Why is a Buyer's Agent paid on a percentage of the sale price?

Here's something that has always bothered me.  In a typical real estate transaction, you have a seller and a buyer, each represented by a real estate agent.  The role of the seller's agent is clear.  Advertise/publicize the availability of the house for sale, find a qualified buyer, sell the house for the highest price and most favorable terms possible.  The seller's agent is paid a percentage of the sales price, which aligns their interest with the seller.

The writers of Freakonomics will disagree here.  They are of the position that due to the size of the percentage, seller's agents primary interests are the timliness and completion of the sale rather than the final price.  In other words, in the case of a $500,000 house that receives an offer for $490,000, the seller's agent would likely be happy to see this sale go through.  If the agent's makes 3% of the sale price, their commission would drop to $14,700 from $15,000 for not getting the full sale price.  The seller, on the other hand, "loses" $10,000.  Thus, speed of sale may be a higher priority for the agent than the seller.  Granted, not always the case.  Sometimes a highly motivated seller values the timliness of the sale above price as well.

Anyway, this isn't my point.  I'm talking about buyer's agents.

A buyer's agent is responsible for helping the buyer find a house that suits their needs and desires.  They assist them in the negotiation process, helping the buyer to achieve the best terms and lowest price possible.  So, why is the buyer's agent paid a percentage of the sales price?

Just as with the seller's agent, the buyer's agent has as their top priority the completion of the sale.  However, in the case of the buyer's agent, if they fail at their duty to negotiate the best price possible for their client, they make MORE money!  That's insane!

I suppose I can understand a higher commission for a higher end property.  I suppose.  Although, not really.  Is it really three times more difficult to help a buyer looking for a $400,000 house, as a $1,200,000 house?  At any rate, I think a fee negotiated at the beginning would make a heck of a lot more sense.

Maybe I'm missing something.  Am I off base?

Comments

[Nathaniel]

I agree with you. Realtors lobby hard to make sure their profession has lots of legal help to prop it up. They use STANDERDIZED contracts. What is so hard about that? You should be able to a lawyer in your area that will do the legal work for a flat fee.

[Charles]

I worked with a buyer's agent when buying my house. From our end, the buyers, we did pay the agent a flat fee ($400). That was stated upfront. He did an excellent job at getting a house. I realize that he was also paid a portion of the sale - I really don't know how that was worked out. Frankly, I didn't think too much about it since it didn't affect how much we bought the house for. I'm not entirely sure what my point is except I thought I could add in some experience from having used a buyer's agent to purchase a house.

[Seth]

It is pretty skewed, and I agree with you that it makes less than perfect sense, but it's hard to come up with a better alternative.

If buyer's agents were paid a flat fee, they still have no incentive to negotiate hard for the buyer. It makes no difference to them whether the final price is $10,000 less than listing price or listing price; either way they get paid the same.

You'd really have to shift the dynamic, I think, to get any sort of sensible solution. If the buying agent was paid by the BUYER instead of the seller, and earned a commission that was a sliding percentage based on how successful they were in negotiating down from the listing price, then maybe you'd have a situation where both agents were motivated to work hard for their respective clients.

But the system does, sort of, work. If the buying agent wants to impress their client (and hopefully get referrals from them as well as their future business), then they do have an incentive to work hard and negotiate a better deal, even if it means taking a tiny hit to their own wallet, as far as getting a smidgen less than they would have if the buyer pays the full listing price.

[limeade]

I understand what you're driving at concerning the buyer's agent fees, but do you really need a buyer's agent in the first place?

If you need help with the paperwork and the legal jargon that goes along with a real estate sale, the seller's agent can handle all of that for you.
All the buyer's agent then adds to the equation is the negotiating.

Is it then worth it for you to learn how to negotiate for yourself? Don't get emotional about the purchase, and be prepared to walk away if the numbers don't work.

Here's a tip. Since you won't be coming in with an agent, the seller's agent won't have to split the usual 6% commission. Negotiate with the agent to accept a 4 percent commission (still higher than 3 if it were split). You can then get the house a little cheaper and the seller keeps more of the sale.

Try convincing a buyer's agent to negotiate the commission...

-limeade
http://fiscalmusings.blogspot.com

[growgon]

If you agree to a flat fee upfront to the buyer's agent it will affect the price the buyer is willing to pay. Which ultimately will come back to the seller as a lower bid.
Having both agents paid out of the selling agent's commission encourages the buyer to use an agent that they may not have - had they had to pay upfront. Both agents are incentivised to avoid bargaining failure, and a little caveat emptor doesn't hurt either. My agent was great at finding our house and handling the paperwork, I however negotiated the price. I came up 4k the seller came down 10k after the the third round of offers.

[Ben]

I thought about this a lot before working with a buyer's agent. My thought was that we should offer the buyer's agent a 6% commission on every dollar below listing price. If he saves us 10 G's, we flop him a cool 600 smackers; 20 G's that's another 600 in his pocket. That would even out the incentive considerably, and really give him a reason to argue on our behalf. (It's not a pure 600 bucks for every 10 grand, cuz in the flip case he'd make 280 bucks for every 10 grand he didn't save us.) Still $320 per negotiated point is better for the agent; and it will give him a reason to negotiate on dollars instead of on things like siding and repairs to the house.

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