How would you restructure the buyers broker commission?

well, theory would have it that the best way to align incentives with the owner is to give the broker equity. that would mean something like: instead of paying them a 3% fee, perhaps pay them a 1% fee, and then give them another 1.5% ownership in the asset itself (with some cap and floor in place). ... that's just off the top of my head, and i realize how silly it may sound.

No, something like that would make sense to me. In the same way that some investment managers take a % of profits. Another option would be to negotiate a time horizon with the broker, say 5 years or 10 years, at which point an unbiased party would appraise the apartment and you pay the broker a percentage of the profits. You would make your decision based on your own time horizon at the time of purchase, and your broker would look for places that would be a good investment for you, given your horizon. You would still pay a certain amount up front and the rest would go into escrow to be paid upon proof of appreciation.

I wouldn't change a thing. People think that using a buyers broker eliminates the need for educating themselves on market conditions and the intricacies of buying real estate. My advice is to be as educated as you can as a buyer and if you feel you need a broker, hold them accountable for your needs. Don't want to get snow plowed by brokers? Know what you are doing. No different than doing research for a car, insurance, vacation, financial planner, etc. More people should understand that if you agree to a crappy deal, it’s your fault, not the brokers.

JuiceMan, I agree with you about needing to do your own homework, but am still confused about you not wanting to change a thing. What would you define as the role of a broker? And then, how you would you structure their payments such that they would do the best job possible at that job, however you define it?

There will always be a demand for 'FREE' (for sake of this discussion, no upfront costs for buyer, although you can argue that commission comes out of buyers hands in end anyway) buy side brokers services as long as they share in the commission percentage at closing.

Think outside this element.

What about this- you pay the buyer's broker a flat fee of approx 2% what the buyer expects to spend, and a % of any difference between what the buyer pays and what it gets appraised at? If it gets appraised for lower than what the buyer paid, the broker forfeits that. Of course a big problem with this is the appraisal itself.

Not so sure why people don't like the current models. There are so many options!
A) If they so choose, buyers can pay a fee to a buyer's broker (rather than have that fee paid by the seller) to represent their fiduciary interests. That fee can be flat, hourly, or a percentage.
B) Buyers can have a broker work with them, and have the fee paid by the seller. In this (most common) case, the buyer's agent is actually a sub-agent of the seller, and as such owes a fiduciary responsibility to the seller. But many agents who represent the buy-side in these transactions are looking out for their buyer clients - it's only natural. That's why this model is so common.
C) Educated buyers with time on their hands can buy without the services of a broker. Either by dealing directly with the listing agent, or buying a FSBO.

People seem to forget that the difference in commission between, say, an $850K sale and a $1M sale may represent $150,000 to the buyer and seller, but is only $3000 for the individual agent (50% of the 3% buy-side commission). If I can get the lower number for my buyers, believe me, I will. My business is referral based, and I can't afford to have clients feeling like they got ripped off.

wishhouse - selling a prepackaged product where the buyer pays an upfront fee of 2% the ultimate purchase price, by signing an agreement to do so even if they dont purchase, will be a very very hard sell.

Forget for a moment what the best option is for the buyer, wonder what might be feasible from a business viewpoint as a product to sell to this buyer as well.

Tina, all I'm saying is that it seems silly to me for a buyer to choose any pay structure which doesn't push the broker to do the best job for the buyer's interests. Yes, you want your clients to be happy and give you referrals, but given that, why wouldn't you want your pay structure to be based on that? If you are one of the ones really working in your client's interests, despite the pressure to make a quicker buck, why wouldn't you want your pay structure to reflect that? You would get paid more and the bad brokers less.

