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How Does a Buyer's Broker Get Paid?

"It shouldn't cost you any more to use a buyer's agent and it will probably cost you a lot less."

BUYER'S TIP: Home buyers don't pay commissions… True? False?    The common myth that home buyers don't pay commissions has hurt many home buyers who felt that the seller had to pay the whole commission so it didn't matter to them.   Nothing could be further from the truth.  That thinking has led many of them to miss out on the opportunity to work with an agent who would negotiate with their interests in mind.  MLS listed homes in Massachusetts acknowledge two sides to a commission -- the listing agent's fee and the fee to the agent who brings the buyer.  To choose an agent who must work  to get the highest price for the seller seems foolish when the MLS system provides a fee to have an agent work to the get the lowest price….. and who brings all the money to the closing table to cover the price of the house and the commissions?  You guessed it… the buyer.

Who Really Pays the Real Estate Fees?
By Iva Liebert

The question of who pays real estate fees is a "chicken-n-egg" debate. The seller could argue that he pays the fees because they are disbursed from the purchase price at the closing and thus he nets less. The buyer could argue the same by saying that the fees inflate the purchase price and are paid from the money she brings to the table. In truth, real estate fees are transaction costs which impact both buyers and sellers. Because real estate fees equate to large sums, they are almost always financed as part of the purchase price.

Method of Payment

Most buyer brokers define their fee and method of payment by a written representation agreement with their buyer clients. This is similar to the representation agreement (listing agreement) a listing broker has with his/her sellers.

There are several ways to build-in the buyer broker's fee as part of the purchase price. The easiest method is to use the traditional way in which agents have always been paid - disburse the fee from the purchase price. This method maintains accurate records for accounting and tax purposes.

Compensation doesn't determine Agency

Keep in mind that the source of the agent's fee does not determine whom the agent represents. A buyer's agent can be paid by a "co-fee" from the listing broker, or by a disbursement directly from the settlement funds with the expense being assigned to the buyer or the seller. Expensing the fee on the purchase agreement and the closing statement is merely an accounting procedure. The important issue is representation. Represented buyers should have a clearly defined representation agreement with their agent. That agreement should state which party the agent represents, how much his/her fee will be and how that fee will be paid.

A large majority of listing brokers offer a co-fee to all brokers regardless of whether those brokers are cooperating subagents (who work for sellers) or cooperating buyer agents. Most listing brokers know that professional buyer agents have serious, pre-approved buyers under contract who have made a commitment to purchase. Reputable listing brokers encourage cooperation with buyer brokers because it is in their sellers best interest to do so.

Double Dippping

Occasionally, one might encounter a listing broker who attempts to charge his/her seller double on a cooperative sale with a buyer's agent. This creates an inflated fee structure and could well result in the seller losing a buyer or netting less from the transaction. Fortunately, this practice is fast disappearing from the market place. This practice is illegal without the seller's informed consent. A seller can protect himself from this by making sure that his listing agreement requires the listing broker to reduce his fee in half, or offer a co-fee, if a buyer's agent procures the buyer. After all, the listing broker would have received only half the fee if a cooperating subagent sold the property.

Fees Tailored to Service Needed

It has been customary for seller brokers and buyer brokers to use percentage fees, but many agents are now using different types of fee agreements depending on the service needed. A real estate fee can be a percentage of the purchase price, a flat fee, an hourly fee or any combination of these. Most buyer brokers charge a retainer fee which may or may not be applied to the final collected fee. (A small minority of listing brokers are charging retainer fees to sellers. This appears to be a growing trend.)

Summary

A buyer should make sure that his/her representation agreement clearly defines the amount of the buyer broker's fee and method of payment. In most cases, it is in the buyer's best interest to require that the buyer broker's fee be paid by way of a disbursement from the settlement funds. The buyer representation agreement should also state that if the buyer broker accepts a fee from a listing broker or seller, that such fee will be a credit against the buyer's fee obligation.

Consumer advocates strongly recommend that buyers hire their own agents. They further argue that a co-fee has already been built-in to the purchase price, and therefore, there is no need for the buyer or seller to incur additional fees when the cooperating agent represents the buyer.