How a 2.5 percent buyer fee on a 250k rental eats into year one returns

Question

Take a 250k purchase, 25 percent down at 62,500, closing costs and reserves around 9k. A buyer agreement at 2.5 percent is 6,250. If the listing side offers 2 percent, that leaves 1,250 out of pocket at best and 6,250 at worst if the seller will not move. On an investment property that fee alone can shift year one cash on cash by close to a full point, so it is worth understanding the mechanics of moving it. A seller credit can often cover a buyer broker fee without breaching a contribution limit on an investor loan, though the limit and what counts against it varies by loan program. Some of it can be financed depending on the lender. A rebate from the agent is available in some states and prohibited in others. If it is paid in cash, whether it adds to basis or is simply an expense is a question for an accountant, but it is worth asking rather than assuming the answer either way.

Rena Expert · Accepted Answer

Take the levers one at a time, because three of the four are narrower than they look.

Seller credit is the workable one, with a ceiling. Conventional financing limits what interested parties may contribute toward the buyer's costs, and the allowance on an investment property is materially tighter than on an owner-occupied purchase. On a 250k purchase you may find the cap sits at or near your 5,000 before you've applied a dollar to prepaids or title. Get the number from your lender in writing for your specific program and occupancy type, since these limits get revised and vary by product. Also confirm with them how they're treating buyer-broker compensation paid by the seller, because guidance on whether it counts against the contribution cap has been moving since the settlement rules took effect.

Financing the fee into the loan isn't a thing. The commission is a closing cost, so the only way it ends up in the loan balance is indirectly, by raising the price and asking for a credit back. That works until the appraisal doesn't support the higher number, and on a 250k investment purchase you're often near the edge of the comps already.

Rebates from the agent are permitted in most states and restricted or prohibited in some, so whether that's available depends entirely on where the property is. Ask the agent, and ask your lender too, since a rebate applied at closing shows on the settlement statement and the lender has to approve it.

Basis treatment is a live question and your accountant answers it.

The lever you haven't mentioned is the agreement itself. 2.5% on a 250k house is thin work for an agent, which is exactly why flat fees are easier to get at your price point than at 700k. A fixed 4,000 with a per-property compensation addendum removes the gap risk you're describing, and if you buy more than one property a year, say so before you sign.

monica_tran3 · Answer

Volume is the point to push. An agent looking at one $250k transaction will hold at 2.5%. An agent looking at three or four a year from the same buyer will usually take a flat number, because the work per deal drops once they know what will be bought and what will be passed on. Just make sure the flat fee is written per property rather than as a lump for the relationship, or there's an argument waiting about what happens when the second deal dies in inspection.

karen_whitfield · Answer

On the land side I've mostly stopped using a buyer agent and pay a real estate attorney instead, which only works cleanly in the states where an attorney runs closing anyway. On a house with a mortgage and an appraisal I wouldn't try it. Ledger, your 1,250 gap is the cheap version of this problem, so I'd worry more about the appraisal risk in the price-up-and-credit-back route than about the gap.

How a 2.5 percent buyer fee on a 250k rental eats into year one returns

3 replies