcott Group Real Estate Company

In the last part of this series - Long Island Homebuyers ~ Buyer Representation - we started to address some concerns that Long Island homebuyers may have about buyer representation, including:  signing a contract, competing clients and dual agency.  All of those issues are important, but perhaps the biggest concern about buyer representation is the issue of compensation.

 

Most people believe that the brokers / agents are compensated by the seller, but this is not actually the case.  Although the seller is the one that agrees to have the compensation come out of the proceeds of the sale, the fact of the matter is that all of the broker fees come off of the top of the transaction.  One could argue that the buyers are the ones that are actually paying the fees, since they are the only ones that bring money to the closing table.  In reality, the whole issue of compensation really comes down to upfront, out-of-pocket expenses.

 

Let's explore some of the myths and realities about buyer agent compensation.

 

MYTH # 1:     "I will have to pay the buyer agent's fee out of my own pocket."

 

REALITY:      Since the buyers are the only ones that are bringing money to the closing table, the fee is already being paid by the buyers.  While it may appear that the sellers are paying the fee, the reality is that the buyers pay the fee and roll it into their mortgage.

 

Many homes on MLS actually offer the same compensation to both buyer agents and seller agents.  When this is not the case, the offer can be structured so that the fees come out of the proceeds of the sale.  The only real issue is negotiating this arrangement with the sellers, but it can be done during the presentation of the offer.

 

Ultimately, buyer agent compensation is normally negotiated into the offer price, treated as a closing cost to the seller, and incorporated into the buyer's mortgage.

 

 

MYTH # 2:     "If my agent is paid a percentage of the sales price, it is in their best interest to get me to pay the highest possible price."

 

REALITY:      It is the buyer agent's duty to negotiate on your behalf to try and help you obtain the home for the lowest possible price.  Failure to do so goes against the buyer agent's fiduciary duties, and could result in severe punishment.  Even if it weren't a punishable offense, the bottom line to the agent is negligible, and the risk of losing future referrals is bad business.  Please see below for a hypothetic example of compensation calculations.

 

  • A buyer client is interested in a home with an asking price of $475,000.

  

  • For the purposes of this example, let's say that the compensation to the buyer's agent is 3%.

 

  • The buyer agent's CMA shows that comparable homes have sold for $450k, $460k and $470k.

 

  • If the buyer client gets an offer of $450k accepted, the compensation to the buyer's agent would be $13,500 ($450k x 3%).

 

  • If the buyer client gets an offer of $470k accepted, the compensation to the buyer's agent would be $14,100 ($470k x 3%).

 

  • The net difference in compensation to the buyer's agent is ONLY $600.  This amount must be split with the broker of the buyer's agent.

 

The above example assumes that the buyer agent was compensated based on the percentage of the sales price.  While this is the most common method of compensation, it is certainly not the only one. 

 

In the next post in this series, we will explore all of the various methods that can be used to compensate a buyer's agent.

 

About The Author

Adam Waldman is a Long Island Residential Real Estate Professional that can assist you with the purchase and/or sale of real estate on Long Island, from bank owned homes to new construction to waterfront property, and everything in between. Adam is a Relocation Specialist that has created a network of real estate professionals throughout the country in an effort to assist relocating Long Islanders in their transition to new areas. These professionals are experts in the field of relocation and can serve many purposes beyond a simple home search. In addition to being a Relocation Specialist, Adam also holds the designations of Certified Buyer Representative (CBR), Senior Residential Specialist (SRES) and e-PRO.

Please visit www.TheLIReloGuy.com for your relocation needs and www.AdamWaldman.com for your local needs.

Adam Waldman - RE/MAX Best - 631-357-2036 - adam@AdamWaldman.com

close

This entry hasn't been re-blogged:

Re-Blogged By Re-Blogged At
Location:
New York
Groups:
Realtors®
RE/MAX Active Rain Bloggers
Exclusive Buyer Agents
Local Expert
ABR/REBAC
Tags:
long island homebuyers
buying a home on long island
buyer representation
long island realtor
certified buyer representative

