Is Buyer Beware still a valid warning today if you are buying real estate? The latin phrase for Buyer Beware is Caveat Emptor. This is a warning to consumers that has been around since the ancient days. I don’t know of a single buyer who is aware of the threat I will share right now. If you read this blog, you know I do not exaggerate, and you know that I am very careful to articulate what is true. If you read enough of my articles, you will also notice that I am very consumer or client oriented. When a real estate broker represents you, everything should be done with your best interests at the center of the Universe. Alas, life is not so ideal.
What Buyer Beware Tip?
There is a practice in the real estate industry, which I have never liked. When a broker refers a client to another broker in a different area of the country, the referring broker wants a 25% referral fee. At first that may not seem unreasonable, but here’s why it is unreasonable, and why it presents a grave danger to a buyer like you, or a buyer beware moment.
Let’s say a real estate commission is $10,000 to make the math easy. A referring broker wants $2,500 for what could be a one minute phone call handing a client off to another broker, who will do all the work. The broker who actually does all the work gets $7,500 and pays the referring broker $2,500, and here’s why this industry standard is unfair. A broker might work for many months for a client, and sometimes for more than a year until a home is found, contracts are drafted, negotiating is completed, due diligence is done, and perhaps hundreds of emails and phone calls and a lot of administrative work is done. In addition, the broker who does all the work has business overhead, pays for errors and omissions insurance, and so on. This is why I say it is incredibly unfair for this agent to pay the referring broker 25% for just picking up the phone and handing off a name.
Here’s an insider dirty little secret. Some brokers have a business model that relies heavily upon referrals for their income. If they do enough annoying lead generation, they can just refer those names to other brokers and have a decent income without doing any work on any of those transactions. I understand you’re not going to be concerned about your referring broker getting into my wallet, but the point of this article is to warn you about the real danger to you. Here’s the danger for buyers, and this is the buyer beware.
Buyer Beware is Real
I got a call from a broker in California recently, and she asked if she could refer a buyer to me for a 25% referral fee. I explained to her that I felt that would be a bit one-sided on the commission split, because I would be doing 100% of the work, and I would spend months working for a buyer, show many homes, do all the paperwork and legal work, protect my client from mistakes, handle the due diligence, carry the burden of errors and omissions insurance, manage all the communications, and so on. She would do none of those things, and yet she still wanted 25%. So what did she decide to do? She will find any broker who will pay her 25%. At first maybe that sounds okay, but what it means too often is that “any broker” can mean a very inexperienced broker or even an incompetent broker. At the least, you don’t get the most qualified of brokers to represent you. The consumer, i.e. you, gets the short end of the stick, and all because the referring broker will not give you the name of the most qualified brokers since she won’t get her 25% referral fee. That my friend is greed, and it disregards your best interests without disclosing any of this to you.
This is a buyer beware. Don’t get caught in this trap. Make sure you do your own due diligence to find the best buyer’s agent you can find, and do not blindly accept a referral from another broker who is getting paid a huge referral fee just for handing off your name. The truth is, you can probably do your own research on the Internet and find the most qualified brokers as well as any other broker can. You probably don’t need a broker to give you a referral to a good broker. If you have never heard of this buyer beware tip, please leave a comment and let me know.
Last Updated on September 21, 2019 by Chuck Marunde
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