Hello to everyone, I have some inquiries about real estate agent comission and lease option deals. I will express these inquiries by providing a scenario.
The investor places a propery on the market with a real estate agent. The real estate agent finds a buyer that wants to purchase the home, but the buyer does not qualify for the loan due to credit issues or concerns. The investor is told by the buyer that their credit or loan issues will be settled within the period of a year. The investor offers to lease option the house to the potential buyer for the period of one year. As an incentive for the real estate agent participation in the deal, the investor offers to pay the agent 30% of his commission up front, and if the buyer exercises his option to purchase the home, the agent will be paid the remaining 70% of his commission upon sale of property in one year.
Let’s suppose that at the end of the lease option period, the buyer’s credit issues are not settled and the buyer chooses not to exercise his option to purchase the home. I have the following questions.
- Can you state in writing that if the buyer does not exercise his option to purchase the home that the real estate agent does not receive the remaining 70% of his comission?
- Can the investor be entitled to receive the percentage of the commission he paid the agent because the home was not purchased? (from the realtor or the potential buyer)
- If the investor offers to pay the agent 30% of his comission now, and the 70% in the time period of the year, will this percentages be based only upon property market values in one year or can the arrangement be based upon property’s current value and value in one year?
Any other suggestions to make this scenario a win-win for the investor and real estate agent will be appreciated.
my opinion is if you put it in writing, i.e. what you intend to pay for what scope of service, you are covered. although why don’t you just look for a more qualified buyer with the help of the agent you have employed?
Thanks for the response, Wendy. I guess it would be simplier to look for a more qualified buyer. I considered the lease option because I know I may be able to receive a nice positive cash flow per month.
It should be spelled out in the listing agreement you have with the realtor. The standard Missouri one that I use states that if the owner sells on a lease/purchase the commision is not due until title passes to buyer.
If you didn’t list with a realtor, but a realtor is bringing you a tenant/buyer than I would suggest you offer them 1 months rent now or the full commision when the buyer takes title.
To answer your questions.
I would definitely state that the realtor doesn’t get the 70% remaining commission if the buyer doesn’t buy.
If you do this 30-70 percent agreement I wouldn’t expect to get your 30% back if the buyer doesn’t buy.
The commission should be on the price that the “option” is for your property. i.e. whatever price you are agreeing to sell to the buyer within the year.
You should use an agent to find tenant/buyers ONLY as a last resort because:
a) Their marketing is geared toward conventional buyers.
b) They are trained for and used to dealing in soft negotiations (sales), offers/counteroffers etc. This is absolutely the wrong way to handle T/Bs. T/Bs should NEVER be given the impression that you are willing to negotiate anywhere but up.
c) Because of the above, agents take much longer (typically 3 to 4 times) to find a suitable T/B than a rent to own specialist.
And to top it off you have to pay them a commission.
If there are no RTO specialists in your area then you should become one. You’ll get your houses filled a lot faster and make a lot more money than you will if you use a regular agent.
RTO specialist definition: A person who is well-versed in the rent-to-own/owner finance niche, who’s marketing is geared toward buyers who are seeking private financing, who sets up lease option/land contract etc. deals for an assignment fee (paid by the buyer).
Thanks for providing the information tcwood and doug on. Successful investing!
Is any license required to be a RTO?
marcus, your a principal so in most states/provinces the answer would be no. Although I believe Michigan and one or two other states have laws limiting the number of houses a principal can sell without have a license or hiring an agent.