One of the biggest myths held by first time home buyers is that they assume if they work with a real estate agent, they have to pay the agent’s commission out of pocket. I can tell you from experience that about 99% of the time the seller actually pays the buyer’s agent’s commission. That may seem weird to you, but it’s actually very commonplace.
The reason why the seller pays the buyer’s agent is because that buyer’s agent is really the person “selling” the home. If you think about it, a seller’s agent, or “listing agent” as they are commonly called, is really just marketing and advertising the property for sale. Sometimes the buyer may come straight from these marketing efforts without an agent, but most often times the buyer will already be working with their own agent to find the right property.
History
Several decades ago the concept of a buyer’s agent wasn’t even present in the real estate transaction. Most buyers searched for properties in the newspaper, driving around neighborhoods, or going to open houses. They didn’t have a professional helping them along the way, and buyers didn’t have a lot of power in the transaction. It was difficult for them to determine the fair value of homes because they simply didn’t have access to the sales information.
With the advent of the Multiple Listing Service (MLS) all the available properties are kept in one place so buyers can save time searching for the right home, and also be able to see what other homes are selling for in order to avoid paying too much.
Even with all this information available in our real estate world today, there still exists the strong need for a good buyer’s agent. Imagine making a purchase of several hundred thousand dollars without any tangible knowledge of the market, laws, and possible risks. It’s a recipe for disaster. Even if you were paying cash for your buyer agent’s help (which you’re not) it would be worth the few thousand dollars. Still, some potential buyers think they can do it by themselves just because they watched a couple TV shows and are a “good negotiator.” If that’s all it took to buy a house do you think buyer’s agents would even exist?
Pretend for a minute that instead of taking out a loan and investing your own money into a down payment for a home, you were buying a stock or mutual fund. Yet, you’re not a stock broker, not a trader, in fact, you don’t know that much about the stock market other than what you read in the Wall Street Journal once a week. Would you take out a loan and choose a stock or mutual fund to invest $100,000 or more by yourself? If you would, you’re crazy–and that’s ok. The world needs variety I guess. But in all seriousness, that would be a bonehead move by anyone’s standard, right? So why play games with your property investment?
Commission Breakdown
When a seller agrees to list their property with an agent, they will agree on a commission amount paid for their services. When there was no such thing as a buyer’s agent, this meant the seller’s agent would get the full commission upon the sale of the home. Over time, it became clear that just as seller’s needed the help and guidance of an agent, buyer’s needed this service too. So if the buyer was also represented by another agent, the commission would be split amongst the two agents.
The listing agreement in today’s market clearly spells out what amount of commission is going to be paid to each agent in the transaction. Normal commission percentages range from 5 to 7 percent of the sale price of the home. Typically each agent will get between 2.5 and 3.5 percent once the sale closes, and these amounts come out of the seller’s net. So if the seller agreed to pay 3% to each agent, then sold the home for $200,000, that would mean they are going to be paying $6,000 to their own agent, and also the buyer’s agent. $12,000 total.
While this may seem like a hard pill to swallow for sellers, what you have to remember is that they will not be paying the commission when they buy their next home. So for most sellers it’s not a big issue, especially if they are moving up to a higher-priced home. They won’t be paying the commission for their more expensive new home, at least not until they decide to sell it at some point.
Summary
Always talk to your real estate agent and ask them what the commission structure is. If you are buying a lower priced property (under $100,000) the agent might have a minimum commission amount they charge, which means you may have to contribute some funds towards their commission at closing if the seller’s amount doesn’t fully satisfy their fee.
Make sure to ask questions, and find the value in using a buyer’s agent to purchase your first home–new buyers need this help more than anyone, and it always surprises me to see some buyers trying to make it happen on their own. Don’t repeat the mistakes of others–do the right thing!
