Most Agents have never really looked at the profit numbers on Buyer's Agents. Many think they are making a large income off of the Buyer's Agents when that's not really true. It's really a small profit per deal.
Let's say your average commission check is $ 6,000 through your Buyer's Agent. You operate on an 80/20 with your company because you are a very good Agent. The gross fee you split with your Buyer's Agent is $ 4,800. That amount you split 50/50 between the two of you. You each receive $ 2,400. Out of your $ 2,400 portion, you have to pay your advertising, marketing, overhead, other assistant, and all your expenses to run your business. Most Agents' initial cost per transaction (what it costs them to do a deal) is between $ 1,500 and $ 3,000. This is dependent on advertising, marketing, staff, expenses, car, and cell phone. Everything you spend to run your business is divided by the number of transactions you do. Obviously, as your units go up, your cost per unit will come down. The Buyer's Agent will help your cost per unit come down. If you were on the lower end of the cost per transaction of $ 1,500, your net profit in this transaction would be $ 900. That is before you factor in the personal time you invested into the transaction. That is not a lot of money.
Let's say you're worth $ 200 an hour, and you work with a Buyer's Agent for two hours per transaction, which would be easy to do when you consider training, monitoring, managing, helping with the clients, and closing the deal. The truth is two hours is nothing. You would then net after your time, $ 500 for a transaction. Having Buyer's Agents is not highly profitable for an individual transaction. I always tell agents that they will net somewhere between $ 500 and $ 1,500 before they factor in their time. The exception would be if your average commission check were substantially higher than $ 6,000. If your average commission in your market is $ 15,000, you have more profit and more options. The vast majority of the Buyer's Agents will help you generate a small, short-term profit.
Buyer's Agents will also provide a higher quality of life. You will be able to take the lion's share of weekends off (or maybe even all of them). This will increase your quality of life with your family, who would like more weekends with you. You will not be fielding ad calls, sign calls, or conducting open houses over the weekend. You will really be able to turn the cell phone off over the weekend and be free. My Buyer's Agents were responsible for the weekends. They responded to other Agents' inquiries about my listings. They handled the ad calls, sign calls, and open houses. Their job was also to respond to Agents who had written offers when I was out of town, which was every weekend, and to instruct those agents to fax the offers to my office to be presented on Monday when I returned. I did not work the weekends.
When you have a Buyer's Agent, you are able to focus more on securing listings. My Buyer's Agents wanted me to focus on listings. They thought that, if I got more listings, they would have more leads, which was true. I wonder where they heard that. What was good for them was also good for the team. You end up utilizing your time better because it takes less time to work a listing than it does a buyer, even when you factor prospecting time into the equation.
I have been asked this question by Agents and Buyer's Agents hundreds, maybe even thousands, of times. There are as many combinations of compensation as there are stars in the sky. I will try to explain the guidelines I think all Agents must apply to arrive at a fair and equitable compensation plan. I am sure some Agents will disagree with my results, beliefs, and guidelines. . . that's fine. I know there will be a large number of Buyer's Agents who will take issue as well.
I was speaking a number of years ago in Eugene, Oregon for a large group of Agents. A Buyer's Agent asked me about how a Buyer's Agent's compensation should be structured. I tried to deflect the question because I sensed, through her attitude, that my views and hers were vastly different. She explained that she was on a 70/30 split where she got 70%, and her agent was getting a great deal in getting the 30% that she generated. I finally could not hold back any longer and told her and all the other Agents that her Agent was losing money every time she did a transaction. She proceeded to get angry and tell me I was wrong. That 30% was a lot of money to her Agent because it's "money she would not have had otherwise." I can tell you that that the argument a Buyer's Agent will make every time for more money. Be ready for it. My job is to give you the truth on the compensation.
The true way to determine what you can pay a Buyer's Agent is based on your average cost per transaction. Whatever it costs you to do a transaction, on average, must be applied to your side of the ledger. There are expenses for each and every transaction you engage in. Each transaction needs to pay for a portion of the overhead, marketing, advertising, your time, staff time, gas for your car, MLS dues, all the costs that you have as a real estate Agent. The Buyer's Agent is really receiving a (predominately) net dollar check with limited expenses. You still have to run the transaction through your system and incur costs they do not.
Let's say that you and a Buyer's Agent have a 70/30 split arrangement like this lady in Eugene. The commission she just generated gross was $ 6,000. You are on an 80/20 split with your company. You now have $ 4,800 to split between the two of you. She gets $ 3,360 of that commission; you received $ 960. You pay all the expenses of your business and your cost per transaction is an average of $ 1,500. You just lost $ 540 for the joy of conducting that transaction. You still have the legal liability of a transaction in our sue-happy world, even though you did not make a dime. Make sure you balance your compensation package using your cost per transaction. Your average commission check will also play a role as well. If your average commission check were $ 15,000 instead, your broker would get $ 3,000. The Buyer's Agent would get $ 9,600, and you would receive $ 2,400. After cost per transaction, you would net a whopping $ 900 out of a $ 15,000 check. That's hard worth the effort in my view. If you use a 50/50 split with Buyer's Agents, you are usually in the ballpark. But in some cases, 60/40 to you would be better. You have to do the calculating to find out if you will be profitable.
Remember in all these computations, I did not ever factor in the value of your time yet. Let the Buyer's Agent know how you arrived at your commission split numbers. Share with them your cost per transaction; they know you have expenses. You will often hear "so-and-so will pay me more." Tell them it's not your problem that so-and-so does not understand his business. Do they want to work with someone who, when the market changes, might be out of business?