Sunday, June 22, 2008

FAQ: If the Seller Pays the Buyer's Agent, How Do I Know My Buyer Agent is Doing Her Best for Me?

If buyer agents are paid by the seller, how do I know they are working to get me the best deal?

I’m often asked this question, especially by readers of Freakonomics (a great book!). It’s a fair question; it seems that it’s an inherent conflict of interest.

Let’s discuss how agents are compensated. Sellers don’t hire an agent, they hire a broker, though in reality sellers often choose a broker based on the agent they like. Let’s say it’s Long & Foster. Long & Foster then has individual contract agreements with many, many agents. (Agents are NOT employees—we’re all 1099, or individual contractors. That means we get to deal with the joys of finding our own health insurance, funding our own retirement, paying our own marketing expenses, and dealing with our own quarterly tax filings, not to mention the 7.5% self-employment tax! But I digress.) Each agent has their own agreement indicating how they will be compensated on every transaction, whether it’s a flat percentage, sliding scale, etc.

A seller agrees to pay a listing broker a compensation of what we’ll call X% or $X. Further, that agreement says that the listing broker will pay a co-operating broker (who represents the buyer) Y% or $Y of that total. That portion gets paid if and only if the buyer has representation. If the buyer does not have representation, then the listing broker keeps the whole thing. Similar to the listing broker and his agents, the co-operating broker (who represents the buyer) has similar agreements with their own agents.

So far, we have x%/$ being split 4 ways: the listing broker, the co-operating broker, the buyer agent, and the seller agent.

So if I, as your buyer’s agent, am getting paid by the seller (though technically it’s the co-operating broker getting paid by the listing broker), and one way or another it’s tied to a percentage of sales price, then how do you know I’m doing the best job I can for you?

I wish I could give you a checklist of “How To Know Whether To Trust Your Agent” but it’s not that simple. Buyers need to choose an agent they trust to have their best interests at heart. It’s a combination of experience, education, and your gut. One thing is for sure: if you are asking yourself this question, you probably don’t trust the agent you’re with.

Here’s another way though: Know whether your agent is building their business based on referrals. Do they keep in touch with past clients? Do they communicate often with you? Do they have events throughout the year designed to thank clients for their business? Are past clients satisfied? These are all indicators that they depend heavily on referrals to build their business, and it’s therefore very important that they do a good job.

These are qualitative ideas though, and I know people want numbers – so let me give an example of why a smart agent knows more important that I do a good job representing a buyer to get future business rather than get a higher commission on a single transaction. Let’s say a buyer overpays by $10,000—that’s real money. Once the transaction is recorded and the buyer lives there for awhile, it will become very clear whether they’ve overpaid. Neighbors talk, and tax records are public information. And if they have overpaid, they obviously will not be pleased with their agent, and will not send any future business. That $10,000 in sales price represents—after splitting four ways, accounting for taxes, etc., about a few tanks of gas in my pocket as a buyer agent. Seriously, no joke. Why on earth would I jeopardize a client relationship, future referrals, and even a future sale (after all, you’re likely not going to stay in that house forever) for such a small amount? For two tanks of gas I’d give up a future revenue stream worth thousands, or maybe tens of thousands? I think not. One of my clients—who happened to be amongst my smallest dollar transactions, by the way—sent me TEN referrals last year!

And therein lies your goal: Find an agent who values the relationship, and builds their business for the long term. Then you can be confident they have your best interest at heart, regardless of who is paying them.

2 comments:

Buyer's Agent Atlanta Georgia GA New Homes said...

While it appears on paper that the seller pays all the commission, the buyer bears some of the burden through the sales price; so, you are paying for your own buyer’s agent, indirectly.

Katie Wethman said...

Yes, BAA, that's correct. But that sales price is set before the buyer comes through with (or without) an agent, as described in the post. It's just a question of whether the entire commission goes to the listing side, or whether it gets split. A good buyer's agent will save their client many times that price in both price savings, transaction optimization, and risk reduction.