Should Lenders Pay Buyer Brokerage Fees?

Peter G. Miller
OurBroker®

Buyer brokerage has been with us since the 1970s, and yet to this day those representing purchasers have largely been unable to shake their dependence on fee structures created by listing brokers.

What typically happens in a transaction involving a buyer broker is this:

A home is listed for $300,000.

A purchaser engages a buyer broker.

The buyer makes an offer for the property which says the purchase is dependent on a portion of the listing broker's commission being credited to the buyer broker at closing.

When the sale closes, the buyer receives a credit from the seller to pay off some or all of the buyer brokerage fee.

Relating compensation for a buyer broker to the fee structure established by the broker who lists the property discomforts many people.

Sellers often do not like the idea that they are paying for a broker to help buyers get a better deal. In fact, this is a common practice in law where one party may be required to pay for the legal fees of an adversary.

Buyers, in turn, sometimes feel they should determine compensation for all brokers, the logic being that it's their cash which fuels the transaction. However, sellers and listing brokers have agreements in place before a home comes onto the market, so efforts by outside parties to change existing listing agreements may open the door to claims of tortious interference. (See an attorney for details.)

Figures from a 1998 study by the National Association of REALTORS® show that sellers pay buyer brokerage fees in 67 percent of the sales which involve buyer representatives, and that both buyers and sellers compensate buyer brokers in 11 percent of all such contracts. Buyers pay their representatives directly in 21 percent of all transactions, and buyer brokerage costs are paid by "other" parties in 1 percent of such situations.

Why isn't the buyer broker paid directly by the purchaser more often? Two reasons:

First, the purchaser generally doesn't have the cash to fund the buyer brokerage fee. Thus the buyer broker seeks compensation from the funds set aside by the seller to market the property.

Second, lenders have traditionally refused to see buyer brokerage fees as a cost that should be included within the purchase price of a property, their concern being that brokerage fees will be "too high" (though, of course, they do not object to interest costs and loan fees being "too high").

But if lenders would allow buyer brokers to be paid directly by purchasers -- as is now the case with listing brokers -- everyone would benefit.

Sellers would make arrangements with listing brokers and purchasers would have separate agreements with buyer brokers. Each party to the transaction would have a private, individually negotiated brokerage arrangement consistent with their needs. No broker would interfere in the relationship between another broker and his or her client.

The tie between buyer broker compensation and seller listing fees would be broken, something which would cause more people to view buyer representation as independent and autonomous. In a related matter, buyer brokerage fees would not go up in the event an offering price must be raised, something which is often the case within today's system. (NAR figures show that 4 percent of all buyer brokers receive a flat fee from purchasers, which generally means the buyer's cost will not rise even if the property is purchased for more money than the original offer.)

As to the matter of listing brokers receiving "too much," forget it.

If lenders would fund buyer brokerage fees, there's no doubt that competition would force listing practices to evolve so that listing brokers would get one fee if they both listed a home and found a buyer, and an alternative -- and lower -- fee if the purchaser paid for buyer brokerage services.

Even lenders would benefit from an approach which allowed seller representatives and buyer brokers to be paid separately.

Right now, lenders effectively pay brokers to get the highest possible price for a property -- a price which means more lender risk than a lower value. Funding buyer brokerage fees would help assure that purchasers pay no more than market value, something lenders in their own self-interest should encourage.

Question Of The Week

Q We have been interested in assuming an FHA-financed home owned by our daughter and her husband because their home has been on the market for six months and has not sold. We would like to assume the loan and then use the property as a rental. However, the mortgage company tells us that we cannot assume the loan because the property would not be our primary residence. Is there a way around this rule?

A Investor assumptions for the basic FHA loan program have not been allowed since December 14, 1989.

Your daughter and her husband may want to consider several alternatives.

Lower the price. It may be cheaper to reduce the price and even take a loss than to continue the monthly payments. Rent the property. This option puts the owners in the real estate business, a business with a large number of complexities.

If there is equity in the property, sell to you, refinance with a new loan -- and have the sellers take back a loan for some or all of the equity. By the time everyone is done with closing costs, it may be cheaper to lower the sale price.

Weekly Resource

It's called the National Wilderness Institute and amazingly enough it's an organization dedicated to the idea that it's possible to combine both common sense and environmental concerns. For a different look at environmental issues, this is a site worth viewing.

See what others are saying about this article or make your own views known. Go to the Interactive version.

Published: August 31, 1999

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Peter G. Miller, also known as OurBroker®, is the author of six real estate books -- including The Common-Sense Mortgage -- and is the original creator and host of America Online's Real Estate Center. Peter's weekly columns appear in more than 100 newspapers nationwide, he is also published in a variety of other media outlets and he is a frequent speaker at national events and conventions. Peter welcomes your questions, comments, and news releases via e-mail at .