Post a Comment
Spam prevention
Spam prevention
Show All Comments
Anonymous
lisa2

So, if the price is the price then the value is the value that is set basically by the appraiser agreeing that the seller and buyer are correct in their negotiated offering price for the home- and as a result of the comparables documented mostly by the MLS's.  The net sheet takes potential profits of the Seller's and instead allocates them to the Selling Brokerage.  The fact that a Listing Agent is present to reap the payment for listing the house is and should be inconsequential to the Buyer.  They are financing the full value/payment for the house.  Deducting the Broker fees off of a FSBO as is rather typical when inexperienced seller's let buyer's manipulate the pricing, is only taking a discount of the seller's monies- if the seller wants to in effect give up the money at the closing table.  In either example the price of the home is the same and the net is the same to the Seller... however, the Seller takes less proceeds for more of their work to get the home sold in their case.  In effect the Buyer's are receiving built in equity- even if the lenders don't see it that way until 1 year after sale. (A technical point to be made- for lending purposes if Buyer's expect a lender to quickly lend/cashout on the original perceived price that the Buyer has now discounted to a lower price- the now lower price becomes the actual value of the property over the short term).

It would seem in this example, that Seller's whom opt to do it themselves are working for nothing & taking a chance on hurting themselves due to inexperience.  Realtors therefore are not only performing a service but protecting the seller's interests legally, using a database to determine the best price points to sell at and assisting the Seller in formulating an acceptance based not on fear but facts-probably the most important factor when dealing with money issues.

Jun 30, 2008 08:24 PM #70
Rainmaker
223,559
Laurie Mindnich
Centennial, CO

One  important aspect of buyer agency that both buyers and Realtors in NY need to understand is that it is NOT incumbent upon a buyer to sign a buyer agency contract in order to obtain representation.

While it is certainly in the best interest of the agent, and a benefit to the buyer to the extent that clarification is offered above beyond the NY disclosure, for those (as I've occasionally encounterred) whose lawyer advises against signing, do not abandon (as a buyer) the representation simply because some have advised against signing a contract. A seasoned buyers agent will perform just as diligently without one.

 I haven't read the rest of the series, but spoke recently to a buyer who believed (had been told) that representation was not possible without the contract- patently untrue. Demanding buyer agency will pull the reluctant Long Island real estate crowd into acceptance, as we seem to be discovering on the east end of Long Island. They are VERY receptive when it is accurately explained.

Jun 30, 2008 08:56 PM #71
Rainer
274,098
Adam Waldman
Westcott Group Real Estate Company - Hauppauge, NY
Realtor - Long Island

LISA2:  No offense, but I don't know what your point is.  There is nothing in the post about FSBO's.

Jun 30, 2008 08:58 PM #72
Rainer
274,098
Adam Waldman
Westcott Group Real Estate Company - Hauppauge, NY
Realtor - Long Island

OPTIONS REALTY:  What your saying may be true, but I cannot understand why any agent would take on the liability of being a buyer agent without having any of the benefits of exclusivity.  It is tantamount to taking an open listing on a home.  If that business model works for you, then you should continue to use it.  However, my intention is to give buyers the choice to have me represent them exclusively or they will be treated as a customer, and I will represent the seller.  It's a matter of how we choose to handle our individual business. 

Jun 30, 2008 09:05 PM #73
Rainer
21,124
Jeff Thornton
Jeff Thornton ABR CRB CRS CSP e-Pro GRI - Lansing, MI
ABR CRB CRS CSP e-Pro GRI

I remember when buyer agency became a common practice in the early 90s.  This exact discussion came up all of the time.  It's an argument I've heard from all different angles.  Usually I heard it from a consumer trying to negotiate my pay and it was na argument I had no chance of winning. 

Jun 30, 2008 10:17 PM #74
Anonymous
Patti Aleshire, Renaissance Realty Group, Inc. (Georgia)

I came into Real Estate in 1990. And was weaned from the very start on the Buyer's Agreement.  I don't know life without it.

I too, tell the clients what I get paid right up front.  I used to be embarrassed and gave in when asked to lower my fee during a tough negotiation.  Now I find that I answer a simple 'no' when asked and wait for the next question.  I'm 53, I know what I am worth. I'm not negotiable. 

Jun 30, 2008 10:41 PM #75
Rainmaker
483,214
Harrison K. Long
Coldwell Banker Previews, Irvine, South OC - Irvine, CA
business, REALTOR , GRI, Broker

Thanks, Adam, for your nice post on buyer compensation.

