Buyer's Agent - Surprised At Their Fee Structure!!!

I met with a BA last week. I had two key questions, namely:

1. What's the benefit of using a BA?

2. What is your fee structure?

To Q1, the answer was better local knowledge, better relationship with REA's, better negotiation skills resulting in a lower purchase price, ...

No surprises there although I challenged the better negotiation skills .

To Q2, the answer was an Engagement Fee + a Success Fee, both totalling 2% of the purchase price.

This answer really surprised me. The higher the purchase price, the higher the BA's fee. This conflicted with the Q1 answer about getting me a lower price. I challenged the BA on this and asked them to re-think their fee as it meant that our objectives are not aligned. That is, getting me the best property for the lowest price.

I asked them to go away and think about their fee structure. They came back with a 5% reduction in total fees. Geez!!!!

I was thinking something along the lines of:

Engagement Fee + Success Fee + Purchase Price Reduction Bonus

where the Engagement Fee + Success Fee would cover the BA's costs, expected profit, etc and the Purchase Price Reduction Bonus would be BA's reward/bonus for getting me a better price.

As an example, say for a $1M property purchase, under the existing model, Engagement Fee might be $4,000 and the Success Fee might be $16,000 giving a total fee of $20,000 or 2%.

My thoughts would be, for a $1M property purchase, Engagement Fee might be $4,000 (same as existing model) and the Success Fee might be $14,000 (less than existing model). The Purchase Price Reduction Bonus could be calculated along the following lines:

a. If the advertised price was $1M, then there was no price reduction. Hence, no Bonus, total fees paid $18,000. In this case, the BA gets less than existing model, like a 'penalty' for not getting a better price for the buyer.

b. If the advertised price was $1.05M, then there was $50,000 or 4.76% price reduction. The BA gets 4.76% of price reduction as a Bonus. Hence, Bonus is $2,380 and total fees paid $20,380. In this case, the BA gets roughly the same as the existing model, because 'anyone should be able to get a 5% price reduction' .

c. If the advertised price was $1.1M, then there was $100,000 or 9.1% price reduction. The BA gets 9.1% of price reduction as a Bonus. Hence, Bonus is $9,100 and total fees paid $27,100.

In this way, the Buyer's and the BA's objectives are aligned. That is, get the best property at the best price for the buyer.

I would interested in anyone's thoughts on my suggested fee structure (please don't turn this thread into a "BA bashing" thread).

Once I have the feedback, I am considering going back to this BA to see if they would consider it.

Edit made 4/2/16 at 3:25pm (EDST): Based on constructive posts from this thread, for future posts change 'advertised price' to 'independent valuation' in items a, b and c above.

 

My concern is what happens in a hot market where there is no discounting? Sometimes the right price isn't necessarily a discount, it's recognising an under valued property and securing it for the buyer.

Sometimes an out of area agent will price something too low, in which case you just want to snap it up, no discount required.

Like you, I love a discount but I'm not sure if it's the ideal way to remunerate a BA.

 

Does your structure then incentivize the BA to look at properties that are advertised way too high ? The advertised price does not seem to be the right starting point.

Maybe if the bonus was based on an independent valuation of the market price - or based on the price that you would be prepared to pay.

 

Its hard to quantify anything other than purchase price.
What about a fee that correlates with the price range of properties you are looking at, i.e. say you have set an investment range of $350-400k then regardles of what price you pay the fee is agreed at $10k paid 30% at engagement 70% at success.

I think their fee is high, but I have no basis of comparison as i have never used one, this may be the norm. I certainly would not be paying $10k to engage and $10k success fee on a $500k acquisition but that is just me.

 

I may have misread, were they chasing 2% + 2% = 4% or a total of 2%???

If 2% this is reasonable to me.

 

You might like to read about REBAA BA fees here: Buyer's agent fees - REBAA

 

Sorry but your method is seriously flawed and if you ask me there method has no issues at all.
O.K we are talking 2% right, so let's do some simple maths.
Say a property is listed for 1mil but the buyers advocate is a brilliant negotiater and could get it for 950k. Do you think it's in there best interest to pay the 1mil to squeeze an extra 2% from you on 50k = $1000.
OR
Do you think it's in there best interest to save you 50k which in turn has you telling all your friends and posting it all over the Internet driving business for the BA?
Do you think they would prefer $1000 or 5 referrals worth 2% on 1mil = $100,000

 

Hi @kierank

The BA may not wish to re-design their pricing structure, but for the sake of the exercise...

