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

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

Posted by Adam Waldman - Long Island REALTOR® on 06/29/2008 12:25 PM

Comments (87)

long island homebuyers, buying a home on long island, buyer representation, long island realtor, certified buyer representative

Originally posted at: Long Island Relocation>> Long Island Real Estate: Buyer Representation ~ Compensating the Buyer Agent ~ Myths vs. Reality

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87 Comments on Buyer Representation ~ Compensating the Buyer Agent ~ Myths vs. Reality

JUN

2008

good post

Adam, great post! keep em coming.

Adam, I am surprised you tackled this age old discussion. It will be interesting to follow the thread and see how it develops.

Adam -- This is a great series of posts. . .the general public has no idea how Realtors are compensated. I field questions about it from buyers all the time.

VICKY: Thanks for commenting.

PETER: Thanks for the support. It is greatly appreciated.

Adam,

I have on occasion been questioned in the same manner.

MISSY: This post is part of a series, and this is one of the issues that buyers have when signing a buyer representation agreement. Just out of curiosity, why are you surprised that I posted on this subject?

LORI: Thank you for the compliment. I'm glad that you find this series helpful. I think that we often times take for granted the things that we think that buyers will know because we deal with it everyday. This is especially true of first-time homebuyers. Thank you for commenting, Lori.

DAN: As I mentioned to Lori, I believe that people question this because they are not exposed to it on a regular basis, the way that we all are. My goal with this series is to to try and get people to understand the process. Thanks for commenting, Dan.

Glad you addressed this "chicken and the egg" debate regarding the commission. It really is paid by both the buyer and the seller -- since it is coming out of the transaction. The real problem comes up in our area where the Seller's agent offers the buyer's less than the buyer agent fee (usually because they don't want to split equally, have taken a discount or some other reason). Then the buyer has to make up the difference -- it is unfortunate that the lender won't let the buyer roll that fee into the mortgage. Now, that we have a buyer's market, we can just ask for a credit toward other closing costs -- however, it was a big problem in the seller's market.

Adam, You are a master at breaking it down into the simplest of terms. Great information.

Adam, the two biggest complaints I hear about why not to do a buyers rep agreement is with a new home they think the builder will charge more, and secondly they don't want to commit to "anything."

Adam: Another excellent post on Buyer representation. I have had clients ask me why I am not pushing the most expensive home because it would, ultimately be more money in my pocket! I show them the calculations and they are amazed at how little the difference really is.

Congratulations on that little gold star! Well deserved...

Debe in Charlotte

Adam, these points are true in any light. Buyer's and Seller's should be reminded that they are talking pennies within the difference and it has no bearing on the "representation" and that we don't crawl on the ground like snakes...he,he. I'm glad this was featured. Thanks,

Later in the rain~Deb

So which actually did come first, the proverbial chicken or the egg?

True the buyers do bring money to closing, usually in the form of a mortage plus a small amount of cash. But when they give that money to the seller isn't it actually in payment for the house they're buying??

A house is worth what a house is worth. It is not worth what it is worth plus an X% broker's fee to either agent, sellers or buyers.

Appraisers appraise house to ensure the value is there for the lender so if you add or include an X% or whatever percent to pay someone how could the house apprairse for enough to convince the lender to carry through with the deal?

Just curious.

YMMV

Great points! In any business and market, each party is better perceived if they clearly add value. In Real Estate, it is important to show that value and that it is a service that is more than "for sale by owner + MLS".

I would tend to say that even though you are suggesting that the seller paying commission is a myth, the reality is that in almost all products and services sold the seller does set the commission that his/her sales people get paid. If we as a society didn't consider this to be the case we would negotiate the commission in all kinds of transactions you were they buyer of cars, homes, boats, timeshare, or any other big ticket item. That's not to say that it doesn't happen from time to time, but it is not the norm and that's really the issue. Society protects the rights of sellers in most goods and services to set the commission.

Now it gets a bit polluted in real estate because often times buyer's agents will look at the commission offered by two competing properties and often times buyer's agents will not show a property with a low commission vs a higher commission. Who are they favoring then... It's certainly not their buyer, its their seller. To take it to extreme, let's say one property has a 1/2 of 1% commission for the selling office where another has a 5% selling office commission. On a $400,000 property one property would be paying a whopping $2000 commission whereas the competing property has a $20,000 commission. Which property are you going to show and hope to sell?

