It's difficult sometimes to navigate the world of real estate especially when knowledgeable professionals throw terms at you that you may not understand. Then to add to it they add in a bunch of numbers and legal terms that you have to navigate. I like to simplify the process for my clients to make it a little less overwhelming or scary.
Let's break down the differences between closing costs and broker compensation.
Straight forward let's talk about broker compensation first. This is simply the amount of money that you pay a broker or real estate professional to represent you in some capacity. It could be under agency, it could be under transaction broker, or it could be under dual agency or customer depending on what state you are purchasing real estate in. In Colorado, we offer Agency meaning we act as your advocate there are responsibilities and duties that we sign up for when we represent you under agency. There is also a Transaction Broker meaning we referee the transaction we make sure paperwork is completed, and that everything is done to get you to the closing table but we do not advocate a deal for you. There's no obligation for me to fight the other side to "win." Finally, I can treat you like a customer. This means more than likely I represent the other side of the transaction and I'm going to work hard to get them what they want. This would be common if you called me off the sign of one of my listings where I already represented the Seller under an agency agreement. I can't represent you if I already represent them. Therefore I would treat you like a customer. I'm still held to a standard of practice, but you might not get the best deal or even the deal you want.
So how do I get paid to provide you with real estate assistance in the above categories? It's fairly simple actually. You the Buyer pay me. Except in Colorado, that's not always the case.
For a long time we have had Exclusive Buyer Agency Agreements in Colorado that break down how I work for you as the buyer and how I'm compensated for my work.
One option is you pay me. You pay me our agreed-upon percentage before I start work for you. Typically I negotiate a percentage of the purchase price with you as compensation.
A Second Option (my preferred option), is the listing brokerage firm pays an offer of cooperating compensation to me for bringing you to the table with their Seller. I advocate for you they advocate for the Seller and the nice part is you don't have to come up with my fee plus closing costs. OR If the property is a for sale by owner, we might ask the Seller to pay my fee for bringing them you as the buyer. Either way, If we can get my compensation paid by the Listing Brokerage or the Seller we will but you are still obligated to pay me if we cannot negotiate it with them.
A Third Option is you don't pay either the Seller or Listing Brokerage Firm Pays but you are not obligated to pay. This is the one option that I as a broker don't care for. Because If I can't get paid by someone then I can't represent you. I have to allow you to terminate your agreement with me because my Errors and Omissions Insurance does not cover my working Probono. This is especially frustrating for me as a broker for my Veteran & Military Clients. You per VA 26-7 when securing a VA Loan to purchase a home, cannot be charged compensation by a real estate broker. Scratch that, you can't pay it. Doesn't say I can't charge it, it says you can't pay it. Again, if I can't secure my compensation from a Listing Broker or Seller, I have to let you out of our agreement if you still choose to proceed on that particular home.
Now let's talk about closing costs. Those are the costs you pay to purchase that home. They can include the following:
- Government recording costs - fees the Government charges to record your deed. I mean why wouldn't they (sense my sarcasm)
- Appraisal fees - starting at like $700 I think in our area depending on the loan product
- Credit report fees - Lenders charge these sometimes
- Lender origination fees - Lenders charge these fees to do the work to get you the loan
- Title services - In Colorado Title Companies prepare, execute, and record all documents associated with a clean title and deed to your home. We go to them on closing day to get you signed over and the keys in your pocket
- Tax service fees - Well of course there would be tax service fees, I mean TAX makes it self-explanatory.
- Survey fees / Inspection Fees - costs you pay to have your home inspected and the property lines surveyed to make sure no one else has a stake in your property
- Attorney fees - to review title commitments, or contract documents further for you
- Underwriting Fees - Lenders charge these to underwrite the loan
- VA Funding Fee - only applies to VA Loans and may be rolled into your loan
- * These may not be all closing costs or fees associated with obtaining your loan*
Final thought... let's talk earnest money (EM). This is an amount of money that the Seller typically requests you as the Buyer put down to show that your true intent is to purchase their home. It can range anywhere from $2000 in our market to upwards of $15,000 and if all sellers were represented the way I thought they should be. They'd all request a minimum of $7500 as their desired earnest money. EM is also the damages I as your Broker representing you as the Buyer will communicate through our contract as being the Sellers only remedy of damages should you back out of the contract for any deadline after it has passed or any reason that doesn't comply with the terms of our contract.
All 3 of these values represent very different things in your home buying process. You should consult with a licensed real estate broker in your area familiar with the process and ABR Certified if possible to get the best representation. I have a network of professionals like me across the country I'm happy to refer you too.
Things to remember:
EM is actually negotiable. Yes the seller requests a certain amount but your broker can negotiate this for you.
Closing Costs are typically fixed amounts that the lender and title companies disclose to you. Most of these services you can shop to see which is the best deal. Your broker and loan officer will be able to guide you on this.
Buyer Broker Compensation to represent you the Buyer is not fixed by an entity or governing body. The Broker sets the cost they charge for their services. You can decide to pay it and be represented or not pay it and navigate the home-buying process on your own. Yes, you will hear brokers say compensation is always negotiable and that is true in that no law or wage entity is saying this is what representation costs. The fee that I charge is disclosed to you upfront in the Agency Agreement before we ever view houses. This way you never get surprised. You decide up front if I am worth the fee I set.
As always I am hear to assist you with one of the biggest monetary and emotionally draining experiences of your life. I am the best of the best and I will prove it.
