You have to provide more information for anyone to understand what you are talking about..

Totally not understanding.

[...] fees that we need to pay to our agent, as well as the builder's agent [...]

Who are these agents? Are we talking about real estate agents? I'm not familiar with this kind of arrangement...?

Regardless of what the answer is to this question, lol, at the end of the day, whatever the cost is, is passed on to the customer, anyway. ;-)

Zero? Well, whatever. If he takes them out maybe he gives you shredded newspaper for insulation.

Why are there agents? Custom homebuilding usually doesnt involve agents. Do you own the land?

Sorry real estate agents. The builder is charging the real estate agents commission into the cost of the house.

Yes, we own the land. Our real estate agent introduced us to the builder so I understand he would receive a commission from the builder. The builder also included a cost of his own real estate agent. So,we are seeing a cost for both the real estate agents.

Wow, that seems strange to me. We bought our land through an agent and she and the seller's agent got her commission off of the land purchase. Our architect introduced us to the builder and we built cost-plus. No additional commissions on the build itself. Why does the builder who isn't buying or selling real estate --just building a house on land you own -- need a real estate agent at all?

Why does the builder who isn't buying or selling real estate --just building a house on land you own -- need a real estate agent at all?

I'm with you, lol.

The only way I could see this making even the smallest amount of sense, is if the builder purchases the land from the customer before starting to build, then re-sells house + lot, back to the homeowner at the end? Maybe?

Our real estate agent introduced us to the builder so I understand he would receive a commission from the builder. The builder also included a cost of his own real estate agent.

This seems awfully scam-like to me. :-( I'm sure it's legit, but dang, it leaves me going, "Now, wait a gosh darn minute here...." Makes me as uncomfortable as a doctor receiving kickbacks from pharmaceutical companies; I question the motives....

:-(

You have got to be kidding me.

I've seen this before when we considered building a new house in the Boston area about 18 years ago. The OP's real estate agent wants to get paid as if she sold a lot with a house on it.

I don't understand where the builder's agent comes into it? How was that agent even involved?

Now is the time to negotiate, before you sign any contracts.

You might want to find out if the builder's agent isn't also his wife ...

'Sorry real estate agents. The builder is charging the real estate agents commission into the cost of the house.'

That's a CON job!!!!!!!!!!!!!!!!!! RA are NOT involved if you hired the GC to build your house!!!!! I've seen this 2x here in the last week. This is just the newest con job they have come up with to SR@W people out of their money!!! They are trying to RIP you off!!!!!!!!!!!!!!!!!!!!!!!!

Thank you everyone. This helps.

If the fee comes to light, the standard line is "oh, the builder pays that, not you."

This bugs me, even with existing homes... "Oh, the seller pays the fees, not the buyer; the buyer's agent is free." Yeah, well, except *I'm* buying the house, so technically, isn't it *my* money? lol No one gets paid until money *from me* goes through, so yeah, I most certainly pay those fees!

Are you buying in a custom home neighborhood with select builders? If so, then this arrangement is normal. And the Realtor CAN assist during the process

If you have a lot not in a neighborhood and your realtor just introduced you to the builder, and isn't going to represent you during the build, then a referral fee is fair, but it shouldn't be like they "sold" you the finished house.

In jannicones example, the referral fee might be comparable to what it costs to advertise. So the builder would pay that out of their advertising budget. And it would be like $600 or something along those lines. I knew a floor finisher who was like that. He would give you 50 bucks for a referral, which is what he paid homesomething.com for a referral.

This shady practice used to be fairly common in the Denver metro. Custom home developments would have a list of "approved contractors" clients were required to use. The contractors got approved by agreeing to pay full commissions on the value of the completed house.

It really burned me to see my clients pay 6%-7% on the full value of the home + landscaping to a realtor who sold them a piece of dirt.

This seems like an incredibly questionable business practice, especially if not disclosed to the client. Realtors have a fiduciary duty to their clients - how do they justify doing this without disclosing it?

Ridiculous. If someone tried this on me, I'd walk away from the deal....not only because it offends my sense of business ethics, but because I wouldn't want to deal with a contractor who started to gouge me even before the project began. I don't do business with people I can't trust.

Common practice in my area. Total scam IMO

@jannicone, I've had Realtors who did nothing more than give the client a listing of builders in the area demand a 6% referral fee. The "test" they apply is whether they "brought the buyer and seller together." One even asked for a referral fee for recommending us to a client who was represented by another Realtor.

What a racket. Referral agreements, between professionals are their own business-not the homeowner. Unless it is included in one or the other of your contracts. Check. Get a lawyer. to help interpret, if need be. And if this isn't some big development where you're forced to use this builder, get a new one. Pronto.

