Many real estate buyers do not feel having his/her own buyer’s agent matters. After all, a buyer’s agent is paid a commission, the same as the listing agent. This does not tell the whole story, however. We discuss the misconceptions of a buyer’s agent and their duty and responsibility to the buyer. An exclusive buyer’s agent owes a fiduciary duty solely to the buyer, representing his/her best interests 100% of the time.
Table of Contents
- How is a buyer’s agent paid?
- I am paying a commission regardless, how can this be so?
- A dedicated expert buyer’s agent responsibility
- How about I represent myself?
- Beware the discount buyer’s agents
- You pay to have or not to have representation
- A buyer’s agent provides a comparative market analysis
- Comprehensive Market Analysis
- Don’t leave home without one
How is a buyer’s agent paid?
The buyer’s agent is paid a commission, as with any other agent, this is built into the purchase price. When the seller is discussing the price with the listing agent/company, he/she is factoring in the 5%-6% sales commission. As a buyer, you do not pay any extra fees.
Many buyers often think if I pay more for the property, then the buyer’s agent makes more money. This is true but not how reputable exclusive buyer’s agents practice. Sure there will be the less reputable buyer’s agent that may try squeeze every dollar out of one deal so better to find a buyer’s agent that understands their fiduciary duty and loyalties in securing the best and lowest price possible for the buyer.
The reputable buyer’s agents instead of trying to make as much money as possible from one deal understand their duty, and that is best to have satisfied client relationships that refer them to other people over the long term. In real estate reputation and relationships are worth much more than a single commission for a career buyer’s agent. Happy clients are how an expert buyer’s agent builds their careers.
I am paying a commission regardless, how can this be so?
A seller negotiates a commission with the listing agent, who receives half the commission. The other half is paid to the agent that represents the buyer. If this is the same agent, he or she keeps the entire commission. The agent has an incentive to sell his/her listings. However, under The Real Estate Board of New York (REBNY) bylaws, cannot refuse to submit an offer from a buyer with his/her representation.
Approx. 90% of the sales transactions settled in New York City involve an agent representing each side. If a colleague of the listing agent sells the apartment, the brokerage firm gets the entire fee. It is essential to understand that if you use a buyer’s agent within the same dual agency company as the listing agent, the buyer’s agent also owes a fiduciary duty to the seller. This is unlike using an exclusive buyers agent in a single agency real estate firm.
A dedicated expert buyer’s agent responsibility
While the same incentive remains for a buyer’s agent, whose commission also increases with sales price, he/she follows a different standard. A buyer’s agent has a fiduciary duty to his/her client at all times. Members of the National Association of Exclusive Buyer Agents (NAEBA) are required to follow a strict Code of Ethics and Standards of Practice, which include a duty to act on behalf of the buyer/client with due diligence, professionalism, and reasonable care, along with a commitment of undivided loyalty.
In other words, a buyer’s agent is legally bound to work for your interest and pass information that helps you decide on a property best poised to outperform and to negotiate the best price. A seasoned exclusive buyers agent performs a comparative market analysis much like an analyst, which traditional agents do not deliver to the same degree.
How about I represent myself?
Readers are probably asking themselves, what happens if I merely represent myself? That way, I can avoid paying a 2%-3% commission and save on the purchase price. However, it does not work that way. In actuality, the listing agent keeps the entire commission, with none of the savings passed on to you. This is because it is not solely the listing agent but the brokerage for whom they work that is bound to the seller.
You may also think the seller’s agent will help you since he/she does not have to co-broke the commission with another agent. This is also false. The seller’s listing agent contractually owes a fiduciary duty to his/her client, not to you, the buyer.
This involves trying to obtain the highest price for the seller with little to no disclosure. A listing agent’s job is an important one, which is to sell a property. A buyer’s agent role is to be unbiased and provide full disclosure.
Beware the discount buyer’s agents
There are also buyer’s agents that offer to rebate part of the fee to you. This sounds nice, but you should understand it might not be once you dig a little deeper. You should ask why an agent is offering to discount his/her fees. Perhaps the agent is inexperienced and looking to drum up business. Worse it may be a veteran agent whose book of business is not at a level he/she wants for some reason.
You also need to ask what level of service you are going to receive. Do they visit properties with you or provide a full scope of services as seasoned buyers agents perform? This includes a comparative market analysis along with the experience and knowledge to provide expert advice. We wrote a blog post to help you ask some essential questions before hiring a buyer’s agent. Going the discount route may cause you to miss out on the experience of a seasoned buyer’s agent.
You may only purchase one home in your lifetime. You should go with proper representation, not the cheapest. Buying the right home for the right price is the prerequisite for longer-term capital appreciation and building wealth.
You pay to have or not to have representation
Since you are paying regardless, doesn’t it make sense to receive representation that is bound to you? The New York State Department of State Counsel’s Office states that homebuyers have the right to refuse a dual agency and can choose a buyer’s agent that represents his/her interests with undivided loyalty.
On a federal level, the U.S. Department of Housing and Urban Development (HUD) recommends using an exclusive buyer’s agent.
A buyer’s agent provides a comparative market analysis
Using an in-depth comparative market analysis and considering all the information that is provided in the report is well informed. The analysis includes a fair value estimate and strategies for offer price and negotiations. This help put the buyer in the best position possible to proceed with an offer on a particular property
Comprehensive Market Analysis
The buyer’s agent should try to determine how motivated the seller is. Since one that is “highly motivated” is likely more willing to negotiate. If someone’s financial or personal situation (e.g., divorce, already purchased another home, pending foreclosure) can be ascertained this would determine if the seller might flexible in negotiations.
Current market conditions
The agent should be well versed on current market conditions, sentiment, and trends. Comp data is a lagging indicator, so an experienced buyer’s agent makes adjustments based on real-time information. Currently, this is a buyer’s market for New York City real estate, but an on the “front lines” will have a sixth sense when the winds are changing.
The essential consideration of the property conditions, including the building itself. This is a complex area, with many factors to consider. Some of these include the building’s profile, age, unit mix, ownership share of primary users versus investors, and quality of the electrical/ plumbing. Our recent article “What To Look For When Buying Real Estate In A Challenging Market” summarizes the components one should look for in a property.
Improvements and upgrades
Improvements, upgrades and the lack thereof should all be weighed. An experienced agent knows what is worth paying extra for, and which ones are not. Tasteful kitchen and bathroom renovations are usually welcomed; however, if need be replaced considerations for the replacement cost, process and time must be assessed.
Now, the agent should turn to sales comps. The comparison has to be meaningful; having an experienced agent will ensure that is the case. Recent closing prices or like-kind properties in the same neighborhood, ideally in the building where the unit is it should be used. If relevant data is lacking within the building, your buyer’s agent must find comparable properties within the same building. Essentials are bedrooms, bathrooms, what floor the units is on if there is a view, how much light the unit has, amenities, etc. Beyond recent transactions, they should also look at the listing price and trends for similar units. Here is an invaluable understanding of the comparative market analysis.
Don’t leave home without one
At Elika Real Estate, we like to compare not having your representative in using your spouse’s attorney in a divorce and paying for both sides. You would hire your lawyer to represent your best interests; similarly, you should have your real estate, agent.