Deciphering Buyer's/Broker's Agency Contracts

14 Replies

Hello all,

I just have a quick question. I recently received a non-exclusive contract from my real estate agent so he can represent me. There's one sentence in there that I don't completely understand. It basically says that the broker's fee will either the the "selling commission" listed on the MLS or 3% of the purchase price, whichever is greater. I get the 3%, but I don't understand the first part. I don't want to go into a deal with some unknown broker fee that won't be disclosed until closing. Can someone explain what a "selling commission"? Is that something I pay? Can I as a buyer even see this "selling commission" if it's listed in MLS?

In case location is relevant, I'm looking at KS and MO.

Carlos O.

I assume this is an agent who will be representing you as part of a purchase?  Assuming so, while you might know this person as your "buyer's agent," in agency parlance, they are typically referred to as the "selling agent."  The agent who represents the seller is typically referred to as a "listing agent."

When a seller sells a house, they agree to pay a commission to the listing agent.  Depending on the location, this is typically between 5-6% of the sale price.  The listing agent will typically agree to split this fee with the selling agent (the buyer's agent), so that each agent will get between 2.5-3.0% of the sale price in commission.

Basically, the agreement your agent wants you to sign says:

-  Assuming the property you purchase is offering a commission from the seller of at least 3%, you won't owe anything additional (remember, the commission is paid by the seller).

-  But, if the property you purchase offers less than 3% of the sale price in commission to your agent, you are agreeing to pay the difference.

So, if you buy a property for $100K, your agent wants $3K in commission.  If that property is offering less to your agent, it's up to you to make up the difference.

I'm assuming 6% is standard commission in your area, in which case, there's a good chance your agent will get their 3% on any typical MLS transaction, but there's always a risk that you're going to want to buy a house that offer less in commission (or if you buy a For Sale by Owner house, they may offer nothing in commission to your agent); if that happens, you're legally on the hook to make up the difference.

A REALTOR might never say there is a 'standard' price because this would violate the laws against collusion on prices (I'm a REALTOR btw). Markets do tend to dictate prices and you will find listings that are 'entry only' with no commission all the way up to 10% depending on the difficulty of the deal.

I'm sure you could find a REALTOR willing to work with whatever commission is offered. Some of the best REALTOR's work at smaller brokerages without the fancy names and offices. More clients means less time with each one.

If you are really set on having this agent..you could always work the higher percentage into the price by offering a higher price and asking for the difference to go toward commission. This does make you less competitive though...I had two identical offers on price, but one asked for higher commission...You can guess which one was picked. The buyer was not better served by paying a higher 1% higher compensation and was in fact hurt by it. 

So just to clarify, the contract states that they can only do one or the other; either get the "selling commission" or the 3%. Let's say the selling commission is 6%, but the seller's agent only wants to pay 2%, therefore the selling commission is 4%? Wouldn't this contract make me pay the 4%? 

Originally posted by @Carlos O.:

So just to clarify, the contract states that they can only do one or the other; either get the "selling commission" or the 3%. Let's say the selling commission is 6%, but the seller's agent only wants to pay 2%, therefore the selling commission is 4%? Wouldn't this contract make me pay the 4%? 

Again, the total commission is what the seller pays to the listing agent and the "selling commission" is the commission the listing agent shares with the selling agent (your agent).

Your agent is entitled to the selling commission or 3%, whichever is greater.  If the selling commission is less than 3%, then you make up the difference.  If the selling commission is at least 3%, then you don't pay anything and your agent just gets the selling commission.

You should feel free to ask your agent what the selling commission is for any property that you might be interested in, so you know if you'll have to pay anything out of pocket (though a good buyer's agent would actually ask you to pay the difference).

@J Scott That answers my question. I didn't see it your first post. Thanks!

Yes, this is typical.  I do to with all buyers.   It should however be disclosed to you when you indicate you want to Look at a property, not after you submit a contract.  A prime example is if you want to buy a Homesearch listed property.  They pay a 1% commission to the selling agent, therefore you, and my clients, would need to pay an additional 2%.  Most cases you run into, if they're not 3%, will probably be 2.5% being offered to the selling agent.

You guys need to be careful with the Buyer Broker agreements. 

I'm reading one right now that would (if I signed it) require ME, the Buyer, to pay the Broker 3% or $2500 (whichever is greater) WHETHER I BUY A LISTED PROPERTY OR NOT.

Now, my Realtor assures me that they would only exercise that if I bought a FSBO, but the paper doesn't lie: Some of these contracts are a liability. 

Buyer beware!!

Originally posted by @Matt Hegedus :

You guys need to be careful with the Buyer Broker agreements. 

I'm reading one right now that would (if I signed it) require ME, the Buyer, to pay the Broker 3% or $2500 (whichever is greater) WHETHER I BUY A LISTED PROPERTY OR NOT.

Now, my Realtor assures me that they would only exercise that if I bought a FSBO, but the paper doesn't lie: Some of these contracts are a liability. 

Buyer beware!!

This is standard. You are guaranteeing the broker a commission on your purchase. Typically, the seller will pay that commission (they pay both sides), but if the seller is offering less than the standard commission or if you purchase from a seller who doesn't pay any commission (FSBO), you can be asked to cover it.

