How to Use A Buyer's Broker: Part One

(Saul Klein offers Part One of a 12-part series of articles for consumers on Buyer Brokerage.)

The revolutionary information in How to Use A Buyer's Broker gives you the knowledge and the power to not only pay less for property but also to be represented in a real estate transaction!

As Alvin Toffler pointed out in his book, Power Shift, the key to power and effectiveness is the implementation of knowledge. The powerful information presented here is not an extension of what you already know. It is another way to look at buying property.  This material is the result of our experience and our investigations. 

Current Real Estate Views

To understand this information, look first at how real estate professionals currently view buyers and how real estate transactions are now handled.

Buyers Are "Looky-Loos"

Misinformed real estate professionals consider buyers to be "flakes" or "looky-loos".  Real estate licensees have a habit of blaming the buyers when they loose buyers to an "Open House", a "For Sale By Owner" (FSBO), a new tract house, a friend, a relative, another professional, an alternative brokerage, or an attorney.  In reality, it is not the buyers' fault at all -- it is the licensees'.

By having contracts with sellers and not with buyers, real estate brokers were being professional with sellers and UNprofessional with buyers. Unfortunately many of  these brokers believe that buyers will not sign a contract with them.  

Current Handling of Buyers

Think about how real estate professionals presently work with you, the buyer.  Real estate professionals

• Drive you all over town showing you properties until you  find a property you like.
• Do not have any written agreement with you, but they assist  you in writing an offer.
• Accept a check for the earnest money from you.
• Call the sellers' agent to make an appointment to present the offer.
• Tell you that they represent you. You may not realize that you should have no confidence in the concept that real  estate professionals are representing you or your interests  to your best advantage.  Even if they believe that they represent you, their legal obligations may be to your opponents, the sellers. You and they may not be aware the professionals are usually agents of the sellers because of  the current structure of the Multiple Listing Service.
• Are usually NOT looking for the perfect property for YOU,  but rather to save the transaction and close the deal. They often attempt to "shoe-horn" you into a property in order to make sure that they get a commission.  They feel if they do not force you into a particular deal today, you  might end up buying from someone else tomorrow.
• Do everything they can to keep the deal together even if it  does not benefit you. 
• Tell you "not to worry" about a problem.  They may say:
     "Don't worry, interest rates will change."
     "Don't worry about the termites.  You have new pets."
     "Don't worry about the increase in points. Its a great deal!  The property will go up in value."
     "You'd better not back out of this deal because we   might not find another one."
• Will often close a deal without consulting you -- even if a problem comes up.  

If you look closely at current practices, the agent's role of keeping a deal together and closing it usually benefits the sellers and the real estate professionals.  At present, most real estate professionals work for the sellers in some capacity -- even most professionals who SAY they work for buyers!  Most professionals feel that the sellers pay the commission. 

Compensation Conversations

Most real estate professionals feel that buyers are never going to want to pay them a commission.  They may also feel that since they always get paid by the sellers, they must represent the sellers.  Although these are two very good points, unfortunately they are both untrue.  Buyers pay the real estate commissions!

Buyers Do Not Want to Pay Commissions

Sellers generally do not have enough money to pay the commissions in a real estate transactions until the escrow closes.  After your down payment and financing are put into escrow, these funds are credited to the sellers.  Then the sellers are able to pay their costs from these proceeds.  Buyers, it is your money that sellers use to pay the commissions!

f you doubt what we say, think about people who sell their homes themselves (For Sale By Owners, FSBOs). They have a competitive advantage because they can sell their property for less. FSBOs do not to charge the buyers for the costs of real estate commissions -- the commissions that sellers usually pay to real estate professionals.

Sellers Pay the Commissions

If you say that the sellers are going to pay the real estate professionals anyway, you may be correct in a sense. The sellers generally make the payment to the professional, but it is usually with your money!  Remember, after your down payment and financing are put into escrow, these funds are credited to the sellers. Then the sellers are able to pay their costs from these proceeds.  Most transactions are arranged in such a way that when a real estate deal closes, the commission for the buyer's broker appears as a charge against the sellers' accounts.

Working for Free

The current structure of the real estate industry requires that real estate professionals work for free.  They usually work many hours before they are finally compensated.  Other professions and trades do not work this way.  Perhaps you can see this concept more easily using analogies from other professions, for example

•  If you have a pain in your side, you go to the doctor, and  the doctor examines you.  If he thinks the problem may be  your appendix, he orders a number of tests.  The doctor charges you for his time and the tests.  The doctor does not  say that if you need your appendix out later, all he asks is that you have him do the operation -- an operation which
   costs thousands of dollars!
• * If you need legal advice, you talk to an attorney and may  even have him do some research.  The attorney does not waive  the fees for the consultation and research time as long as  you agree to use him for any lawsuit that may result!

What Was Missing

Traditionally, real estate professionals represented sellers only. What was missing wass the contract with the people with the money -- you, the buyers.  The reason that you buyers were not represented is not because you did not want representation.  Real estate professionals never asked you.  You are the most important participants in the whole transaction!

Representation

Real estate professionals CAN exclusively represent you, the buyers, in transactions.  Their commissions can be paid at the close of escrow using the sellers as a conduit.  Just because it appears on paper that the sellers pay the professional, the professional does not automatically represent the sellers in the transaction.

Commissions do not determine who represents you -- actions do.  If a real estate professional looks, walks, and talks like he represents you, he probably will be considered your agent.  He  owes no duty to the sellers just because the sellers pay the commission.  Compensation does not determine agency.

Loyalty

Signing a buyer's broker listing agreement is much more than having a real estate professional locate property, negotiate the transaction, and close the deal for you.   Entering into a buyer's broker listing agreement makes the real estate professional loyal to you.  They will protect your interests right up until day the escrow closes. 

If a real estate professional represents you exclusively, he is going to work with loyalty and integrity during the entire process.  He will use all his knowledge and wisdom throughout to serve your interests.  If something comes up that is not in your best interest at any point in the transaction, he will protect you.  He will not let you go through with something that could inherently damage you in the long run.  This is the biggest benefit to you.

Compensation

Judging from the past and present, we believe that in the future, compensation structures are going to change.  We feel that in the future, buyers will pay less to the licensee selling them real estate.

• Commissions are going to become more competitive --  licensees will receive less in commissions.  Licensees in  the securities, insurance, and some other facets of the  financial services industries already receive less money in commissions than previously.  Real estate, a part of the financial services industry, is experiencing the same  phenomenon.
• Many real estate professionals will choose to be paid by the hour and forego any commission.  As a result they will  receive pay for all for the hours that they work -- therefore they will charge less.  They will enter into a  buyer's broker listing agreements with the understanding that they will be paid for their time whether they accomplish their ultimate goal of finding you a property or not.

(Saul Klein is CEO of Real Estate Electronic Publishing Company, home of RealTown.)