How does an "exclusive buyer's agent" get paid?

August 2, 2010 5:08 PM

How does an "exclusive buyer's agent" (for real estate) get paid?

My husband and I are looking at condos in a specific area. We're not first-time home buyers. I've heard about "exclusive buyer's agents" and found this web site. I also read this thread.

I've read and Googled, and I still can't find out how an "exclusive buyer's agent" gets paid. If they still get a split of the commission, how is that not a conflict of interest? If they work for a fee (flat fee? hourly?) why can't I find out what this might be?

posted by Joleta to home & garden (10 answers total)

You pay them, typically a negotiated amount that's not contingent on the price of what you buy. They should sign a contract that signs any buyers-agent-compensation over to you, as well.
posted by RustyBrooks at 5:21 PM on August 2, 2010 [1 favorite]

http://rebac.net/homebuyers_faqs.cfm#A7

This is one of the buyers' agents professional orgs. Reading between the lines, it looks like it goes like this:

You: Hi, I'd like you to represent me.
Them: OK, what's your price range?
You: 200,000 - 300,000
Them: I'll do it for $7500.
You: Sounds good.

Yadda, yadda, yadda, you pick a house for $225,000. The seller's contract says that buyer and seller split the 6% commission evenly, so the seller pays your agent $6750 and you kick in the other $750.

You got representation that had only your interests in mind, and it only cost you 0.3% of the purchase price.
posted by gjc at 5:53 PM on August 2, 2010 [1 favorite]

I am in the process of looking at homes, I have a buyer's agent. Basically she represents me, finds homes, arranges viewings, helps with the paperwork, etc.. The contract I have with her states that she will receive 3% of the commission on the home (typically a 6% commission split between the buyer's and seller's agent).. there is no out of pocket cost to me.

I'm in Michigan.
posted by HuronBob at 6:24 PM on August 2, 2010 [1 favorite]

RustyBrooks: So if I agree to pay a buyer's agent $7500 but the buyer's share of the commission is more than that, I get to keep the difference?
posted by Joleta at 6:51 PM on August 2, 2010

This varies greatly depending on your region/state. Here in southern Missouri, where I am a broker, the two scenarios given by RustyBrooks and gjc above are not very common.

In this area, you sign an Exclusive Buyer's Agreement with an agent that states they will represent your interests in finding and purchasing a home. There are various levels of this agreement: it can be for any and all homes you look at (even if the agent doesn't show the home to you), it can be for only homes the agent shows you, or it can be for one or more specific properties. This should be explicitly spelled out in the contract.

For the most part, the agreement states that the Buyer's Agent will be paid 3% of the purchase price, and the agent will make best efforts to obtain this fee from the Seller's Agent or the Seller. Meaning -

1. If the property is listed with an agent who offers 3% to the Buyer's Agent, all is taken care of (the standard for most listings).

2. If the Seller's Agent is offering less than 3%, or if the home is For Sale By Owner, the Buyer's Agent will attempt to negotiate the fee difference as part of the deal (not as common).

3.The most difficult situation is a FSBO, where the Seller does not wish to pay any commission - very common for FSBOs, if they wanted to pay out agency commissions they wouldn't be selling it themselves in the first place. In this case, the buyer is then on the hook for paying the 3% of the purchase price out of pocket at closing.

There is a school of thought among some home buyers that because the Buyer's Agent is paid as a percentage of the sales price, they do not have an incentive to get the lowest purchase price. I won't dismiss this concern out of hand - a Buyer's Agent could certainly not negotiate the price lower for their own benefit. Two things are against this - in Missouri, at least (and I would assume most other states), the Buyer's Agent is legally bound to represent the best interest of the Buyer, regardless of their own benefit. If an agent is found to be not negotiating the lowest possible purchase price, they could be investigated by the appropriate representative boards and subject to fines, loss of license, and/or a lawsuit by the Buyers. But the more important issue is the Buyer's reputation. Any agent who regularly performs as a Buyer's agent relies heavily on word of mouth and referrals, and an agent who does not negotiate great deals will not get very far in the business. Again, I'm not saying it doesn't happen, but the system is built in such a way to keep it in check.

