Should Buyer Brokers Charge Set Fees? It's a bi-annual event, the publication of NAR's buyer and seller study, and with dull regularity each edition confirms that the case for flat-fee buyer brokerage has not been made. In the 2000 edition we find that buyer representatives are compensated by sellers in 56 percent of all transactions, 15 percent of the time purchasers pay the tab, both buyer and seller pay 11 percent of all sales, and an amazing 17 percent don't know who paid the buyer broker. This last figure should cause eyes to roll. How can people engage real estate professionals and not know how the bill is paid? But the figure which is most appalling is this one: purchasers paid buyer brokers on a flat fee basis in 2 percent of all transaction -- down from 4 percent in the 1998 survey. (See Table III-7 in the latest study, Table 30 in the 1998 study.) To see why this is an issue, let's look at the matter of how brokers are compensated. When owners wish to sell property through a brokerage, they sign a listing agreement that establishes a number of benchmarks including the sale price, the amount down, fixtures that stay with the property and a negotiated commission to which the broker will be entitled for satisfactory performance. We'll call this fee "X." When a purchaser wants to retain realty services, it seems logical that he or she would hire a broker and pay a given amount for professional services. And while this does indeed seem reasonable, it's not the way it usually works. Traditionally, lenders have seen fees to listing brokers as a normal part of a realty transaction and are thus willing to finance them. But lenders have not always felt the same way about buyer brokers -- the VA will not allow borrowers to pay buyer brokerage fees, FHA allows them only in those geographic areas where they are customary (But how can they become customary if they are not allowed?), and many conventional lenders oppose them as a matter of custom. The lender position in this instance is short-sighted. Surely it is in the lender's best interest to have buyers get the best possible deals and thus reduce lender risk. The result of lender traditions is that in most cases, as the NAR figures attest, the buyer broker's compensation comes from the listing broker's fee. The idea that buyer brokers must rely on listing brokers in any way for compensation should cause wonder for three reasons. First, as attorneys endlessly point out, there is nothing wrong with one party to a transaction paying another party's costs. This information is both true and misses the point. Listing fees are typically a percentage of the sale price. Thus, the listing broker has a huge incentive to get as much as possible for the owner since this strategy will also maximize the broker's compensation. But if the buyer broker is being compensated through the seller, then the buyer broker's fee rises along with the sale price -- not good news for the purchaser. At this moment buyer brokers will say that the increased commission values are generally minimal and thus not likely to influence their actions or obligations. Again, this is both correct and misses the point. The point is that it looks curious, if not in conflict, to be better paid as your client's fortunes ebb through the mechanism of higher purchase prices. Second, there is an assumption that listing brokers will pay the same fee to all licensees who bring in a purchaser. This is not always the case, sometimes buyer brokers are offered less and sometimes nothing. Such practices surely do not benefit owners and should raise regulatory and ethical concerns. Third, it's possible for a home to be listed for a minimal fee, with the result that a buyer broker may be providing services with an unintended discount if he or she relies on listing brokers for compensation. For the reasons above, and for others, there is a need to separate buyer broker compensation from the fees paid by sellers to their listing brokers. The idea of fees set in advance for buyer brokers works like this: At the time a buyer broker is retained a fee for professional services is established. If the buyer representative fulfills his or her obligations, then payment is earned, due, and payable. This fee is known before the deal is done. It does not go up if bidding causes a buyer to raise an offer, and it does not go down if the buyer broker is able to extract an especially good deal -- that's one reason the buyer representative was hired in the first place. Moreover, this set fee comes from the buyer, and only the buyer. The buyer and the buyer broker don't care about the relationship between the seller and the listing broker -- it's none of their business. They also don't care whether the listing broker is being paid in gold bullion or prunes, that's a matter for the seller and the listing broker to work out. The buyer is not asking for a piece of the listing broker's fee, but the purchaser may surely call for a "seller contribution" in the purchase offer. Contributions equal to 3 to 9 percent of the purchase price are allowed by most loan programs, but not all, so check with brokers and lenders for details. Why would a seller want to offer a contribution to a would-be purchaser? It may be that the buyer's offer is the best available deal. It may also be that since no money is being paid from the listing broker to the buyer's rep, the owner and the listing broker will work together to create a satisfactory arrangement between themselves. What do we have at the end of this process? - The listing broker is paid by the seller. The amount paid is a private matter between the parties.
- The buyer broker is paid by the purchaser. The amount paid is also private.
- A flat fee is a flat fee - it is a single amount negotiated in advance. It is whatever purchasers and buyer brokers negotiate.
- The seller has agreed to a contribution to assist the buyer in the purchase. This contribution is not related to any specific cost such as painting the living room or replacing the dishwasher. If it happens that this general contribution is greater than the buyer brokerage fee, the purchaser keeps the excess. If the contribution is less than the fee, the buyer must come up with additional cash at closing, as is the case with expenses for lawyers, taxes, and other transaction costs.
- The buyer broker's fee does not rise should the purchaser spend more money.
- A buyer broker would neither seek nor accept a bonus from an owner or a listing broker. If a bonus has been offered, it would be used to reduce the purchase price, thus benefiting the purchaser.
- The appearance of a relationship between the listing broker and the buyer broker is gone -- there is none.
Since 1984 I have written that the combination of buyer brokerage and fees known in advance is the one approach to purchaser representation with the greatest clarity, the most benefits, and the fewest liabilities. I still have that view, and perhaps in 2002 the next NAR study will show that more than 2 percent of all purchasers agree. But for flat-fee buyer brokerage to work -- something many buyer reps might favor -- the lending community must do its part. It's long past the time when traditional and customary lending practices should change. Buyer brokerage is a legitimate and valuable marketplace option, one now constrained by out-dated and impractical lender policies.
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