It might be a bit difficult to determine the "success fee" without first defining what "success" actually is. From the example above it sounds like in your model the success fee is based on reduction from list price. As @Jess Peletier has mentioned a discount on listing price is not always possible - particularly in hot markets.

Have you determined your desired outcome in terms of approximate location to buy, budget etc? It's of course important to ensure you're speaking to a BA that services the area you're looking to buy, and that your budget will indeed get you a property in your desired location.

A property needs to serve you year on year in terms of being able to attract tenants due to the amenity of the property itself and its surrounds. You wouldn't want a property that struggles to attract tenants, merely because it was the only property for which a vendor was willing to discount in the area.

 

Hi Kieran

OK I'll have a crack at tackling the points raised. Keeping in mind I am a BA of course so of course am responding from a professional point of view, as well as my own personal thoughts given my experience in the field

Firstly you should be asking more questions- this is a good start from the REBAA site How do I choose a buyer’s agent? - REBAA

As to superior negotiation skills, this is certainly something that we all may put forward as an advantage but in reality it's almost impossible to quantify if you are going to be a better negotiator than the BA or vice-versa. Experience and knowing how to/when to/what to/where to can play a large role in determining the final result. Same with selling a property- how do you know you couldn't have gotten more than the selling agent had you sold your own place? Bottom line is that you could engage a BA to locate you properties and present them, and then negotiate yourself if you feel you could do a better job, but then again you'll never know if the BA could have done better.... do you see where I'm going with this?

I have to check firstly before commenting on fees here- was it 2% no matter what the outcome or was it 2% within a sliding scale price range (eg: $1-1.5m)?
Most BAs operate flat fees on sliding scales as it makes little sense otherwise. We agree here, but if you can clarify that would be helpful.

Phew! Quite a bit to take in and digest here, but in nutshell let me express a personal opinion here, in that I am a huge disbeliever in these types of "incentive" bonuses/payments to anyone within the RE industry, as I actually find them insulting, when suggested by a client. I'm offended because I stand by my reputation to get all our clients the very best outcome on price and terms, not to "try harder" to gain more $$$. From a selling agency's point of view, of course the higher the price the higher the fee as they do operate purely on a % basis but BAs generally charge fixed fees and you know upfront exactly what you're up for. It's not a sales-based model and shouldn't be misconstrued as such.

I've had various conversations over the years with potential clients suggesting a similar "incentive scheme" and reiterate the above to them. You hire a professional to do a great job for you, and you should expect nothing less. As @Jess Peletier has also said it's about recognising value in the market, not just relying on prices/guides. Just because a price 20% under an asking price is achieved, this doesn't necessarily make it a bargain. It could have been an overpriced turkey to begin with.

Also, given the disparity between price guides, fixed prices, price ranges, under-quoting, set sales, express sales and auctions how exactly do you reward/provide a bonus payment in any type of quantifiable manner here? If, in a state like QLD, where agents are not allowed to even provide price guides for auction properties, or you're dealing with known under-quoters in NSW or VIC (see my recent Thread on How to spot an under-quoter) you're going to find it impossible to put a "price" on a property knowingly. A great BA should be able to provide you with a professional and individual CMA on any shortlisted property, regardless of the pricing strategy of a property.

Re: fees. If you are being charged $20K for a $1m it's my personal opinion that this is excessive for a standard resi search. Our company charges a flat fee for properties up to $1m and it's nowhere near that for standard searches. Then again, I'm not privvy to the size or scope of your search, so I could be talking out of school here.

Sorry for the long-winded thread but I thought it pertinent to add my view as a BA and please do let us know what you decide to do, and the subsequent follow-up and outcome. Good luck

 

In these cases, the BA gets the Engagement Fee + Success Fee which covers the BA's costs, expected profit, etc. There is just no Bonus.

Once again, the BA gets the Engagement Fee + Success Fee which covers the BA's costs, expected profit, etc. There is just no Bonus.

