By Tom Raub, CCIM
In today's real estate market a buyer has many items to consider. A real estate agent representing the buyer's interests should be one of these. Structured properly, a Buyer Representation Agreement can provide a win/win situation for both the buyer and the real estate agent.
Since the marketplace of the early 90's, no longer does an investor or owner/user depend on future property appreciation to provide investment return. The buyer and banks now look much closer at a potential purchase to assure that it makes good business sense today, as well as for the future. This includes not only financial soundness, but environmental considerations, local and state regulations. tax implications. etc.
Today, prudent buyers surround themselves with a team of experts to make sure all aspects of the transaction are considered. The team consists of one or more attorneys, accountants, bankers. environmental sites specialists and other experts as deemed appropriate for the specific property. The above parties provide their expertise on behalf of the buyer and are compensated by the buyer for their services on either an hourly or flat fee basis. While the banker is not compensated directly by the buyer their focus of making sure the bank's interests are protected provides an additional check and balance for the buyer.
Since we are talking a real estate agent transaction, there is one noticeable exception to the above team. It is the expert in real estate itself, the very item being acquired! In most transactions, the real estate agent represents the seller and therefore has a fiduciary responsibility to obtain the best price and conditions for the seller. In this case there is no real estate agent expert looking out for the best interests of the buyer.
Regardless of whom the real estate agent represents, the buyer ultimately pays the commission as the seller has included the real estate's commission in the offering price. Since the buyer is paying for the service anyway, why not maximize this expenditure by having the real estate agent represent the buyer's interest? The real estate agent has a large investment of time and money in real estate agent education and many years of experience to bring to the table.
For buyer representation to be effective both parties should to agree on the specifics of what the buyer needs and expects from the real estate, and how the real estate agent's fee will be paid.
The first step in the process is a meeting between real estate agent and buyer to:
· Understand the buyer's needs
· Understand exactly what the buyer's expectations are
· Decide how information should he presented (verbally, in writing, etc.)
· Identify the person the real estate agent will answer to
· Discuss details of the buyer representation agreement, fees, and method of payment.
With a good understanding of the buyer's needs and what is expected of the real estate agent, a buyer representation agreement can now be drafted. A key part of the agreement is the real estate agent fee schedule. Fee schedules will vary, depending on the many circumstances of a particular situation. A schedule that provides a combination of hourly fees, billed and paid monthly, up to the point of a signed Purchase & Sale contract, and then a flat fee or percentage fee paid at time of closure, provides benefits to both the buyer and the real estate.
With hourly billing, the buyer may set a limit on the number of hours spent per month. This can be adjusted later if the conditions warrant. This method of billing works for both sides and keeps efforts focused. A recent example is a client who wanted to find out about expanding an existing site rather than moving although for many reasons a move was desirable. A cursory look determined that the answer would require significant time to investigate due to some planned highway construction in the area. After learning this, the client felt the information was not important enough to justify the expenditure of funds. Thus, focus was kept on the client's real priorities and the client made the decision, not the real estate agent. Without the check and balance provided by the hourly fee, the real estate agent could have easily spent much time researching this answer, for no compensation, instead of focusing on what was really important to the client.
There are other ways to structure buyer representation fee agreements that depending on the particular situation should also be considered. In many buyer representation agreements the real estate agent fee is a percentage of the sale price and payable at closing. This is similar to a real estate agent representing the seller is compensated. This method is not to the advantage of either the buyer or the real estate agent for the following reasons:
· For the buyer, the percentage fee is linked to selling price and the higher the price, the higher the fee. And yet the real estate agent is supposed to be getting the lowest price for the buyer!
· For the real estate, the percentage fee method provides for compensation to the real estate agent only if the transaction closes. The situation may arise where due to the expertise of the real estate agent and his efforts on behalf of the buyer, reasons are found not to proceed with the transaction. The real estate agent has provided a real service to the buyer, done exactly what the job was, and yet receives no compensation since the transaction does not close.
Regardless of the fee arrangement, the value add of the real estate agent to the transaction is a given. The expertise and experience the real estate agent can provide to the buyer should be utilized and paid for in the same way that other members of the buyer’s team are paid. This then is a win/win situation.
This information is provided for reference purposes only. You may want to consult with legal counsel on current Vermont State laws.