The seller does pay the commission because he in fact sets the incentive for the selling office to cooperate on the sale of the property. For the very very very few agents who have solid buyer's agent agreements with their buyers this isn't an overt issue, but for the rest of the agents... Who are they really working for?

JOAN: The best way of thinking of it is that it comes off of the top of the transaction. I realize that much of this is a matter of opinion as to who is paying the commission, but the point of this series is to show the buyers that they are actually paying for it whether they have representation or not. Without the buyers, there is no money and there is no commission. As far as rolling it into the mortgage, the way to achieve this is by structuring the offer so that the seller agrees to have the commission come out of the proceeds. If they refuse, then they are rejecting the offer. If listing agents were really looking out for their clients, they would never offer less to a buyer's agent, but we are dealing with that here as well. Thanks for your comment, Joan.

JUDY: That is a tremendous compliment. Thank you very much. I'm glad that you found this to be user friendly. My goal is to make things clear for the buyer. Thanks for your comment, Judy.

GARY: The builder issue doesn't come into play much around here, since new construction is limited in comparison to resales. As far as the commitment issue is concerned, the way around it is to offer a termination clause. I don't want buyers to feel locked in, but I do want to be able to represent them in every possible way, and this cannot be done without the agreement. Thanks for commenting, Gary.

DEBE: I think that if more of us showed them the calculations, they would realize that greed is not what motivates us to get deals closed. We just know when the two sides are close enough to get it done, and when neither party is likely to do much better. If we don't educate the public, we cannot expect them to understand. Sometimes, I think that agents take the knowledge of the buyers and sellers for granted because we do this everyday. It's just like if we went to try and do their jobs without any training. Thanks for the comment, Debe.

DEB: You said it! I love your snakes analogy. As I mentioned to Debe above, we need to educate the buyers and sellers so that they realize that when they are close and fighting over a few thousand dollars, that our commission barely changes. Thanks for commenting, Deb.

JIM: There is one thing that you left out of your equation. True appraisers are appraising the house for the bank, but they are basing their comps on other homes that have sold with a commission involved, so it is always factored in. Now, the commission may vary from home to home, and the seller determines what they're willing to net, but ultimately, the commission is coming off of the top of the deal. Without the buyers, there is no commission to be paid. Sellers do not have to accept any deal that they don't want to, but a buyer also doesn't have to agree to a deal that doesn't work for them on their terms as well. The bottom line is the net to the sellers. We're basically just talking about which side of the ledger that the payment appears on.

GLENN P: Thanks for your comment. I agree in showing value, and my point in this series is to show homebuyers the value of having their own representation.

GLENN S: First of all, let me tell you that I've read your blog and I respect your opinion. However, I think that you have muddied the water a bit with your comment, so I'd like to address your points individually.

"Society protects the rights of sellers in most goods and services to set the commission."

While I agree that the seller has the right to set the commission that they are willing to pay on their home, they are not the only ones that have a say in the matter if they want to get the deal done. A buyer agent has buyer clients. In this case, the buyer client has agreed to a commission. Now, the seller could refuse the structure of the deal based on the buyer agent's commission, and then the buyer would have a choice to make. They could either go out of pocket to make up the difference, or they can tell the seller that their offer is contingent upon the buyer agent being compensated out of the proceeds of the sale, or there is no deal. Buyers working with a seller's agent have no such luxury, and the whole point of this ongoing series is to show the value of buyer agency.

"often times buyer's agents will look at the commission offered by two competing properties and often times buyer's agents will not show a property with a low commission vs a higher commission. Who are they favoring then"

If a buyer agent is doing their job, and honoring their fiduciary duty, their fee will already have been negotiated and it won't matter whether they show the buyer a FSBO or a home listed with a high commission. Are their shady agents that will take advantage of a situation and do what's best for them instead of their client? Absolutely! However, I can only speak for myself in this situation, and it is not how I approach my business. Now again, this series is about showing the advantage of buyer representation over working with a seller's agent. You've helped to prove my point. If a buyer works with a seller's agent, they have no incentive to show them homes that are offering a lower commission. The seller's agent has no fiduciary duty to the buyer, so they aren't even doing anything wrong.

