Legally, the buyer broker's commission is negotiable. This TIP shows you how to negotiate that often hidden commission and it should save you thousands of dollars.
Working with a buyer broker is NOT FREE. Buyer brokers get paid a LOT by sharing or "splitting" (sometimes secretly) the seller broker’s commission. You have a legal right to negotiate that commission and it is worth it.
In most parts of the country, the seller broker “splits” their commission in half and offers half of their commission to the buyer’s broker. Follows is an example of how you might negotiate that buyer broker portion of the commission and save thousands of dollars.
Example: For this example, let’s assume that the typical commission being offered to buyer brokers is 3% of the purchase price. Let’s assume you’re in the market for a house in the $300,000 range. That works out to approximately a $9,000 commission your agent will get for just driving you around and then negotiating the terms and price. Although many agents have to share some of that fee with their brokers, to avoid that situation, we recommend hiring either a 100% fee agent or hiring a broker who works for himself.
Here's one way to negotiate the commission. Let’s say that instead of letting your agent collect the whole commission split being offered, you offer your agent a flat fee of $4,000 (adjust this figure to the price range of the house you are buying) with any extra to be given to you or credited towards the purchase price of the house (depending upon lender requirements). In this example, you’re going to save a whopping $5000 in commissions. Now let’s assume that your agent found you a property where the listing broker was offering an extra $5,000 bonus… That’s yours too. If you had not made the effort, your agent would have received $14,000 for helping you find a house. We believe that to be excessive and a highly inefficient use of your money.
If your agent spent 40 hours (typical amount of time a buyer agent spends with a buyer) helping you, that $4,000 works out to $100 an hour. If the agent pocketed a bonus, in the above example the agent would have earned $350 an hour. That is a lot considering the specialized education required to become and maintain a real estate license is minimal as compared to all other professions.
Flat fees are just one example of how to negotiate with your buyer broker.
Optional More Detailed Explanation
When you hire a buyer broker to represent you (where legal) in the purchase of a home, they are supposed to first present you with a Buyer Representation Contract that addresses the conditions of that employment, the duties that they owe to you, the services that they will provide to you AND HOW MUCH THEY ARE TO BE PAID. Financial consideration is such an important contractual term that most courts won’t enforce a contract unless there is an agreement on this one term called "consideration." You could actually insist on not paying your agent if they don’t fill in this section of the contract at the time of signing and you would likely prevail in court. Yet despite that risk of not getting paid, agents still often elect not to fill in the amount they are to be paid.
The reason many agents don’t fill in the payment section of your contract is because listing brokers offer different amounts to your agent on different properties. And your agent wants to get the benefit of whatever is being offered – especially if there is a bonus or unnusually high compensation being offered on the property. It is very common to see extra compensation (bonuses and very high commission splits) being offered in amounts of $1,000, $2,000, $5,000 or even a lot more. We've seen as much as $20,000 and one builder in Minnesota (Lennar) went so far as to offer a free Lexus.
By not filling in the compensation section of their contract with you, many buyer agents hope to be able to collect that extra compensation by “disclosing” it to you later on. Well, disclosing their compensation to you does not make a valid contract. It has to be NEGOTIATED up front and before they start showing you homes. Legally, that extra compensation belongs to the buyer, not the buyer’s agent. Can you imagine any situation where it would be a good idea for the seller to be offering your buyer’s agent extra compensation as a bonus for convincing you to buy their property? That’s called bribery in every legal definition we could find. So this TIP isn’t just about saving you money, it’s also about making sure that your buyer agent’s advice isn’t being financially influenced by the seller’s agent.