5 Ways to Reduce the Compensation Gap

If you are thinking of buying a home and have heard about the National Association of REALTORS® lawsuit and subsequent settlement, you may be wondering about how the system of paying your agent to represent your needs as a Buyer works in the current real estate landscape. This is a topic that has gotten a lot of media attention, but there is still confusion. At its very basic level:

1.     Buyers and their agent decide on services and the fee the Buyer is ultimately responsible for.

2.     Sellers may offer to pay some or all of the fee on behalf of the Buyer as part of their home marketing strategy.

3.     Covering the gap between the two is part of the contract negotiation process – which also includes purchase price, closing date, contingencies, and more.

What happens when there appears to be a gap between what the Buyer agrees to pay their agent and what the Seller agrees to cover in the listing? The Buyer is ultimately responsible for paying their agent, but here are five ways to address a gap if one exists:

1.     Buyer pays the difference – This is the most straightforward way to have a gap covered. The Buyer simply brings additional funds to closing to cover the gap.

2.     Buyer pays the difference and brings the same amount of funds to close – In the event the Buyer doesn’t want to or cannot bring more money to the closing table, they may be able to work with their lender, putting less money down and adjusting their loan amount. For example, if the Buyers were putting down $100,000 but needed to cover $5,000 to pay for their Buyer agent, they could work with their lender to see if they could put $95,000 down instead. Changing the down payment may impact the loan-to-value ratio which could cause the loan costs to be higher. Work with your lender on options.

3.     Negotiate with the Seller – In the offer, the Buyer may ask the Seller to cover all or part of the gap. This can be negotiated between the parties along with other aspects of the contract.

4.     Buyer offers a higher price for the property in exchange for covering the gap – This can be problematic if the Buyer is getting a loan and the appraised value does not justify the higher sales price as the bank will only finance the home, not commission, but it may be an option worth exploring. After all, this is how lending has worked up until this point.

5.     Lender credit or creative lending – Although Buyer agent commission is currently not allowed to be covered in Fannie Mae, Freddie Mac, FHA, or VA mortgages, some lenders may consider a loan package (such as a shorter-term personal loan) where this is allowed and lending practices may change as time goes on.

This is new territory for most Buyers (and Buyer agents), but I am happy to go over the mechanics of the new practices, forms, and review different scenarios with you.