"For the very very very few agents who have solid buyer's agent agreements with their buyers this isn't an overt issue, but for the rest of the agents... Who are they really working for?"

I think that I've already addressed this, but I will say that it is an extreme exaggeration to say that very, very, very few agents have solid buyer agreements with their buyers. Again, the whole point of this ongoing series is to show buyers the advantage of buyer representation, while also addressing any concerns that they may have. Compensation is one of those issues. I am confident that I can negotiate deals without this being an issue. Others may not be as confident, or quite frankly, as honest.

Buyer representation is ideal for agents that want to advocate for their clients, and for buyers that want the highest level of service possible. Some buyers will sign the agreement, and others won't. It is a challenge on Long Island because it's not the norm. Maybe it's not the norm in Seattle either. I don't know, because I don't work in your market. But I do believe that if you can show your value, then you can make this work.

I hope that I've cleared up my position for you, and hopefully made you see a different side to your argument.

... because it is the chicken and egg debate. Over the years, there is two sides to it, both with valid arguements. I am in agreement with you on a buyer getting a few thousand more or less for a home doesn't change our commission.

I just was commenting on the who pays the commission arguement. I've heard it both ways over the years.

I knew it would generate a good discussion and it has.

Missy

MISSY: I guess that I haven't seen the debate around here before, but I can see that it is a bit more hazy than I expected. The main reason that I did this was to address a concern of homebuyers about buyer representation. It's good to have the discussion, but I guess I just didn't expect it. Thanks for coming back and clarifying.

Thanks for this post. It was worth reading.

Judi Downing

I have found these questions from buyers all the time good info for buyers.

Great job Adam! Thanks for the post....

Adam, the chicken-and-egg aspect of the Buyer's Agency has a built-in check and balance system- the Buyer's Agent's fiduciary responsibilities to his/her client. It is important to point out that almost anything can be negotiated in a contract.

I like to look at the arrangement as if both sides compromise to pay the set percentage of commission agreed upon beforehand in the Listing Agreement. Thanks for the stimulating post.

YOu are sooo right ... I get a laugh out of the difference in my commission that a counter offer provides ... its a NON ISSUE!

www.PippaMAC.com

JUN

2008

Nice post, Adam.

It's funny, the only client to ever question me about whether I would REALLY try to get them the lowest price was from Long Island. In Las Vegas we only have the listing agent and the buyers agent.

It seemed so foreign to me when I sold a home on Long Island a while back and the listing agent was talking about sub-agents and buyers agents. It's no wonder the public doesn't know who to trust. It's still a little curious to me. If the listing agent is offering a coop to an agent bringing the buyer, why wouldn't that always be a buyer's agent representing the buyer? What is the role of the sub-agent and why don't all buyers out there just work with agents that represent them?

Liked your post. It was an interesting way to read about this issue. Will come back later and see more comments you get on this.

Good post. I do think that buyer's (and sometimes sellers) don't realize that the commission is actually the BROKER'S commission and we (the buyer's agent) receive a percentage of that amount.

Adam,

Thanks for your commentary back... As you may know I run a real estate company, BuyerTours Realty. We are buyer based and the agents of the firm know that without buyers we wouldn't have near the business that we have. We discuss with our clients the benefits of working with a buyer's agent as opposed to the listing agent. Most clients get it, however some do not. The idea of having a party who does real estate as a living who doesn't represent the seller really does make sense. There are flaws to the existing real estate system that is in place and part of it is the way commission is paid out and by whom.

The internet in my opinion is one of the ways that commission is getting shook up. As much as I would prefer that companies like Redfin would not exist, they are shaking up what it means to have a buyer's agent and who pays the commission. During the recent boom years through 2005, FSBO firms were hoping up everywhere. The only agents who were getting paid with these companies were the buyer's agent. In fact in many cases the seller's were not in a real way being represented by the company putting them in the MLS. It was up to the buyer's agent to negotiate directly with the seller. Now the buyer's agent almost was becoming a dual agent because of the role he/she had to play.