The other issue is the idea of "who pays the agents" in the purchase of a home. The reality is - both parties do. The price of a home inherently factors in the real estate agent fee, although not as an inflated figure. Because agents sell the majority of homes in any given area, the default is a commission of X% will be taken out of the price - here in Missouri, 6% is most common, with 5% and 7% as outliers. For FSBO homes, the seller will assume they are getting the full market price of the home, and are thus not paying out that 6%. In reality, most people negotiating for a home will take that as a position, arguing that the Seller isn't paying a real estate agent and thus can afford to lower the price accordingly.

In a standard deal, where both parties are represented and the commission is being split, the money comes out of the Seller's side. From a pure accounting standpoint, the dollars to pay the commission come from the Buyer's money.

This is long and rambling, but I hope it clarifies your situation a bit.

On preview, RustyBrooks example is possibly more of a gamble - I would assume that when you agree to pay them $7500, that is what you owe regardless of the purchase price. If that were the case, you are back to the same issue of a Buyer's Agent not attempting to negotiate the lowest purchase price. If your largest concern is an incentive to negotiate the lowest price, the ideal agreement would be an inverse commission rate - the agent earns more by getting you a lower purchase price, but that would require more out of pocket expenses on your side.

If you have any questions, please feel free to ask here or MefiMail me.
posted by shinynewnick at 7:34 PM on August 2, 2010

Also, the "reading between the lines" in gjc's link is not what that says at all. That is describing the standard commission structure as I described in my first example above. Commission is 6%, Seller's Agent and Buyer's Agent split it 3% each.

Now, a Buyer's Agent could come up with such a pricing agreement, but it would definitely not be the norm.

Also, the example RustyBrooks gave is not standard in any way - I also believe it would be possibly illegal in some states. In Missouri, only licensed real estate agents are allowed to be paid a commission on the sale of home, so you don't have people unlicensed by the state trying to buy or sell homes for people. You as a buyer would not be allowed to accept that commission from the deal in this state.

Here is what it boils down to: a Buyer's Agent gets a split of the commission of a listed home, and in most cases that is covered by the standard Seller's Agent listing agreement. You could certainly negotiate a different deal, if you so desired, but you might have to dream up that agreement yourself and find a Buyer's Agent willing to go along with a plan that could result in them getting paid less than they would on a normal deal for the same amount of work.

After saying all of this, and defending the current system: I think the real estate agent's control over the market will begin to lessen in the coming years. The power of real estate agency comes in their exclusive listing services to assist in coordinating the market of buyers and sellers through agents. This is a powerful industry, that does plenty of lobbying to maintain that control, but the rise of third party systems are always a threat to the status quo.
posted by shinynewnick at 8:00 PM on August 2, 2010

Just to be clear, when, for example, HuronBob says that his buyer agent costs him nothing out of pocket, that's not quite true. ALL the money in a real estate transaction comes from the buyer. It is possible, in some places, to arrange a transaction, even with a seller's agent, for the buyer's commission portion to either not be paid at all, or to be paid back to the buyer, for a true no buyer agent cost transaction. Obviously, you a) can't have a buyer's agent, and b) have to know what the laws and customs of real estate transactions are in your area.

The advantage of an exclusive buyer's agent is that you are paying for service, not solely by commission, which means it is far more likely that there is no conflict of interest in a bargaining situation.
posted by birdsquared at 8:15 PM on August 2, 2010

In NC, buyers agents and seller's agents split the commission.
posted by St. Alia of the Bunnies at 8:46 PM on August 2, 2010

I see that you're "somewhere near Chicago". My husband and I bought a home in Oak Park in April using an exclusive buyer's agent.

HuronBob is right on the money. His commission came entirely from the seller's funds, there was absolutely no talk of any of his commission coming from us, and he spent a long time negotiating down from the seller's asking price. (We actually chose to offer slightly higher than he recommended.)

(By the way, I HIGHLY recommend the guy we used. His office is on the north side, and his first name is Jeff. MeFi-mail me if you'd like more info.)
posted by marteki at 9:48 PM on August 2, 2010

Thanks, everyone. I marked a few as "best answer" but all are very helpful. Personal experiences most of all.
posted by Joleta at 9:22 AM on August 3, 2010