Can you suggest the ideal way? The current model of paying x% of the purchase price is far from ideal. In fact, it rewards the wrong behaviour. It is in the BA's interest to keep the purchase price as high as possible.

 

I can understand your logic; after all, in a selling situation remuneration is typically:

- engagement fees (general costs such as advertising etc)
- commission (% of sale price, hence incentivizing the agent to achieve the best return for their client)

You would therefore assume in a buying situation remuneration would be:

- engagement fees (general costs; no difference here)
- some form of inverse commission to the one above

The difficulty would arise in trying to work out an equitable 'inverse commission' formula. I'd say that measuring based on 'listing price' is far too simplistic. As mentioned by others, simply getting a property for 5-10% less than the listing price doesn't necessarily mean you've got your client a great deal.

Personally, I'm not a big fan of commission based engagements. There's plenty of service industries that don't need these kind of incentives to achieve required results for their clients.

Definitely an interesting situation; no solution from me though! (sorry). Interested to hear what the BA's response is if you propose this to them.

 

No, I'm also not sure what the ideal thing is. It's a tricky one!

 

Personally I think its fine. It doesn't quite work like you suggest, because you get to decide on the price you are happy to offer at the end of the day.

Trying to quantify a bonus for "success" otherwise becomes nearly impossible to calculate properly - and even if you came up with something you would be happy with, I'm sure it would incentivise some other artificial scenario as well.

 

I don't believe so. First of all, the BA would need to present us with a shortlist of properties that met our requirements (and our requirements list is quite extensive). I don't believe the BA would find multiple properties that met our list and were ALL advertised way too high. One might be but ALL of them. I doubt it. Even If they did, prior to proceeding, we would check their advertised prices with recent sales. If we 'smelt a rat', we probably wouldn't sign up for any of these properties. All the BA would get is the Engagement a Fee and one very unhappy customer!!!! Probably not worth it.

Yeah, a Bonus based the amount the purchase price is below independent valuation might work. My only concern is that valuations are typically based on recent settlements and can be a little out-of-date. Too low in a rising market (OK by me) and too high in a falling market (not quite so good for me).

Also, might have to consider sharing a larger percentage of the reduction to make it attractive to the BA.

Thanks for the good idea.

 

Problem is, it's more work to get the property you want in a rising-hot market and very easy in a soft market.
Idon't know the perfect solution either. Except, do it yourself, I would think.

 

Total of 2%.
I also challenged them that it was twice as much work to find a $2M vs a $1M property and three times as much work to find a $3M vs a $1M.

They said Yes. I said BS (in a nice way )

This is my whole problem with the fee being based on a percentage.

 

My only suggestion (because I have used one)

Do your own DD as well ... it's easy enough to look around the properties they locked-in for you, it's price, size comparison, and then determine if it's under or over ... of course we always want something priced lower than listing it really depends on "when" in the market you're using the BA.

 

On a property worth $400k at 2% the BA fee would be $8000. If it was bid up by the BA to $430k thats $8600. No respectable BA would purposefully overpay to earn a few hundred extra. Reputation is everything and if something like this was exposed it would be the end of that BA's goodwill.

In the same way that selling agents have, buyers agents have a fiduciary duty to their clients to act in their best interest. If this duty is breached, the BA can lose their license, or fines, or both.

 

Tend to agree that it's not significantly harder but is it harder for an agent to sell a $1m property than a $500k property not really if they are both median prices properties in their suburb.

It's really what they can get away with. As a percentage people accept its only x% of the deal.

I think 2% is ok but at $1m+ it starts t get a bit rich. To me something like $3k flat service fee and $7k success fee is fair fee for an acquisition of a standard IP. If your after a development site though I would be happy to pay more but receive a higher level of DD.

 

I am aware of that site.

It states that one of the benefit of using a BA is that 'a BA helps you negotiate to obtain the very best price and terms'.

But, it also states that BA's full service fees work out to typically be 1.5% to 2% of the purchase price and a fixed fee may be negotiated.

I would have thought that this site would have suggested an incentive scheme to reward the BA in obtaining their client "the very best price" as detailed on the benefits page and to show alignment between the BA and their client.