Not to pile on, wishhouse, but for the sake of this thread can you define the scope of services you expect to have performed by the buyer's broker?

urban- It is more of a theoretical question than an actual proposition. I doubt any broker would go for it unless times got much much worse. However, it is interesting to think about small changes that could be made that an agent might actually go for.
FYI, if I were purchasing with a buyer's agent (and I'm not buying right now so the 2nd part is moot), you'd be at the top of my list.

tina- no worries. Very broadly, I would expect my broker to help me find and purchase an apartment that is more suited to me and will appreciate more in the long term than I would have found on my own. Whether that is through a better understanding of the properties available, a better understanding of the markets, a better understanding of negotiating or just more legwork, I'm not sure. To be honest, never having purchased an apartment, I'm not sure which of these would factor in the most. I'm not against paying money for the services up front, and I'm not necessarily against the current structure, given you do your own homework and find a broker you trust, but I think it's interesting to think about other payment structures that might benefit some buyers and brokers

I appreciate that, but lets keep the brain working here on a very important topic.

If a were a buyer, I would want:

a) unbiased service - meaning the broker did not work for a % of the deal
b) meat of consulting - I would want a broker who I full trusted, willing to pay for their time, and who was a expert on the market, the trends, valuing a property, bidding, negotiating, etc..
c) service until closing - I dont want to deal with the crap of closing. I want to be represented, like if I hired an attorney, to handle the entire process on my behalf. Time is money for me and I have my own life/business to deal with

Now, what is this worth to me when I think I want to buy, I thnk I know I want to buy, but you never quite know what may change in the future that will make me not buy. So I wont lock myself in to a 2% commission on a 600K deal, up front, if I might change my mind later on. This is the avenue we need to brainstorm. Im 10 months in, and I have ideas, but what do you think?

Are you all familiar with these folks in Massachusetts?:
http://www.realestatecafe.com
They're working on some alternate models. Plus they have pie charts!

nope - but this idea has been tried many times..its the big boyz that squash you in good markets. But now the market isnt good anymore, so now is the time for innovation to rise to the top...trust me, you will see it.

Should brokers get paid more from clients looking for more expensive properties? I can think of three reasons off the top of my head
1. There are fewer properties that will fit the bill and they may be harder to find. (is the 2nd part true?)
2. The process of closing will likely be more complicated.
3. If you are spending more on the property, you can afford to pay more for a more skilled broker.
Anything else?
So maybe the fee is based partially on the amount the buyer is looking to spend rather than what they do spend? What about giving the broker a % off asking price you get?

I'm skeptical of any website that advertises "beating the system!" on it's front page.

wishhouse:
"1. There are fewer properties that will fit the bill and they may be harder to find. (is the 2nd part true?) "
Not necessarily true. If you're looking for a studio apartment in the West Village for $60,000 - now that's rare! If a broker finds you one, should you pay less for that than you would for a 4.5M 2-bedroom?

"2. The process of closing will likely be more complicated."
All closings are complicated. Some are more so than others. Sales price does not determine the degree of difficulty here.

"3. If you are spending more on the property, you can afford to pay more for a more skilled broker. "
But should you have to? It's a good question. Are you a wealth-redistributionist, or just a socialist?

"Anything else?
So maybe the fee is based partially on the amount the buyer is looking to spend rather than what they do spend?"
The buyer and the broker can work out a lower percentage, if they like. In a recent deal, I reduced my fee by a percentage point so that my buyer didn't have to come up in her asking price.

" What about giving the broker a % off asking price you get?"
Not sure what this means...

wishhouse
"I'm skeptical of any website that advertises "beating the system!" on it's front page."

Wait - isn't that what you're trying to do?

"All closings are complicated."

Not outside NY. I bought and sold a house in Minneaspolis, and nobody there uses lawyers. Standard forms are handled by the real estate agents and included in their fee, and the title company handles the closings. No contracts, no lawyers, much lower closing costs.

Outside of NY you generally do not need them and closings are a pretty simple affair.

Why can't NY simplify the process and lower the costs? Lawyers in the State Legislature have basically passed laws ensuring lawyers are needed for real estate deals.

I'm not trying to beat anything. I just think it's interesting to think about aligning the buyer and broker's interests. I think this is generally the best way to get what you pay for. My post about paying more for more expensive properties had nothing to do with socialism. I was thinking that these might be counter arguments to an absolute flat fee for broker services.

