Negotiating Commissions with Buyers

Before the 1980s, it was widely understood that both the buyer’s agent and the seller’s agent worked for and were paid by the seller. The listing agent would negotiate the fee for both the buyer’s agent and him/her self and then place the home in the MLS. The agent who brought the buyer would receive the co-op fee.

This changed in 1983, when the Federal Trade Commission published a report called The Residential Real Estate Brokerage Industry. The report found that 72% of potential home buyers working with an agent thought their agent was working for them - not the seller. When the general public found out this was not the case, they began to see the real estate industry as deceiving and dishonest and were outraged. To change the public’s perception of the industry, NAR encouraged local Realtor groups to petition their state legislatures to create disclosure laws and mandates. During this time, the concept of buyer’s agency was introduced.

Today, when a buyer contacts a real estate agent to help them find a home, they expect that the agent has a fiduciary duty to protect their best interests - not to negotiate the most favorable deal they can for the seller. Many agents that work for buyers now ask the buyer to sign an agreement outlining their services and fee structure. Yet because the fees are still paid by the seller after closing, the question of “who really pays” the buyer’s agent still is a sore spot with many agents who have been in the business for 20+ years.

If you look at the real estate transaction as a whole, the seller sets the price. The buyer then brings money to the table - either through personal savings or various financing options - and hands the money over to the seller. After all fees have been taken out, the seller hands commission checks to the buyer’s agent and the seller’s agent and keeps the rest for himself.

While this may seem like the seller is still paying, keep in mind that the only person bringing money to the table is the buyer. If it wasn’t for the buyer, neither agent would get paid.

If you work with buyers, you should consider creating a buyer’s agreement that highlights:

• The buyer is entitled to negotiate your fee. When the buyer understands that they are paying your fee, they are more likely to take the home buying process more seriously. Too often, buyer’s agents explain that working with them is essentially free because the seller pays their commission. When people believe they are getting a service for, in essence, free, they tend not to value it as highly as if they were paying for the service directly.
• The buyer agrees to work with you exclusively. Just as the buyer would hire an accountant, lawyer or doctor, they should hire you exclusively to represent their best interests. However, you should also include terms in the contract that allow you or the buyer to cancel the contract if one party is unhappy with the relationship or if differences cannot be resolved.
• You agree to represent the buyer’s best interest. When the buyer is paying you, it is your duty to represent them as best you can. That means showing them homes listed at lower commission rates if that home will be a good choice for them.
• You agree to only represent the buyer. When people negotiate contracts, both sides usually have their own legal representation. In the case of real estate, you are negotiating on behalf of the buyer - so it would not be in the buyer’s best interest if you also represented the seller. How could you negotiate a fair price for both when you have vested interest in both sides?

Recently, there has been much debate in the blogosphere about divorcing buyers commissions from sellers commissions. Bloodhound Realty is maintaining an exhaustive list of articles on the topic. If you are a buyers’ agent, this should be required reading.

Update: This article is a Black Pearl Winner over at Bloodhound Realty Blog’s carnival of real estate, The Odysseus Medal. Woohoo!