How to Negotiate a Real Estate Commission (for buyers)
Few consumers know how to negotiate a real estate commission, and most who have done it have made some big mistakes. This short article is intended to provide home buyers with some basic knowledge to help them negotiate that fee and the services that come with it.
1. Only use small brokerage firms. Stay away from large brokerage firms. Big broker firms rarely negotiate their fees. In fact, most big brokerage firms incorporate subtle market manipulations that increase the likelihood that they will collect a double commission and strip you of your right to representation. Small brokers often offer far better service, better marketing strategies and they are much more likely to negotiate their fees (especially very small firms). If you pick a broker/agent who does not have to share their fee with their firm, you will have eliminated almost 50% of the fees. Smaller is better and they have access to all the same marketing opportunities. Also, consider hiring an Exclusive Buyer Agent (EBA). These are agents who work at firms that only represent buyers. We have started a Nationwide List of EBA’s (click here) and the only one of its kind that does not charge referral fees or a fee of any kind for this service. We have also begun compiling a list of buyer agents who have alternative fee arrangements that result in a discount to consumers. Nationwide List of Agent’s Whose Fees are Fair (click here).
2. Buyer broker’s compensation. An Explanation. Today, many home buyers do their own research and find homes on their own searching Zillow.com, Realtor.com, Trulia.com and others. However, most of those buyers end up contacting the listing broker and unknowingly forfeit their representation and give the listing broker an extra 3% in commissions. A savvy do it yourself homebuyer can save thousands of dollars by following our steps.
Most buyer agents tell their clients not to worry about their fee because they get paid by the seller. Untrue. Buyer broker’s fees are negotiable – just look at any buyer representation contract and you should see CYA terminology indicating that their fee is negotiable. The only reason buyer brokers get paid by the seller is that every listing commission negotiation includes two commissions, the fee payable to the listing broker and the fee “offered” to be applied towards the agreed upon buyer broker fee (agreed upon between the buyer and the buyer broker). However, if no one claims the buyer broker fee offered by the seller’s listing broker, the listing broker pockets both (a double commission, called a “hogger” in the industry). When that happens, the buyer and seller forfeit their right to any meaningful representation and the broker gets paid double for doing a fraction of the work. Buyers should be aware of how much money is being offered to buyer brokers on every listing (only buyer brokers have access to this information – it is hidden from buyers) and leverage that to their advantage. Few buyers know how important it is to do this.
3. Follow these steps. Always check with an attorney to before you try this:
a.Hire a buyer agent from a small firm on an hourly basis. If their fee is contingent upon a successful closing, expect a higher hourly rate. If not, $50 an hour should suffice for most. Do not approach large brokerage firms as they are in the business of collecting double commissions and rarely will negotiate. Small brokers have the same technology at their fingertips sans the conflict of interests and are much more open to innovative fee arrangements.
b. Set up appointments with listing brokers to see houses (without your buyer broker) and make sure the listing broker is aware that you have signed a buyer broker agreement with another broker. If the listing broker refuses to show the property, contact the seller (information is usually available through online property tax records) and ask to see the property. In that situation, the listing broker has likely violated their contractual duties to their seller.
c. When you have narrowed your search down to the properties you want, ask your buyer broker for their opinion. Require them to examine the property and confirm the facts in the MLS listing (e.g., a large percentage of the MLS listings contain innacurate information on land and building dimensions).
d. Hire a real estate attorney to draft the purchase agreement. Attorneys have far more training on contract drafting than real estate agents.
e. On a $300,000 house, expect to save $3,000 to $7,000 in the form of a commission rebate. Your buyer broker will collect the fee and pay the difference to you. If that is not possible in your state (11 states prohibit rebates – sign our petition), have the seller reduce the purchase price by this amount.
f. ALWAYS tell your lender about the commission rebate as soon as possible so that it can be approved by the underwriter.
g. ALWAYS manage your broker’s time allocated to your transaction. Purchase agreements often take just a few minutes to draft given the sophisticated nature of drafting software and Realtors have no legitimate business in attending the closing. If you want representation at closing, hire an attorney (they are licensed to provide legal advice).
4. Junk fees. Read your listing contract carefully. Many brokers include junk fees in the boilerplate of their contracts. No matter what your agent tells you, it is a mistake to pay this.
5. Bonuses. Some listing brokers actually offer secret bonuses on certain properties. We think the practice is illegal and possibly criminal, but the practice exists. Put it in writing, all bonuses belong to the buyer. Do not split this with your agent as it creates an improper incentive. This is your money.