Fixed Fee Vs Commission (%)

June 4, 2024
June 4, 2024 Luke

Fixed Fee Vs Commission (%)

How Buyer’s Advocates Typically Charge

There are two main fee structures used by buyer’s advocates: commission and fixed fee.

Commission is the more traditional model, where the buyer’s advocate receives a percentage of the purchase price as their fee. For example, they may charge 1.5-2.5% of the final sale price. This means their fee goes up as the price of the home goes up.

With a fixed fee model, the buyer’s advocate charges a flat rate for their services regardless of the final purchase price. For example, they may charge a fee of $10,000 or $15,000. The fee is agreed upon upfront and does not change based on the price of the home purchased.

The fixed fee model has become increasingly popular in recent years as more buyers look for transparency and predictability when engaging a buyer’s advocate. However, commission fees are still common, especially among more traditional buyer’s advocates.

Issues with Commission Model

The payment model for buyer’s advocates can lead to conflicts of interest. When advocates are compensated based on the final purchase price, they may steer clients towards more expensive properties to increase their commission, even if these options aren’t the best fit. This misalignment between the advocate’s desire for higher earnings and the buyer’s goal of finding an affordable home can result in biased advice and potential overspending.

Moreover, this commission structure lacks transparency, as clients are often unaware of typical commission rates. Consequently, advocates may not feel compelled to justify their fees or invest additional time and effort into serving their clients’ best interests. Overall, this payment system creates conflicting incentives between advocates and clients, making it challenging to find a suitable home at a fair price.

Benefits of Fixed Fee Model

The main benefit of the fixed fee model is that it properly aligns incentives between the buyer’s advocate and their client. With a fixed fee, the buyer’s advocate is incentivised to find the absolute best value property for their client within the parameters that have been agreed upon. There are no conflicts of interest, as the fee does not change regardless of which property is purchased or the final purchase price.

Some key benefits include:

  • Incentive Alignment – With a fixed fee, the buyer’s advocate has a clear incentive to find the best possible deal for their client. Their goal is to maximize value within the client’s budget and criteria.
  • No Conflicts of Interest – On a commission model, the buyer’s advocate may be incentivised to encourage a client to spend more to increase their commission payout. With a fixed fee this conflict goes away completely.
  • Unbiased Opinions – Without a commission influencing recommendations, the buyer’s advocate can provide fully unbiased opinions on which properties represent the best value and match for the client.

The fixed fee model ensures the buyer’s advocate is working solely in the client’s best interest at all times. There are no ulterior motives or misaligned incentives.

Case Study

Susan was working with a buyer’s advocate charging a 2% commission. The advocate convinced her to purchase a property for $800,000, resulting in a $16,000 commission. Later, Susan realized the property was only worth $750,000 – she had overpaid by $50,000 just so the advocate could earn a higher commission.

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