Should you "cooperate" with buyers' agents?

When you agree to pay a commission to an agent who brings you an offer from a buyer (assuming the deal goes through), you’re said to be “cooperating” with agents.  I recommend you do this, for these reasons: 

• Many prospective buyers (especially first-time homebuyers) are inexperienced at real estate transactions and need a lot of handholding when buying a house.  Buyers' agents are good at this.  

• Many prospective buyers are already working with real estate agents, and are expecting their agents to show them all available houses.  Unless you offer a commission, these buyers may never learn about yours.  

• Some prospective buyers are so frightened of making a mistake that they become paralyzed with indecision.  A good buyer's agent can help allay their fears and coax them into making an offer.    

• Agreeing to cooperate with agents doesn't prevent you from selling to an unrepresented buyer.

• If you don't cooperate, you probably won't pocket all or even most of the commission savings.  Buyers who make offers without the services of a buyer's agent usually expect a price discount.

• You have to cooperate to get on the multiple listing service (MLS) and various MLS-affiliated websites, like Realtor.com.  These websites get lots of traffic.

• You can always reject any offer.  (Though if you were to reject a full-price offer with no contingencies, you might have to pay a commission to the buyer's agent who brought it.)

Agreeing to cooperate with agents lets buyers make choices about the amount of services they want.  If you were to offer a commission of 3% on a house that sold for $500,000, for example, here are different ways it might play out:

• If the buyers are inexperienced and need a lot of handholding, they'll probably want to work with a buyer's agent.  In this case, the agent would get (and probably deserve) the full 3% commission, or $15,000.

• More experienced buyers might want to negotiate a partial commission rebate with a buyer's agent and make do with less handholding.  For example, the buyers might ask the agent to accept a commission of just 2% of the sales price ($10,000), and rebate back to them the remaining 1% of the sales price ($5,000).

• Some buyers might want to dispense with a buyer's agent altogether and make an offer through a lawyer.  In the offer, the buyers might ask the lawyer to accept a commission of just 1% of the sales price ($5,000), and rebate back to them the remaining 2% of the sales price ($10,000).  Alternatively, the buyers might pay for the lawyer's services directly, waive the buyer's agent's commission, and bid a lower price for the house (say, $485,000 instead of $500,000).

When I was selling my Sacramento rental, a woman came by herself to an open house and seemed very interested.  The next weekend, she came to another of my open houses with an agent in tow.  She, like many buyers, had assumed the agent's assistance was "free."   It was not.  As a seller, I would have accepted a lower offer from her if she hadn't come in with an agent.

What commission should you pay?

In many areas, the total sales commission paid by the seller is 5% to 6% of the sales price of the home.  The buyer's agent usually gets 2.5% to 3%.  (This share, by the way, is normally split again between the agent and the agent's broker.)  I recommend that you offer a competitive commission to the buyer's agent.  In California, this will usually come to 3% if the home's value is $300,000 or less, and a 2.5% if its value is more than $300,000.  

There's a case to be made, however, for offering a slightly more generous commission.  Some agents discriminate against FSBO homes (in violation of their fiduciary duty to their clients and the Realtor code of ethics) since they see the FSBO movement as a threat to their livelihood.  Offering a generous commission will help motivate agents to do the right thing and show your house without bias.   A second reason is that many buyer agents believe that a FSBO transaction will require them to do "double duty" to close the deal since there's no listing agent to share the work.  This shouldn't be a problem if you follow my advice and hire a discount broker or real estate attorney to help you conclude the transaction, but offering a generous commission will help persuade buyers' agents that selling your house is a good deal for them.

Be careful--once you've set the commission, you're pretty much stuck with it.  Agents usually check out commission rates only when houses first come on the market.  If you come back later and raise the commission, many won't notice the change and will continue to view your home as a low-commission property.   

Should you offer a discount to buyers without agents? 

You'll almost certainly want to offer a discount to buyers who come without agents, since you'll save money by not having to pay a commission.  But be discreet about it.  It's okay to write "Buyers without agents take 2.5% off!" on your FSBO website ads, or on your Craigslist.org ad. But don't put it on your signs or flyers or anywhere buyers who are with buyers' agents can see it.  Buyers' agents may stop showing your property if they think you're encouraging their clients to ditch them.

It's hard to imagine buyers' agents showing this property since it gives clients a strong incentive to ditch them.

Should you encourage unrepresented buyers to make offers through lawyers or discount brokers?

During my open houses, I usually ask prospective buyers if they're working with an agent.  If they're not, I hand them a flyer that explains how they can save money by making an offer through a real estate lawyer or discount brokerage rather than a buyer's agent.  Click here to download a copy of my flyer.

I believe, however, that's it unethical to encourage prospective buyers to ask for rebates once they've begun working with an agent.  It's not fair to the agent to change the rules after the game has already started.  

As a seller, you'll be better off if your buyers can get commission rebates.  Buyers who receive rebates are able to make higher down payments, which allows them to bid more for your property.

Next topic:  More decisions

©Lori Alden, 2008.  All rights reserved.