Harrison K. Long, Explore Properties Group, Coldwell Banker Previews, Irvine, CA

Jun 30, 2008 11:37 PM #76
Rainmaker
271,598
Ross Quintana
Real E Smarter - Spokane, WA
Real E Smarter Real Estate Coach - 509-362-1966

Spokane Washington Real Estate Expert Yeah, I usually explain in that scenario you are talking about 20,000 dollars difference and the agent after split and taxes will walk with like $200 in most cases the buyer can see there is not much reward in getting a higher price and also then his buyer's don't feel he did a good job.

But I think you also have to say just as the HUD 1 says that the seller pays the fee, they have the contract to pay it and it is on their side of the fees, and with your logic the mortgage company is the one who really pays the fees because they are the only one who brings money to the table, but I disagree.

Jul 01, 2008 11:03 AM #77
Rainer
26,036
Stephen Graham
Inactive - Atlanta, GA

Now that Adam has clearly articulated who really pays for the buyer‘s broker [agent], we must now analyze "procuring cause". If the buyer & seller are sharing the cost of brokerage fees (each bearing their respective burden), should the buyer ever be denied their choice of whom they want to represent them -- whether before or after seeing a particular home?

Jul 01, 2008 12:12 PM #78
Rainer
12,384
Pat Hommel
Annapolis Plaza CB Residential and Commercial - Annapolis, MD
Annapolis, AA Co., Md. Real Estate Sales

Adam,  This is some excellent information on compensation.  It clarifies some situations that come up when buyers and sellers ask about compensation.

Jul 01, 2008 03:54 PM #79
Rainmaker
223,559
Laurie Mindnich
Centennial, CO

Adam, while I agree, I believe in NY that it's imperitive for all agents to understand (opinion) the fundamental neccessity of buyer agency as a consumer benefit (i.e., the right thing for consumers) and get them acquainted with the practice HOWEVER we can accomplish it. For us, it's not negotiable, as we believe that regardless of how it comes about, ALL buyers are entitled to representation.

The liability issue is something that I hear often, but as with some of those above, because it began for me that way 20 years ago, it's just the "right" (as in, equitable) thing to do. LI consumers and Realtors will come around, but Realtors have a long way toward full comprehension if they are willing, from an ethical standpoint, to leave a buyers fiduciary by the wayside out of a fear of "liability"- that vantage point, while understandable, is unethical to buyers. Sort of "you're IN, or you're NOT"- OPINION.

Kudos to you for your diligence in promoting it- our buyers are very, very grateful to have the knowledge, and yours will be equally delighted. It's just a matter of achieving consistency, which takes time, irrespective of an agreement. A Long Island secret: it's highly unlikely, in light of the absence of buyer's agents, that you'll lose a buyer who doesn't sign (atty recommendation) a contract, because finding someone to step up to the plate and represent them is darn near impossible. We are  happy to pick up those that want  representation, but are nervous about the contract in our little area- it's our business philosophy.

Jul 01, 2008 08:04 PM #80
Rainmaker
21,679
Julie Q. Fuelling
Keller Williams Katy @ Cinco Ranch - Katy, TX
Real Estate Consultant

Interesting post--not sure that I agree with it all but it's food for thought.

Jul 02, 2008 06:48 PM #81
Rainer
3,027
Mike Warren
Prudential Missoula Properties - Missoula, MT

Great information...just what I was looking for.

thanks and good luck!

Mike Warren

Jul 03, 2008 05:07 PM #82
Rainer
67,769
Sandra Carlisle
McMonigle Team - Corona del Mar, CA
Residential Sales & Property Management

Great post, I may need your permission to link to it from my Outside Blog.  It's not as if we are in competing areas... ;)    It would save me the time I would have spent writing something similar...

 

The commission ONLY comes off of the seller's side so that the buyer can FINANCE it.  Which is why people knock the commission directly off of any offer they would give to a FSBO.

Jul 03, 2008 08:03 PM #83
Rainer
5,214
Jon Lu
Coldwell Banker Platinum Group - San Jose, CA

Great post.  Often times buyers and sellers get too caught up with how much commission realtors get, which is probably why some people go FSBO.

Jul 04, 2008 05:14 PM #84
Rainer
8,585
Keith Webb
Guardant Investments, Inc. - Fullerton, CA
GRI

Adam, an interesting and provocative post as evidenced by the amount of comments. I totally understand your presentation.  My two cents would be that although the buyer is the only one bringing cash to the transaction, the seller is paying the commissions.  That's what the HUD I states!  Sort of like in sports, if it wasn't called it didn't happen and in the official box score the seller paid the commissions.  All the rest is a logical argument and interesting food for thought but inconsequential.