Unfortunately seller's have the luxury of asking agents to work for them for free (if the property doesn't sell). This makes real estate unique in that in most industries where someone would work as hard as a listing agent does (or should) would be paid some sort of retainer at least for living and actual expenses with a bonus on deal completion.

Buyers and buyer's agents are in the same boat. Buyer's normally only cause a commission to be paid out if one is successful in procuring a home which meets their criteria, they don't get cold feet, the house passes inspection, and ultimately can be financed by the buyer.

Adam I agree with you take on the myths. My commentary back is really being a devil's advocate in a discussion. I think that you can, as someone else pointed out, argue who pays commission from many different perspectives. Commissions is the part of the inefficiencies in the market which give you and I as individuals the ability to grow a business through buyer and/or seller representation. The number of clients and our negotiation skill ultimately determines how well we can use those inefficiencies to support ourselves, our families and our loved one.

I hope this made sense... Gotta get some sleep

JUDI: Thank you for reading and commenting.

TERRY: Hopefully, buyers will read this post as well to gain some new perspective. Thank you for commenting, Terry.

TERESA: Thank you for the compliment.

ROSEANN: Thank you for lending your perspective to this post. I agree that as long as there is a buyer agent involved, then there is always room for negotiation. This is how buyers can get their offers accepted and the fees paid out of the proceeds of the sale. Thank you for commenting, Roseann.

PIPPA: A total non-issue indeed! Unfortunately, this is rarely explained to the buyers, so they have no reason to think that it isn't making us a lot of money. Their perception of what we get paid is usually not reality-based to begin with. Thank you for commenting, Pippa.

DAMON: Thank you for sharing your story. You have enlightened everyone as to why I'm even writing these posts. I love Long Island, but I know that Long Islanders also possess a healthy dose of skepticism (because I am one of them). The majority of the buyers are working with a seller's agent (a/k/a subagent, a/k/a broker's agent). It is extremely confusing.

I can't say that I'm surprised that things are this way, because most agents do not take the time to learn about buyer representation. As it becomes more popular, I believe that we will see a trend towards buyer agency, but it will take time. Our current MLS offers a space to show the payout for the following: seller's agent, broker agent and buyer's agent. At times, the split offered to buyer agents is lower than the split to the seller's and broker agents. Anyone that doesn't take the time to get proper training will not know how to protect their fee when structuring a deal, so they don't offer buyer representation to the customer.

It is a broken, backwards system (in my opinion). What ends up happening many times, is that the agency lines get blurred because of this unnatural relationship. The agent represents the seller's interests, but in most cases has never met the seller. At the same time, they get to know the buyer by being with them on a somewhat regular basis.

My goal is to do my part to make buyer agency the norm on Long Island. I hope that blogging about it at length is a step in the right direction. Thank you for your comment, Damion.

BOB & CAROL: I'm glad that you found this to be an interesting take on what is apparently an "age old" discussion. My intention with this post was just to enlighten buyers as part of a series on buyer representation, but it got featured on AR, and has taken on a life of its own. Thank you for commenting.

KERRY: You're absolutely right about that. I think that the consumer at large sees us as making a lot more money on each deal than we really do. Thank you for commenting, Kerry.

GLENN S: I do know about your company. I've found your SEO information very helpful, and I went and checked out your website for more information. I like the name of it as well, because it clearly shows that you value buyers. It's too bad that you don't have locations all over the country, because I think that you have a good approach to real estate. Truth be told, we probably agree on more things about the business than we disagree on. I also think that the system is broken, but unfortunately, it's all that we've got right now.

We are totally on the same page with the FSBO / MLS companies. I find it to be a tremendous disservice to sellers who think that they are getting the same benefit as those that are truly represented.

I wish that we would move towards the system that you mentioned for listing agents. It's a sad commentary that we are the only ones with anything to lose, and if the home doesn't sell (usually because the seller was unreasonable in some way), we take the hit, and end up losing money and time on the whole deal. It has made me think very hard about what kind of listings I will take, and this should never happen.

I think that it's possible to work past this more with buyers than with sellers, but maybe it's possible to do it for both. Why can't a new model start that gives the sellers more risk (upfront fees) with a chance to save money when the house sells (lower commission).

