Buyer Representation ~ Methods to Compensate the Buyer Agent

In the previous post in this buyer representation series, we explored some of the misconceptions about buyer agent compensation.  While most people think that they will have to go out of pocket to compensate the buyer agent, this is not necessarily the case.  A skilled buyer's agent will know how to structure a deal so that the fee can be incorporated into the buyer's mortgage. 

There are several ways in which a buyer's agent can receive compensation, and this is something that many homebuyers are not aware of.  The following is an overview of the various compensation methods.

[1]        Percentage of Sales Price - This is, by far, the most popular compensation choice for homebuyers that work with a buyer's agent.  In many cases, there will be no discernable difference between working with a buyer's agent or a seller's agent when using this method to make offers on homes that are listed on the Multiple Listing Service (MLS).  Although there are still listing agents that offer less to a buyer's agent than to a seller's agent, this is a trend that is on the decline.  Most listing agents now offer the same compensation to both types of agents.

In the case where there is a lower fee offered to buyer's agents, the offer can be structured in such a way that the fees are paid through the proceeds of the sale, thereby protecting the buyer from having to go out of pocket to pay the buyer agent.  This same method can be used for any offers made on homes that are for sale by owner (FSBO), expired or any other home that is not listed on the MLS.

One concern with this method for a typical homebuyer is that the agent that is working for them seemingly has an incentive to sell homes for the highest price possible.  For a detailed explanation as to why this is not the case, please check out the previous post, entitled Buyer Representation ~ Compensating the Buyer Agent ~ Myths vs. Reality. 

[2]        Flat Fee - Some buyers want a greater assurance that the agent that they hire is actually working in their best interest.  Even though the percentage of sales price method should still result in buying a home for the lowest possible price, the fact remains that the buyer agent has the potential to make more money by selling a home for the highest possible price.  For this reason, some buyers prefer to pay a flat fee, which sets the exact amount that a buyer agent will be compensated, regardless of the selling price.

While some buyers may see this as an advantage, they must realize paying a flat fee usually shifts the risk from the buyer agent to the homebuyer.  This is because these fees are customarily paid upfront, and are not refundable if the buyers cannot find a home to fit their needs during the length of the contract.  By locking in a price, the buyer can save money, but runs the risk of paying for a service that does not result in the purchase of a home.

[3]        Hourly Rate With Retainer - This is the least common payment method, but it is a possibility.  In this case, the compensation would be similar to that of an attorney.  An upfront fee would be required, and a minimum number of hours would have to be guaranteed.  This is, by far, the riskiest choice for a homebuyer because the hours / dollars can really start to add up if a deal becomes at all problematic.  This compensation method is the same one that is commonly used by attorneys, but it is a legitimate option for homebuyer clients as well.

[4]        Combination of Methods - It is possible to mix and match the aforementioned compensation methods, but realistically, it would require using the percentage of sale method to fairly structure a deal.  The most likely combination would involve an upfront, non-refundable payment, which would be deducted from the percentage of sale fee at the time of the closing. 

SUMMARY:

Buyer agent compensation is something that is often times misunderstood.  While the buyer is ultimately responsible for protecting the fee of the agent that they hire, steps can be taken to ensure that all fees are incorporated into the purchase offer.  Buyers have more control over the process than they are often led to believe. 

As is the case with all real estate commissions, buyer agent fees and payment methods are negotiable.  Buyers that are willing to take on more risk, in the form of a guaranteed upfront payment, will likely be able to negotiate a lower fee than buyers that choose the percentage of sales price method (where most of the risk is with the buyer agent).

Regardless of what payment method is ultimately decided upon, the bottom line is that a good buyer agent will think of his / her buyer clients as team members trying to reach a common goal.

In the next part of this series, we will explore the relationship between buyer agents and buyer clients, and outline the roles that each will likely play during the home buying process.