Why Agents Should Talk Commissions With Buyers

Real Estate

Utah requires all licensed real estate agents to have the buyer clients with whom they are working sign a buyer agency agreement before an offer can be submitted to the seller to buy a home. It creates a fiduciary and legal representation.

 Some agents get it signed with the purchase agreement and others have it signed at various times before an offer is made. The Utah Division of Real Estate prefers Realtors get it signed when they first start working with a potential buyer, which often results in some pushback from customers. It weds those buyers to that agent for specified period of time.

 Regardless, the buyer agency agreement is mandatory in Utah. Among its provisions is a commitment that the buyer is responsible for the commission, typically 3 percent, which is satisfied when the seller pays it. Currently, the Wasatch Front Multiple Listing System has a little over 2,000 property listings, of which more than 1,670 offer a full 3 percent commission. The rest offer less than that except for a small handful that offer a 3.5 percent commission.

For those offering less than 3 percent (or the amount specified in the contract) the buyer could be responsible for the difference, according to the contract. In the past that difference was usually half a point to a full point, which many brokerages accepted as part of doing business. However, in the last few years a noted discount broker has taken listings with a buyer broker commission of just a few hundred dollars or less; sometimes a few thousand dollars, but rarely what is considered in the business as a full commission matching the amount in the buyer broker agreement, thus exposing buyers to paying part of the commission.

This situation puts buying agents in an awkward position. Buyer’s agents typically hate asking their clients to break with tradition and fork over part of the commission. But, like anyone in business or in the workforce for that matter, agents really don’t want to take a cut in pay.

 Several months ago, our legal team came up with verbiage to ask the seller to pay a full commission, which was included in the offer. When I first started in the business 25 years ago, commissions were never part of an offer. Running commissions past sellers was strictly taboo and kept just between agents.

However, with rising prices and commissions based on the selling price, and rising Realtor expenses to boot, couples with increased discount broker marketing to get listings, Realtors needed a better way to ask sellers to pay an expected commission.

Recently the Utah Division of Real Estate came up with a new form that is a request from the buyer to the seller to assist in paying the brokerage fee that the buyer has committed to pay.  Called the Real Estate Brokerage Payment Addendum to Real Estate Purchase Contract, this makes an agreement between buyers and sellers so agents are able to include it in the negotiation.  If it was between brokers, it should not be done in the contract.  

Just how discounters will accept this form is yet to be determined. However, it does give full service agents a way to push back against low pay. But before they ever get to that position, buyer agents should have a conversation with their buyer clients and make sure they understand what the buyer agency agreement requires.

If the buyer balks, then the agent can choose whether that potential client is a good fit. On the other hand, buyer agents should inform potential buyers when a house or other property offers a low commission so the buyer can choose whether to even look at it. So it’s best to have a conversation with buyers regarding commissions before they ever get to that point.

In my experience commissions aren’t really the expense a lot of people, including many Realtors, think they are. I see them as a powerful marketing tool. It’s the commissions, or profit, if you will, that pays for the marketing that gets the most exposure that gets the most money for the property.

A full, or even bonus commission, has the power to attract the most agents (who represent the vast majority the buyers, by the way), get the sellers the most showings and higher and better offers in any market. The right commission goes a long way in bidding properties up in multiple offer situations. The right commission excites agents and pushes them to show a property with more enthusiasm, rather than just opening doors.

 Then there’s the argument that it’s really the buyer who pays the commission because it’s figured into the purchase price of the home and the proceeds. Sellers collect it but buyers pay it, just like buyers pay the commission of the sales agent when they buy a car from a dealer or purchase anything else in the world of commerce. 

I had a real estate coach who believed in the power of effective marketing and justly compensating buyer agents when he taught, “the right commission won’t cost you money, it will make you money.”