As far as "Upfront fees", we had a  model that we structured in 1998 where as licensed brokers we would be paid for our services as they were provided and completed.  The overall compensation was significantly lower, but we were fairly paid for our services, and the public loved the idea, were very receptive and we were doing a lot of business.  As the broker of record, with no public or industry complaints, I ran this by the California Department of Real Estate to be certain our approach  was legally compliant.   While they understood our model, the DRE said that these were considered "Advance Fees' and need to be approved before we could continue.  They also added that there was no way they would ever approve advance fees.   Since we initiated the inquiry and there were no complaints,  without penalties or restrictions upon my license we "voluntarily" agreed to withdrew the program.   Again, we felt if we were paid for our services as they were completed, even though it was a lesser amount than a "full" fee, it was a win-win situation.  Another case of government being there to help to the detriment of John Q. Public.

Jul 05, 2008 09:56 AM #85
Rainmaker
101,187
Leslie Stewart
Prudential Real Estate Professionals - Stayton, OR
Realtor , CRS, eCertified, Oregon Licensed Broker

Great post Adam.  Very easy for the consumer to understand. 

Jul 07, 2008 06:34 PM #86
Anonymous
Gerald

I'm an intelligent and educated man, I'm told, but I'm confused.

Am I right in reading that, in New York, a selling broker can refuse to split a commission with a licensed buyer's broker? If so, wouldn't prospective purchasers be best off dealing only with seller's brokers?

I'll lay out an example: Let's say a house is listed by a broker who won't split with a buyer's broker, and the owner is willing to accept a price of, oh, $500K. If prospective buyer, Mr. X, has an agreement with a buyer's broker and wants to buy the house, he has to pay $500K PLUS the buyer's broker's fee ('cause, for this house, the buyer's broker's fee won't be paid by the sellers's commission split). But prospective buyer Z, who does not use a buyer's broker (but, instead, is shown the property by a broker you refer to as, I think, a "sub" broker), pays only the $500K...

Am I right about this? And, for that matter, to whom does the "sub" broker owe allegiance?

Aug 26, 2008 08:39 PM #87
Rainer
274,098
Adam Waldman
Westcott Group Real Estate Company - Hauppauge, NY
Realtor - Long Island

GERALD:  The situation is a bit confusing.  Unfortunately, the only reason that this issue even exists is because of agent greed and a lack of education.  Please allow me to clear up some issues for you.

A listing agent has an agreement with the homeowner for a certain commission percentage, which may be split however the listing agent chooses.  Many split the commission equally, some keep more for themselves, and others actually give out more than they keep.  It really is up to the individual agent and their broker.

Because buyer agency isn't as common on Long Island as other parts of the country, some agents have a misconception that buyer's agents are getting paid by the buyer and the seller, and thus would earn more commission on a sale.  This is not necessarily the case, however, it doesn't stop the misconception.  A good buyer's agent will be able to make this clear during the negotiations.  Ultimately, the homeowner will not usually pay out any more commission than they would if the agent was working for them (any agent that doesn't represent the buyer).

The buyer broker fee is usually rolled into the mortgage during the offer, so the buyer does not have to go out-of-pocket anymore than those that work directly with a listing agent or broker agent. 

If you would still like some more clarification, I would be happy to speak to you about how the process works.  You can reach me at 631-357-2036 or adam@adamwaldman.com.

Thank you for your comment, Gerald.  Your question was a very good one.

 

Aug 26, 2008 09:36 PM #88
Rainmaker
256,153
Jason Feinman
Coldwell Banker Residential Brokerage - River Vale, NJ
Bergen County Real Estate Expert, ABR, CNE, e-PRO

Dear Adam. If buyers compensation is listed in the sellers listing agreement at 6% and say 3% goes to the Buyers agent, that 3% is NEVER paid by the buyer. I dont know what kind of real estate you are practicing but when I perform an estimated closing costs for my buyer, they are NEVER charged. I would NEVER use you as a buyers agent.

Apr 03, 2010 08:01 PM #89
Post a Comment
Spam prevention
Show All Comments
Rainer
274,098

Adam Waldman

Realtor - Long Island
Ask me a question
*
*
*
Spam prevention

Additional Information