Welcome to our Real Estate 101 series! This is the second in a series of articles we’ll be doing to help educate clients and the public in general about relevant topics in the world of real estate. This is important because real estate is a “hyper” local market. What works in one location may not work in another. Lawrence, KS is very different from rural Kansas markets. Perhaps even more different than it is from say, New York City! So, these topics we cover will be very specific to Lawrence and the surrounding areas but may not relate to other places so well. With that being said, let’s dive into our next topic: Do You Pay Your Buyer Agent?
Let's cut to the chase here in the shortest way possible: the vast majority of the time the answer is "no." Your buyer agent's commission will actually be paid by the seller on the day of closing. However, there isn't just one business model out there. Some situations may call for a home buyer to pay their agent directly. For example, if a for-sale-by-owner seller isn't offering to pay a buyer agent commission but a home buyer wishes to use their agent in the transaction.
That possibility is a good pretext to have a conversation about compensation when interviewing REALTORS to work with. A good real estate agent who's worth their commission will be able to easily explain how they'll be paid and why they're worth it. If the agent you're interviewing can't explain and/or justify their value, then you should keep interviewing!
So how do you know, or how would your agent know what they're being paid for any given house for sale? If it's a listed property, the compensation is listed in the MLS. The figure being offered is most often a percentage of the sales price. Sometimes it could be a flat fee. The number I see the most often is 3%.
But knowing that, let's circle back for just a second and discuss what's known as a Buyer Agency Agreement. This is the document a buyer signs in order to make it official with a REALTOR. This is what says that this particular agent is working for you and it states exactly what that means. One of those items laid out in the agreement is how, and how much, the agent expects to be paid. It should also say something to the effect of where the compensation will come from. If you haven't already had that conversation about how your agent is paid, this is when that should take place!
Another item to be aware of for home buyers when signing a Buyer Agency Agreement is the issue of transaction fees. I detest transaction fees. These are fees your agent is requiring you to pay them over the commission percentage they'll get at closing. Because REALTORS seem to throw a fit when I talk about how the charging of transaction fees is unethical, I won't go much into it here. It's just something to be aware of. If you're really interested to know more, my contact info is on this site. Anyone is free to call me anytime and ask!
While we're on the topic of "The More You Know," it's a great opportunity to point out that the buyer agent commission being offered by a seller in the MLS is public knowledge. That's right, the buyer agent fee is published right there with number of bedrooms, square footage, and all the other info about the property. Just take a look at this screenshot from a listing on Zillow here in Lawrence:
Until recently I didn't even know this was being publicly displayed on consumer-facing MLS sites like Zillow. Things were moving in the direction of transparency around displaying offers of compensation publicly, but this was the first I'd seen it and I was elated! Every educated consumer in this country should have access to this information for any and every home available. Is it 3%? Less? 2%? More? Is the commission being offered a variable-rate commission?
Since the seller is paying the commission, it's part of the cost of the house, right? I mean, the seller certainly has an amount of money they're seeking to make in the sale of their home. And with commission being far-and-away the largest cost associated with selling a home, it factors into the equation. Having that knowledge will make you a better buyer. Then one day, you'll be a seller. And commission will be one of the most important topics when discussing the listing of the house. In a sense, the percentage your buyer agent makes is "baked-in" to the overall value of the house. Knowing the buyer agent commission amount is indeed no small thing!
Now what if there's a particular house you really want to see but your agent comes up with excuses? For some reason or another, they just don't seem to want to show you that particular house! Here's a hint: take a look and see what buyer agent commission percentage is being offered. If it's less than 3%, could that be a reason? If you notice that they won't show you any houses where the offer of compensation is less than 3%, you have a Code of Ethics issue on your hands. And you may wonder why your agent seems to be working more for their commission than for you. This is less rare than it should be. Because of that, it's a critical piece of education that all home buyers should be exposed to!
Long story short, your buyer agent does get paid to work for you. It all just depends on from where and how much. While that compensation will most likely be paid by the seller, there are situations where a buyer might pay their agent as a closing cost. And good agents prove the value for what they get paid. When hiring a REALTOR, knowledge of these and other topics are critical. By choosing to work with a great agent who lives and works locally, there comes confidence, education, and knowledge that should last beyond closing day. At that closing table you'll know exactly what your agent made in getting you there!