This is a typical Buyer Broker Agreement clause...and makes perfect sense.  The broker shouldn't have to work for free...

If the broker/realtor don't find you an acceptable property, and you find one on your own, why should they get paid anything?  If your mother goes into a nursing home and sells you her home to avoid the government taking it, why should the broker get paid anything? If the broker stops doing his job after a month, why should you be stuck with him?

How many investors on here go it alone without a realtor?  How many sign 6 month exclusive contracts with recapture clauses? How many have been able to find realtors who will enter non-exclusive contracts?

Originally posted by @Ken McGrew :

If the broker/realtor don't find you an acceptable property, and you find one on your own, why should they get paid anything?  If your mother goes into a nursing home and sells you her home to avoid the government taking it, why should the broker get paid anything? If the broker stops doing his job after a month, why should you be stuck with him?

How many investors on here go it alone without a realtor?  How many sign 6 month exclusive contracts with recapture clauses? How many have been able to find realtors who will enter non-exclusive contracts?

 For non-investors who are looking for their personal residence, a standard buyer brokerage engagement is typically just fine.  For investors, I would never recommend signing any exclusive agreement.

Either sign a non-exclusive agreement, or better yet, don't sign until the agent/broker finds you a house you like, and then sign an agreement for that particular property.

Even better yet, get your own real estate license...

Hi Scott,

Thanks for the advice, and it does seem to be the overwhelming consensus, for all the reasons stated.  

I am curious if and how people find investor friendly contracts/realtors because I am not finding them. I can't find anyone who will do a non-exclusive agreement, Etc. I can do most things myself but it's much harder than having MLS and showing access. I am looking into getting a license but don't want to delay the next two properties I hope to close this year.

You would think with the public threads like this one that show up every couple of months that numerous realtors would be posting that they are investor friendly. Because they don't you must conclude that they hate working with investors or else are turning away easier jobs that pay more. And yet we know what the salary ranges are for real estate agents. They should be motivated to earn 2K per day for 4 days work. I am assuming that most investors are series buyers for the right property and many home buyers end up not being able to actually work the financing. They need the agent to do all the searching for them on MLS. Am I missing something here?

Originally posted by @Ken McGrew :
You would think with the public threads like this one that show up every couple of months that numerous realtors would be posting that they are investor friendly. Because they don't you must conclude that they hate working with investors or else are turning away easier jobs that pay more.  And yet we know what the salary ranges are for real estate agents. They should be motivated to earn 2K per day for 4 days work. I am assuming that most investors are series buyers for the right property and many home buyers end up not being able to actually work the financing.  They need the agent to do all the searching for them on MLS.  Am I missing something here? 

Here's the problem (many problems, actually):

-  Most investors these days aren't serious (lots of new investors jumping in with little experience), and agents eventually realize that they can spend days/weeks/months with an investor and ultimately not make a single commission.  

-  Most good agents these days are not having much trouble making a living working with retail buyers/sellers and therefore don't need investor business.

-  The typical commission on an investor purchase is going to be substantially less than a commission on a retail purchase (distressed houses cost less).

- There aren't a lot of good deals on the MLS these days, so an agent may have to show dozens/hundreds of properties to an investor before they ever find a decent one -- and they may never find a decent one.

- Agents who work with investor want to work with investors who are going to do a lot of deals, so they can make up for the smaller commissions and extra headaches through volume. But, most of the investors doing lots of deals aren't buying on the MLS (and the one who do likely already have an agent).

-  If you work with an agent who specializes in working with investors, that agent probably has other investors they've been working with longer, and they may pass the good deals to those investors before they show them to you.

Ken McGrew I agree. I've had some of the same thoughts. On my 1st deal the broker asked me to sign an agreement and I did. The broker brought me one deal that I went 10k over list and was still outbid. After that I just searched the MLS day and night until I found one I liked. The broker didn't like my lowball offers I submitted but was a trooper and helped me find a lot of cheaper solutions than the subs I found on google. Because of this I'm listing this property with the same broker. J Scott I understand where you're coming from.
Originally posted by @J Scott:
Originally posted by @Matt Hegedus:

You guys need to be careful with the Buyer Broker agreements. 

I'm reading one right now that would (if I signed it) require ME, the Buyer, to pay the Broker 3% or $2500 (whichever is greater) WHETHER I BUY A LISTED PROPERTY OR NOT.

Now, my Realtor assures me that they would only exercise that if I bought a FSBO, but the paper doesn't lie: Some of these contracts are a liability. 

Buyer beware!!

This is standard. You are guaranteeing the broker a commission on your purchase. Typically, the seller will pay that commission (they pay both sides), but if the seller is offering less than the standard commission or if you purchase from a seller who doesn't pay any commission (FSBO), you can be asked to cover it.

This is a typical Buyer Broker Agreement clause...and makes perfect sense.  The broker shouldn't have to work for free...

Thanks J. 

The part that threw me off was "Broker's fee, paid by Buyer to Broker, is as follows... 3% of sale price or $2500, whichever is greater."

However, when I read on it says "it's the broker's policy to accept compensation from the listing broker. The Broker's fee only applies when the amount received is different from the amount [in the paragraph above]"

I get it now...

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