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.