I understand that you were playing devil's advocate, and I appreciate the way in which you have handled these discussions. I deleted one comment of someone that totally took me to task on everything that I said and then signed on as John Doe. I don't mind defending my position, but I'm not going to play games with those that want to hide in the shadows.

We probably should be thinking about how we can work together to create a new model to fix the broken system than going back and forth in posts. Food for thought....

ADAM- Dispelling myths is so important in these tumultuous times. So often parties to a transaction have little idea how the transaction is actually constructed. Great guildelines and very helpful to anyone looking at Real Estate.

Good Luck and Sell Well!

Great post. Buyers should get used to signing agency contracts just like sellers do.

ALLISON: It's amazing how myths seem to take on a life of their own if they are not addressed early on. The more that we educate the buyers and sellers, the better off we all are. Thanks for commenting, Allison.

GITA: I agree. For some reason buyers are more nervous about signing anything, but they are better off when they do. Thanks for commenting, Gita.

I agree an disagree....Yup...the seller does set the commission...and if the buyer wants the house, has no choice but to pay it since it is part of the price. The buyer can't say, gee...this is the first and only house we looked at, my agent didn't work too hard...so I will pay him $500...As for "lowest price"....as a buyers agent...the object of the transaction is still to get the deal together...and not to see, as some newbies do, how black and blue you can get the seller...so fairest price based upon comps and condition...hmmm ?

Hi Adam, Recently I was asked by a client to explain this..I thought that I did a pretty good job..thanks for clearing a few things up. My clients are from Virginia and I guess Buyer/ Broker agreements are big on the East Coast and out West were are getting used to them. I have always been a fan of the Buyer/Broker agreements. How about you? How do you present it? Thanks for the helpful posts.

SALLY & DAVID: I find your comment to be a bit condescending, and I disagree with some of your assertions. The seller does not set the commission between a buyer agent and the buyer client. While they don't have to agree to allow the compensation to come out of the proceeds of the sale, they have absolutely no say in how much a buyer's agent is paid by his/her client.

I have no idea where the leap came that the buyer could somehow offer less because only one house was looked at. It doesn't even follow any logic. If there is a buyer broker agreement, this is not up for discussion. With your logic a seller may only offer a $500 commission for a house that sells on the first day.

I know full well that the object of buyer agency is to get the deal together. I also know that a buyer agent will find the lowest possible comparable sales. Not once did I imply that buyer agents should try and beat up the seller and "steal" the house. That is a leap that you made on your own. In fact, in my example, I showed a $475,000 listed house showing comps of $450,000 - $460,000 and $470,000. Are you saying that a buyer's agent should not use the lowest comps in their negotiations?

The point of this series of posts on buyer representation is to show buyers the advantages of having their own representation. Based on your comment, you don't seem to put much value in buyer representation. I do, and many others do as well.

ANGELICA: The buyer broker agreements are just starting to become more popular on Long Island, although they are used regularly in various parts of the country. The first thing that I did was to take a designation course called CBR (Certified Buyer Representative). I don't know if it is offered on the West Coast, so you may want to look into the ABR (Accredited Buyer Representative) designation. You can find it at www.rebac.net. I've been doing a series of posts based on all of the knowledge that I gained during the course. This is one part in the series. If you'd like, I can send you the links to the other parts as well. I find that people are receptive to the idea once they are shown how it benefits them. If you'd like to speak offline, feel free to give me a call. Thanks for commenting, Angelica.

Adam, very nicely done as usual. I'll have to go back and read the rest of the series. Here in the Pacific Northwest buyer broker agreements have been here for quite a while but there are still many consumers out there who are wary of buyer's agents and what we do. The myth about agents not being motivated to negotiate the price down for their buyers is common belief too.

BTW, with the new Distressed Property Law having gone into effect, Washington State is, I think, the only state where Realtors are not exempt from the law. That is having a huge impact on the listings we take and the homes we sell, because any legal action taken against us falls under the Consumer Protection Act. As a result, the Buyer Broker agreement has been modified to include a clause that states that we are not required to show any properties that fall under the Distressed Property definition(occupied Short Sales, sellers in default, sellers who think they are going to be in default, etc). So agents have been extremely motivated to get those BBA's signed by their buyers because nobody wants the liability(and who likes writing up short sales anyway?) It's a nightmare.

