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

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Rainer
8,585
Keith Webb
GRI
Guardant Investments, Inc.

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.

July 05, 2008 09:56 AM
Rainmaker
93,550
Leslie Stewart
Realtor , CRS, eCertified, Oregon Licensed Broker
Prudential Real Estate Professionals

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

July 07, 2008 06:34 PM
Anonymous #87
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?

August 26, 2008 08:39 PM
Rainer
274,084
Adam Waldman
Realtor - Long Island
Westcott Group Real Estate Company

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.

 

August 26, 2008 09:36 PM
Rainmaker
252,803
Jason Feinman
Bergen County Real Estate Expert, ABR, CNE, e-PRO
Coldwell Banker Residential Brokerage

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.

April 03, 2010 08:01 PM
Anonymous
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Rainer
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Adam Waldman

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Additional Information

Long Island Real Estate and Relocation Specialist. Please read my blog for tips on how to sell your home for the most amount of money in the shortest amount of time, general real estate advice and consultation on out-of-state relocations. View Adam Waldman's profile on LinkedIn
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