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The Buyer Broker

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Who pays for the broker you're using? That's a tricky question. And the answer is, it depends on where you live. Real estate law is controlled (for the most part) at the state level. In the last few years, there have been a lot of changes aimed at protecting the house-hunting consumer. Your best bet is to call your county's or state's real estate board and ask about the guidelines that govern brokers.

Before we examine traditional brokers, and how the industry has changed, let's take a slight detour into terminology. When a person gets a real estate license, he's called a licensed real estate professional, or an agent. He's not, strictly speaking, a broker, though you'll hear the person who shows you houses loosely called "your broker." Brokers actually have advanced training and a different license; they generally need to have been licensed for three years before becoming a broker. This doesn't mean that you're getting second-class service if you get an "agent" instead of the "broker." The only benefit to being a broker is that he could start his own company; some brokers choose simply to manage the office rather than going out and showing houses.

Here, as is done in common usage, we'll use the terms interchangeably.

The Buyer Broker

Traditionally, the real estate agent has always represented the seller of the house. So whenever you walk into an agent's office and say something like, "I'm ready to offer $150K but would go as high as $160K if I had to," that agent is duty-bound to tell the seller about your conversation.

Even though a traditional agent may spend hours and hours with you, her allegiance isn't to you at all. It's to the seller, and in this regard her main motivation is to get as much money out of you as possible. There are two reasons for this. One, it makes the seller happy to get a lot of money. Two, as we've seen, the agent's commission is based on a percentage of the selling price. The more you pay, the more she makes.

There are many agents who will take exception to looking at their business so coldly. And there are many fine and ethical agents in the world. But the bottom line is that sellers' agents are salespeople who make their living off commissions. Never forget that, no matter how nice they are.

So how can a good Fool make sure that the guy who is helping him is really helping him? By hiring a "buyer broker" instead.

Thanks to legislation and the changes in the real estate business, the buyer broker business has really taken off. Let's see why so many people think they're the way to go.

A buyer broker works for you. The two of you will negotiate a fee based on several criteria, according to the state in which you're looking. Most of the time the fee comes out of the seller's proceeds, but sometimes buyer brokers are paid up front with a flat fee.

Usually, however, the broker is compensated by commission based on the sale price of the house. So, in spite of what we're about to tell you, know that the payment structure still favors a higher sales price -- and that does not benefit you (unless you negotiate your commission with the buyer broker, as described later).

Practically speaking, the amount the buyer broker makes in commissions if you get the house for, say, $247,000 versus $249,000 (3% of the difference, or $60) isn't enough for her to jeopardize her relationship with you. After all, this deal may fall through, and she wants you to have no qualms about using her as your agent until you find the house that you buy.

For a discussion of specifics to keep in mind when choosing a broker check out, Choosing an Agent.