As infill builders, we would buy lots and list them on MLS with proposed new homes on the lots. We paid the real estate agent(s) a commission based on the selling price of the finished product, i.e., land and the new home. This was a common practice. That a "scam" too???

It's only a scam if the homeowner is charged for your private business agreement, outside of their own purchase.

Mr. Worthy, since you, the builder, owned the lot, and then sold the house to the client *after* completion, I can see the logic behind a realtor getting commission based on the selling price of the new home.

What the OP described -- owning the lot him/herself, not the builder -- doesn't seem as cut-and-dry as the situation you describe.

So, I think you're good, lol.

So the builder is breaking out the referral fees it is paying to real estate agents rather than simply treating them as one of its business costs and including them in the sale price. Sorry, but I still fail to see the "scam" in that.

The OP (buyer) has to judge whether the total cost they are being charged is acceptable.

Confession: I am a simple guy and my head twirls when I hear of all the complicated arrangements described here that builders come up with to extract a buck from buyers.

I think the problem here is expectations (isn't it always??? lol)....

Folks don't expect to pay a realtor for the lot + the house if the realtor simply sold them the lot. They expect the transaction to end there.

Now, if the agent had said something along the lines of, "Oh, by the way, if you use this builder, just know that there is a financial referral arrangement -- between him and me -- on the completed home," then they at least can decide if they want to use the referral. They will know it will cost them the money, because their relationship with the realtor isn't "done" yet.

I see no problem with these arrangements, as long as the non-professional party -- who likely isn't in the industry -- is educated and made aware. :-) Otherwise, it just feels sneaky, whether it is or not.... It just *feels* that way, that you were taken advantage of.

I consider a realtor to be a professional I pay who provides me valuable services when I sell land, a house, or both. When a realtor refers me to a quality builder so I can construct a house on property I already own, that referral has value, but nowhere near the value for the level of effort involved in selling something that already exists to a market of buyers. Further, why should the realtor get a commission on what I choose to spend on my house when there is no connection between that price tag and the service the realtor has provided? The realtor may deserve a modest fixed fee for the referral, but if the realtor wants a percentage based on the unbuilt home's value, he/she can earn it when I'm ready to sell the property. I don't care about what are claimed to be standard practices...it still makes no sense to me.

I will happily refer realtors, contractors, plumbers, CPAs, Doctors, Dentists etc. The only thing I hope for is that they do a good job since it reflects on me and when given the chance will return the favor.

Reread the posts from the OP. Why is the building paying HIS RE agent when they are not a party to this transaction at all? Buyer's RE agent introduced buyer to builder. Where is the builder's agent in this?

There are costs to do business, and as worthy said, ultimately, you have to decide that this is a deal you can live with in total or not. Just because folks might not list out the cost as a line item - they are still occurring.

This thread has really bugged me.

I still think these arrangements are disgusting. Why is it- really- that people who are sellers ALSO think they deserve a piece of the buyer's future equity? Are those folks willing to share their sales commissions/builder's fees, with the buyer? LOL. My RE Attorney would have blown both of these folks away.

Bottom line- as soon as you have the cash and the stones to invest it, you can have a say with my equity. Otherwise? Step off, and live off the commission I just paid the agent, and the builder's fee- plus all the sneaky "efficiencies".

Golly...referrals are simply referrals. One good referral generates another referral in return. Referrals aren't services and expenses which are due compensation.

As Summit so well said, in the professional world there are services preformed and there are referrals which may be made.

Services incur expenses. Referrals do not. Professionals understand the difference and perform accordingly.

Anything other than that is sleazy and stinks!

Sorry. But that's the way it is.

[ODD saying to herself: Whatever you do, do NOT ask the agent who sells you the land for a recommendation, on either an architect or a builder... Because you never know....]

My previous land purchase (6 yrs ago) involved a buyer's agent and a seller's agent. To make the deal work, I believe the agents together reduced their commission. The hounding we got over the next month or two about builders was comical at first. After that, it was annoying. It was an obvious attempt to get some percentage (probably 5%) of the build cost which may have been some attempt to recover their reduced land sale commission. The reason I say that is that both realtors came at us.

To me that was an attempted scam.

People build custom one or few times in their lives. It is a huge expense. Everyone knows some horror stories about builders. Realtors presumably have more experience and knowledge about local builders than non realtors and so they can be a resource. I am not sure in what world that would be worth $30k and I think most savvy people now agree. But - there are a lot of folks with money and without the time to understand or vet these things.