Great Article! Very clear and concise on what can sometimes be a cloudy subject matter!

I've been trying to explain this for years and it has always ended up convoluted in my mind (and out of my mouth.)

Thank you thank you THANK YOU.

Adam - this is excellent; this is also my way of explaining who pays the buyer's broker (agent).

Adam once again you have given a great explanation! Congrats on the Gold Star!

Opps.. I forgot to login. Buyers need to realize that if they go it alone, they are still paying brokerage fees through the sales price.

This is a great discussion, and one that doesn't happen often enough with clients. It involves what most clients think, but never verbalize.

I'm on the commercial side, doing tenant representation. I think too many clients get bogged down in the question of who's paying the fee, instead of asking "is my agent creating value for me?" If an agent (on either side) is not creating value in excess of their fee, they should probably start looking for another line of work. (Harsh? Maybe, but how successful can you really be if you continually take more than you give.) If I can demonstrate value in excess of my fee, no one should ever object to my fee, or who's paying it. In reality, a client who says "you're making too much money" is saying "you are making more than you EARNED".

There's no shame in earning a fee, and if I've earned their trust first, there should be no question as to whether I'll be motivated by the extra $600.00 in your example.

Some good information for thought, but I disagree with Myth #1, realty, the seller is paying,

The property has a CMA to help determine price

The property has an appraisal to help determine price, the price is not lowered because it was a FSBO

The buyer get the advantage of a buyer's agent that the seller is paying for (that's a lot of FREE services) and it doesn't cost them a cent, even when they are using several agents without the others knowing.

LISA: Great to see you around! I never heard of the Distressed Property Law. If the buyer broker agreement protects you even more in Washington, I'm surprised that anyone would work without it anymore. I'm glad that you found this post helpful. You may find some good information in the earlier posts that show the advantages of having a buyer representative when buying a home (to convince those that are wary of signing an agreement). Thanks for commenting, Lisa.

SUSAN: Thank you for the compliment. Hopefully, you'll be able to use some of this information to help with your potential clients.

KRIS: Thank you. It's nice to see that some people appreciate this explanation. Actually, most do. However, this post has brought the naysayers out of the woodwork too. Thank you for your support, Kris. I really appreciate it.

JEREMY: Thank you for your support. I have to say that the gold star was unexpected on this one, and while the exposure is great, it has also brought out those that disagree with me. It's ok, the majority are in agreement, and the ones that I respect most are in agreement as well. Thanks for commenting, Jeremy.

STEPHEN: Thank you for logging in, and giving your opinion. We are in full agreement. The commission is built into the sales price, despite what some may think. Thank you for your comment, Stephen.

Good issues to discuss.

I must point out though that here in AZ buyers aren't the only ones bringing money to the closing table!!!!

DAVID: Thank you for bringing up the issue of value. It seems that too many people are getting bogged down in the minutiae, but not acknowledging that going above and beyond expectations should make the payment issues less important. Thank you for commenting, David.

DORIS: Your comment is kind of convoluted. Ok, so you think that the seller is paying, but I don't feel that way. What does the CMA, appraisal and FSBO have to do with each other, or with Myth # 1 for that matter? None of that is even mentioned. I guess since you think that the seller is always paying (which I strongly disagree with), you somehow think that the buyer is getting a lot of free service by working with a buyer's agent. But then you go on to say that they are working with several agents without the others knowing? Are you sure that you even read this post? It's about buyer representation. What buyers do you know that sign a contract to be represented and then go to multiple agents? I thought about deleting this comment because it makes no sense, but I decided to address you the best I can.

JENNIFER: Unless sellers owe more on the home than they are going to net from the proceeds of the sale, why would they be bringing money to the closing table?

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.

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.

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

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.

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.

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.

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

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

JUL

2008

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.

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?

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

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

2008

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

JUL

2008

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

thanks and good luck!

Mike Warren

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

2008

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

2008

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

2008

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

AUG

2008

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?

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.

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