Here’s a great real estate investing question I got today that’s worth sharing in case it helps anyone else in a similar quandary…

jp,

I’m wholesaling a couple of properties and a real estate agent brought me an investor/buyer for the properties. The Agent says he needs to get a commission but I’m just assigning the contract to his investor/buyer.

Who pays this guy his commission? Is it legal for me to pay it? He wants the commission on the full amount which includes my assignment fee. I’m kind of lost here …any thoughts?

Thanks, Robin

Who's Paying the Commission?Hi, Robin – great question.

Without knowing a little more about the situation and the relationships, I’ll have to make a few assumptions in my answer.

Also, please don’t take this as legal advice.  You know, consult your own attorney and all that.

First let’s deal with what’s legal…

If the agent in this situation has a legal contract establishing an agency relationship with someone, then any obligation for commission due would belong to that person – the person who entered into an agency relationship.

To be clear, if no agency relationship is clearly established, then no commission is legally obligated by any party.

(Interestingly it’s for this reason that being a “buyer’s agent” is inherently riskier than being a selling agent. If the seller doesn’t voluntarily agree to “co-op” and pay the agent a commission, then he either has to try and collect it from his client (the buyer) or he just gets stiffed – yikes!)

From what you’ve said, it sounds like any agency relationship that may exist is between the agent and your investor/buyer.  So any legal obligation for commission due should be between your buyer and his agent only.

Now let’s look at what’s “Kosher”…

The agent, if he’s bringing a legitimate buyer to the table who you wouldn’t have had otherwise, deserves a commission in my opinion.

Someone (be it the buyer, the seller, you, or some combination thereof) should ensure he’s fairly compensated…and in my opinion 3% of whatever the buyer’s paying for the property is a fair compensation in most cases.

So if I were you I’d first ask the homeowner if he’d be willing to pay a buyer’s agent’s commission if you can get the house sold quickly.  If he says yes, then yay for you! If no, then my “Plan B” would probably be one of two things…

Option 1) Either I’d just pay the agent’s commission out of my wholesale profits,

Option 2) Or (more likely) I’d approach the buyer and explain it’s a great deal, but to make room for the agent to be fairly compensated the price would need to be adjusted enough to cover the agent’s commission.  Either that, or he needs to compensate his agent himself.

Which of these two I’d take depends on a number of factors, including how badly I wanted to get the deal sold, how much money was in it, how much time I’d spent on it thus far, etc.

The main thing is to try to find a way to make the deal work where everyone’s happy…your seller’s getting his house sold, you’re buyer’s getting a fair deal, the agent is compensated for his part, and you get yours in the middle.

Understand who’s legally obligated for what.  But also understand that everyone deserves to be fairly compensated when they bring value to the table – and agents can be some of your best friends in this business! It only makes good sense to do give them every good reason to keep bringing you great deals and/or great buyers for your deals.

Heck, some wholesalers even go all out to over-compensate people as often as possible.  I know that’s Erik and Steve’s approach.  As a result, guess who’s called first when the hidden diamonds come to surface? 🙂

Make sense?  Hope it helps, Robin!

PS. Please share your thoughts in the comments below…

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