Thursday, April 27th, 2017

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Wholesalers: Who Pays Your Buyer’s Agent?

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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About 

JP Moses is a roughly-hewn man-child who first got into REI after reading Rich Dad, Poor Dad back in Y2K and went full time in 2002. He's tinkered in everything from landlording to short sales to rehabs to Realtoring to REOs to notes to owner financing, blah, blah, blah...Till he finally stuck his flag deep into wholesaling and has since flipped somewhere north of a couple hundred deals.

JP's not a “guru” but also doesn't think it's a bad word. Among his core values are authenticity, creativity, big honkin' value, general fun-ness and being unshaven. He's super proud to be chief blogger guy at REItips.com and host of the free REIology podcast. He also thoroughly enjoys sharing his 53 best real estate investing forms with anyone who wants them. You should totally check that out. :-)

  • Could not have explained better.
    The word is “fair” and the conclusion
    should be a wi-win-win situation.
    Congratulations!

    Sándor R. Ochoa, ABR, CIPS, GRI, TRC
    Licensed Florida Real Estate Broker

  • Could not have explained better.
    The word is “fair” and the conclusion
    should be a wi-win-win situation.
    Congratulations!

    Sándor R. Ochoa, ABR, CIPS, GRI, TRC
    Licensed Florida Real Estate Broker

  • Scott Phillips

    Hi JP,
    I agree with what you said. There are lots of variables that were not mentioned in the question, but I would doubt if the A-B seller would be willing to pay it so I would consider explaining to the agent that you normally assign these deals with minimum profit but you are going to propose a 3% commission to be split between and your B-C buyer. If there is still lots of profit, give the agent a bonus. Otherwise, explain to them that you will try to protect them with as much commission as possible on future deals.

  • Scott Phillips

    Hi JP,
    I agree with what you said. There are lots of variables that were not mentioned in the question, but I would doubt if the A-B seller would be willing to pay it so I would consider explaining to the agent that you normally assign these deals with minimum profit but you are going to propose a 3% commission to be split between and your B-C buyer. If there is still lots of profit, give the agent a bonus. Otherwise, explain to them that you will try to protect them with as much commission as possible on future deals.

  • Eli Perkins III

    It just so happens that I was wondering this same exact thing. You explained it for me to where I dont feel bad now. You’re right about “spreading the love” when it comes to making sure those that help you complete deals are happy. A bunch of small deals sure on a consistant basis beats one big deal.

  • Matt

    Sounds like an easy deal still. Nothing wrong with the agent asking for full upfront (unless they’re a bit “pushy” about it 😉 ), then re-negotiate a bit from there depending on the numbers.

    All can still win on this.

  • Eli Perkins III

    It just so happens that I was wondering this same exact thing. You explained it for me to where I dont feel bad now. You’re right about “spreading the love” when it comes to making sure those that help you complete deals are happy. A bunch of small deals sure on a consistant basis beats one big deal.

  • Matt

    Sounds like an easy deal still. Nothing wrong with the agent asking for full upfront (unless they’re a bit “pushy” about it 😉 ), then re-negotiate a bit from there depending on the numbers.

    All can still win on this.

  • Jared

    It sounds like he is acting as a buyers agent and is trying to negotiate the best deal for his client. For me it would come down to how many other people were interested in taking the deal w/o this commission. I would stall if there were no others to see what came around before I gave him my answer. Even though the investor is really the party responsibe for the agents compensation, some money is better than no money and he would certainly be able to pitch that to his investors in the future. I believe “The flip man” on Youtube covers this answer also.

  • Jared

    It sounds like he is acting as a buyers agent and is trying to negotiate the best deal for his client. For me it would come down to how many other people were interested in taking the deal w/o this commission. I would stall if there were no others to see what came around before I gave him my answer. Even though the investor is really the party responsibe for the agents compensation, some money is better than no money and he would certainly be able to pitch that to his investors in the future. I believe “The flip man” on Youtube covers this answer also.

  • James B

    Just read the other responses: To those I might add, get creative and don't always assume the commission has to be paid in cash at closing. You can “negotiate” discuss with the Buyers agent, and any agent involved. Creative ideas: Will agent take a promissary note, accept double or full commission on a future deal, accept a fee in lieu of full commission (with future deals), accept referrals and other consideration, etc.

    Excellent points, may also be able to get the buyer “C” to be aware of the commission and agree to pay it or negotiate your price in the assignment or 2nd closing. Assuming this is a Seller A sells to Buyer U, U become Seller B and sell to your Buyer C in your transaction. Clearly, it is better to pay commissions on deals completed than not do deals because you don't want to pay commissions.

  • Gary B.

    It really depends on what has been agreed to by the buyer and the agent in the Buyer's Agency Agreement. In SC there are three different choices the buyer can choose on how the agents commission will or can be paid. If the Agreement doesn't state that the buyer will pay the commission from there personal funds, it could state that the seller would pay the buyers commission. In this case, the agent should have gotten with the seller before introducing the buyer and gotten a commission agreement signed with the seller beforehand. If the seller didn't want to pay the commission, I wouldn't introduce the buyer to the seller. BUT, if you don't pay the agent, you may get a reputation that you don't want with real estate agents.

  • Option 2 would be a great choice! Dealers and Buyers can also share the deduction for the agent. In this way, the agent would be paid diligently without either of the dealer or buyer, shouldering too much payment deductions.