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Latest posts by Larry Rothman (see all)
- Understanding a Co-op Ownership Structure and Proprietary Lease - July 17, 2018
- New Construction Final Walk-Through Punch List - July 16, 2018
- Evaluating a Building’s Financial Statement - July 13, 2018
Many real estate buyers do not feel having his/her own agent matters. After all, the buyer’s agent receives a commission, much the same way as a traditional seller’s agent is paid. This does not tell the whole story, however. We would like to clear up any misconceptions regarding compensation and assure you that an exclusive buyer’s agent owes a fiduciary duty only to the buyer, representing his/her best interests.
Would you use the same attorney as your spouse in a divorce and pay for it?’’ Gea Elika said.
More than meets the eye
While a buyer’s agent receives a commission, as with any other agent, this is built into the purchase price. When the seller is discussing price with the listing agent/company, he/she is factoring in the 4%-6% sales commission. As a buyer, you do not pay any extra fees. What does this really mean? You are paying the commission regardless, whether or not you choose to have your own representation.
Image byBriYYZ /Flickr
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 party that brings in the buyer. If this is the same agent, he or she keeps the entire commission. Obviously, 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 own representation. In fact, 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 whole fee. It is important 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.
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 duty 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 comprehensive market analysis much like an analyst, which traditional agents do not perform to the same degree.
At Elika Associates, we value our reputation and would rather expand our business with satisfied client relationships that refer other people over the long term.
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 just 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 real estate firm 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 split 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 typically 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. An exclusive buyer’s agent role is to be unbiased and provide full disclosure.
Watch the discount buyers agents
There are 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 just visit properties with you or provide a full scope of services as seasoned exclusive buyers agents perform? This includes a comparable market analysis along with the experience and knowledge to provide expert advice. We wrote a blog post to help you ask some important questions before hiring a buyer’s agent. Going the discount route may cause you to miss out on the experience of a strong, venerable 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.
Don’t leave home without one
Since you are paying the same commission regardless, doesn’t it make sense to have your own representative that is legally bound to you? In fact, 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 broker 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.
At Elika Associates, we like to compare not having your own representative to using your spouse’s attorney in a divorce and paying for both sides. You would hire your own lawyer to represent your best interests; similarly, you should have your own real estate, agent.