What does that mean, “Cost of an agent?” Is it going to cost you money to use a real estate agent?!
No. And yes. And, it depends.
Let’s look at the most common questions regarding real estate agent compensation and how it affects you as the buyer.
How are buyers agents paid?
The three most common ways they are paid are:
- By the listing company. It is a long-standing real estate custom for the listing company to offer a portion (usually half) of the commission they collect from the seller to the agent representing the buyer who purchases the property. This is how compensation is paid in the vast majority of real estate transactions.
- By the seller. When a home is not listed through a real estate company (i.e. For Sale By Owner), it is common for the seller to pay the buyer’s agent fee.
- By the buyer. When neither the listing company nor the seller will pay the buyer agent’s fee, it is usually the responsibility of the buyer to pay it.
How much is the buyer’s agent fee?
It varies but, typically, it is somewhere between 2.5% – 5% of the purchase price of the property. Most often, it’s about 3%, in which case an agent will be paid $6,000 on the sale of a $200,000 home. Sounds like a lot doesn’t it? It might be if agents were paid for every buyer they worked with. Instead, the real estate industry has this crazy business model where agents agree to work with you for free – sometimes for months – and if you decide not to buy anything, you owe the agent nothing. Most people would not agree to that pay arrangement, but real estate agents do and that’s why they are paid relatively well when a transaction does close. However, the most important reason agents are paid that much is because their knowledge and expertise can easily save you considerable amounts of money as they help you through the many problems that come up during a typical transaction.
If the listing company pays my buyers’ agent’s fee, doesn’t that imply the buyer’s agent is working for the seller or the listing agent?
Absolutely not – your written agreement with the buyer’s agent guarantees the agent is working strictly on your behalf and is legally bound to represent your best interests at all times.
I’ve been told using a buyer’s agent won’t cost me anything, but it sounds as if it could. Is that correct?
It is more accurate to say using a buyers agent will cost you no more than using a traditional agent. Buyers agents are paid the same way as traditional agents, which means the agent’s fee is usually paid from the seller’s proceeds. If you work with a traditional agent and find a house with a seller who is unwilling to pay your agent’s fee either through his listing agent or directly, that agent will expect you to pay it.
So, if I don’t want to risk being in a position where I have to pay an agent’s commission, would it be best to buy a home without an agent’s services?
That would rarely be the case. First, the odds of being in a situation where you are expected to pay the fee directly are small. Second, unless you are very experienced in real estate transactions and know how to anticipate and deal with the myriad of issues that can, and almost always do go wrong, a competent buyer agent’s fee is well worth the cost. A good buyer’s agent will almost always save you at least the amount of his/her commission over the course of your transaction. Even in a strong seller’s market, where price reductions are rare, a savvy buyers agent can save you significant money in several other ways. For instance, by directing you to the proper lender for your circumstances (this alone can save you thousands of dollars); suggesting top-notch inspectors who will help you uncover problems with the property before they become your problems; and negotiating well during the repair request phase.
If I don’t use an agent, I should be able to negotiate a better price on the house because the seller won’t have to pay my agent’s commission, right?
No, that is a common misconception that has cost many buyers dearly. Understand that the amount of commission that the seller has to pay was negotiated before the home was listed. The listing company has a contract that says the seller will pay X% when the house sells. That amount doesn’t change if you aren’t using an agent to guide you through the process.
The only thing that changes is whether the listing company will keep the full amount or whether they will split it with your agent. They love it when you want to make an offer without an agent. More money for them. Plus, they assume they’re dealing with someone who doesn’t know a lot about real estate, so they are generally pretty confident they’ll negotiate a deal that favors their seller.
Can I negotiate my agent’s compensation?
Technically, yes. All real estate commissions are negotiable in most states. BuyersWire.com encourages you to ask your buyer’s agent to reduce their commission by rebating 1% of the sales price back to you at closing.
But, pay attention here: if the agent agrees, move on and find another agent! That’s right. Don’t work with an agent who reduces their fee. Here’s why:
A rebate of 1% of the purchase price represents 33-40% of the agent’s compensation. This is the money they use to pay their bills. If they will so easily give up their OWN money, how quickly do you think they’ll cave at the negotiating table when it’s YOUR money on the line?
Where can I find a quality buyers agent to help me purchase a property?