Good points on #1 and #2; I'm not in the industry, so I wouldn't know. As for #3, what I mean is:
Presumably there are some brokers who are more skilled than others. If you're about to spend 10MM on a property and a more skilled broker can help you find the place you want for 3% cheaper, that 3% translates into a larger fee than if you were buying a 1MM property. So, if you were richer, you'd be able to afford a more skilled broker. Although presumably a better broker would be able to charge a higher flat fee, so that factor could be mitigated.

"What about giving the broker a % off asking price you get?"
I meant giving the broker a bonus based on their negotiation skills, although this would be an incentive to ignore properly priced properties.

"What would you define as the role of a broker? And then, how you would you structure their payments such that they would do the best job possible at that job, however you define it?"

Good question wishhouse, this is a very interesting thread. I define the role of a broker as someone I require to do something that I cannot do or do not want to invest the time to do myself. This could be education on a market I'm not familiar with, negotiating the best price, agreeing to favorable terms, dealing with co-op boards, finding the perfect listing, etc.

The difficulty with this definition is that this is different for everyone. As a buyer, I feel comfortable representing myself based on my knowledge of certain markets, negotiation skills, and understanding of ins and outs of real estate transactions. I choose not to hire a buyer’s agent because I believe that gives me the ability to get the best price. If I did choose to hire a buyer’s agent, it would be because I felt this person could add to the process over and above what I could do myself. When working with a buyers agent, it would be hten up to me to ride that person and get the most out of the relationship. If not, shame on me. I feel this buyer’s agent decision is more cut and dry than the one with a listing agent.

Where I think the real issue is in the commission structure is with listing agents. I think listing agents should agree to a stair step commission structure based upon a sellers desired price. Just an example, but it could be something like 3.5% commission if the place is sold at ask or over, 2.5% for 90% to 99% of ask, and 2% under that. This would do a few things, make the seller whole if offer prices decrease, motivate brokers to get the highest price – not the easiest price to make a deal, make brokers walk away from sellers that had unrealistic price expectations, and prevent brokers from getting deals by promising the highest listing price.

I was just teasing about the socialism thing.
And Modern is right - outside of NY, closings are often less complicated. NY could simplify the process and lower the attendant costs. Not sure of the likelihood of that, sadly.
You could pay the broker a bonus based on performance, sure. But I think what you're saying (to oversimplify a bit) is that a "good" broker should earn his or her fee, whether it's for a $25K storage space or a $13M building. So how do you evaluate that? My sense is that it varies from deal to deal, and is difficult to quantify. If you go to a dentist for a filling, or pay to have a flat tire fixed - these seem like straightforward services rendered. But I would argue that a genius agent who understands your needs as a buyer, takes you to see one apartment that you fall in love with, and negotiates a price you're willing to pay, and navigates to a successful closing - that person has done his/her job. Even if the process takes only six weeks total. So, what's that worth?

Glad you were teasing, although it's not the first time I've been called a socialist ;)
I don't have an answer to your question. I would like that genius agent to be paid properly for his/her genius skills, I just don't think the current system promotes that.
This is a random question- but what percentage of representation comes from referrals/repeat business v. other avenues?

I think that depends on the agent and the firm. Big companies like Corcoran and Elliman get a lot of business through advertising and brand recognition. Smaller firms get more business through referrals. I work with a small client base, most of which comes through referrals. My company is small (and vaguely socialist). Which means I can be home posting to SE when other agents are out running open houses on their overpriced properties!

Big companies like Corcoran and Elliman get a lot of business through advertising and brand recognition

Yes. And any new innovation will have to make their way to success through similar advertising (meanng business must follow) and brand recognition (meaning the brand is trusted and known)....

any new innovation via a new name will be hard with these big players in this town

Noah - you're creeping me out with all this cloak & dagger stuff. Are you going to unveil some sort of real estate doomsday machine?

Hmm. Radio silence...