Selling a spec house is a different animal of course. But let's face it, the vast majority of time, the internet sells a house. My last house I paid our agent .3% - it was a difficult buyer and she earned her money. I don't think most spec house builders are paying our typical regional 2.4% on the sell side.

I've never seen this sort of arrangement. As an appraiser, I have to look at contracts and analyze them. This is a new one.

I've experienced buying a new home from a mass builder before. If I had used a realtor in the transaction, they would have been compensated. I didn't and the building company got to keep their 2-3%.

What to do? Do you like this builder? Are they the finalist? Unless there is something we aren't understanding, I would simply strike those items from the contract and wait to see what is said. If anyone say's anything, tell them you will walk and find your own contractor. I wouldn't blame the contractor. He is honest enough to alert you to the practice. I bet that is why it's broken out.

You own the land. It's your decision, your money.

Short answer: No. I wouldn't pay it. I'd raise a stink about it with the realtors. I bet they back down fast.

If I had gotten $10k, $20k, or $30k every time in my life that I had made a useful referral, I’d be sitting on the beach on my own private island right now, and my administrative assistant would be typing my GW answers for me. ;-)

I agree completely with Virgil: "referrals are simply referrals." They're a professional courtesy...not a way to gouge somebody.

Thank you everyone. Your answers have given us more confidence. To further clarify, our RE agent showed us a different lot in the same community, we did not luke that lot and chose this one by ourself. Although, he showed us the community. The builder was referred to us by our RE agent. The cost that he has put up for the total of the house includes 3.5% for each agent. So, a total of 7% of the cost to build the house. So, the number is really crazy. We have not signed any contracts yet, nor does the community force us to use a particular builder.

DP, how does the builder even justify getting the second agent involved?

If your RE agent did not show you this lot and you found it yourself, unless you have signed a buyer's representation agreement, you don't owe them anything. As a courtesy, you might give them a small amount of money for their general services. Not 3%.

I would have a conversation with the builder and get this clarified before you proceed.

"I would have a conversation with the builder and get this clarified before you proceed."

I would think long and hard about finding another builder. To early in the process for games and a possible red flag for the future. Just my .02...................

@chispa we are yet to meet him to ask for clarification. Since we are new to the process, I chose this platform to confirm my doubts. Thank you.

DP, good to be doing your research upfront before you sign anything. In my area, with high building costs, that referral/introduction to the builder would be worth 6 figures, which is crazy! I pay well, tip well and believe people should all be able to make a good living, but that much for just an introduction is crazy.

So, a Realtor has been showing clients houses they ask to see for six months. The clients have been signed and the agent has been performing exceptional fiduciary duties on their behalf. In the extremely competitive sellers market, they have written offers but not landed a contract on an existing home. This agent knows of an potential custom build spec project and brings her clients and the builder together. The project is not in the mls with stated commission or terms. Should the agent be paid for their months of work on the clients' behalf? By whom, the buyers? Should the agent be compensated by the builder/seller for bringing them? The home isn't in a development . All parties want what is fair and justifiable. No scams or cons. No greedy Realtor or builder. Honest question. If the buyer bought a $700k existing home, the brokerage may have made $15-20k, and paid the agent's split - $10k - $14k likely.

Realtor's commissions, at least here in Virginia, are transaction based. If you spent six months showing a client resales and they end up purchasing nothing, that's what you get. If they end up purchasing a $75K lot, your commission is on that sales transaction. Referring a builder is a separate transaction, and your fee for that should be disclosed so the client can make an informed choice.

It is a different scenario if the builder has listed the lot through a Realtor and is offering one or more options as "proposed construction." In that case, the builder has retained a Realtor to market the home/lot package. The normal selling agent/buyer's agent commissions would apply to the home/lot package if that's what the buyer purchases.

I don't understand why the builder would have a real estate agent? But I do understand why clients building would. Especially if they are out of town. Real estate agents look out of for the buyers building and also act as a buffer, asking questions the buyers are too uncomfortable to ask/say. They are also there for after closing when things come up they can be the bad guys. They can help look over the contract, etc. They also many times are the ones who suggest to the buyers which builders to interview.

Is this property in a new construction neighborhood where lots are all sold by a particular real estate company and/ or developer? is there a requirement that you must use an approved builder from a list of one or more? it is highly likely that the raw land purchase was very attractively priced and the real money for the developer is in the commissions on the build. IF, it were structured that way you would see it in writing somewhere before closing on the land. Of course most of us dont read all of a contract. I have seen this and you really have to just decide if that structure/ cost is worth building in that neighborhood. But, your decision should be an informed one. I would examine your contract for the land purchase carefully