Buyer Agent Commissions – Nothing Worth Getting is Free

Here’s a little lie home buyers believe.  Real estate agents know it isn’t true but don’t always correct.

The seller pays the commission and therefore using a buyer’s agent is free! 

I love free stuff as much as the next person but haven’t you noticed that free stuff is usually worthless, with the obvious exceptions of love and having your dog greet you at the door wagging his tail.

If something is free, it usually means that no one else wanted it, someone couldn’t sell it for enough money to make it worthwhile, or it’s just a gimmick to get you pay double for something else. 

As a home buyer, you can choose to bury your head in the sand and believe that the services of a buyer’s agent are free.  You may not have to take out your checkbook to pay for the service but you do pay for it.

Or, Know the Truth

Quoting Ardell Dellalogia:

Before you, as a buyer, go to see homes, there is already a mechanism in place for the agent who opens the door for you to get paid.  This is why agents may want you to sign a contract to work with them, but they do NOT rely on you to agree to pay them.

The listing agreement is the mechanism Ardell mentions. 

When a home owner signs an agreement with a listing agent to sell their home, included in that agreement is a commission – say 6%.  The seller agrees to pay the listing agent 6% of the sales price at closing.  Unless otherwise directed by the seller, the listing agent will advertise the listing in the Multiple Listing Service with an offer of commission to the buyer’s agent, usually half of the 6% but not always.  The listing agent may choose to only offer 2% and keep 4% or offer 4% and keep 2%.  This is an agreement the listing agent makes with prospective buyer’s agents.  Every listing in the MLS has such an offer, called the co-broke. 

In either case, the commission is built into the price you pay as a homebuyer.   That’s why buyer agents don’t rely on buyers to pay the commission – payment is guaranteed in the listing. 

With almost 80% of the homes in the United States sold through real estate brokerages who are paid through this commission structure, sellers price their homes expecting to pay a commission.  Even if the house is being sold as a For Sale By Owner without the use of an agent, a FSBO seller when setting a sales price is still looking at sales statistics of homes that sold paying the commission.  People sell their house FSBO so that they get to keep the commission – not give it to some buyer!

But the HUD-1 says…

When you actually buy a house, you’re given a HUD-1 statement either before the closing or at closing.  In Connecticut, the agent commissions are listed at the top of page two and are an item on the seller’s side (not every state discloses this).  So, technically, the seller pays for the commission of both agents OUT OF THE PROCEEDS OF THE SALE.  

No buyer=no sale=no commission.  The commission is weaved into your purchase price but appears to be paid by the seller.  Very sneaky…

How Do You Know What Your Buyer Agent is Making?

Ask, as Greg Swann writes in his article, Repeat After Me, Mr. Realtor, What do you charge?  I write my agreements up front with clients so they know what my commission is and don’t have to ask later on.  If you’ve signed a buyer agency agreement with an agent, then ask when you’re putting in an offer.  The commission is listed in the MLS so it’s a really easy question to answer. 

And don’t be afraid or intimidated.  Your agent may choke on her latte when you ask but she’ll live.  (No offense meant toward lattes, real estate agents or latte drinking agents).

Can You Negotiate the Buyer Agent Commission?

Yes.  You can do so up front when you sign a contract with a buyer’s agent or when you’ve written up a contract for an offer.  For example, if you’ve looked at only one house with an agent, the co-broke is 3% and your offer is accepted, then I think it’s fair to ask buyer agent to rebate the buyer for 1% of the commission or so.