How Do Home Buyer's Agents Get Paid?
Question: How Do Home Buyer's Agents Get Paid?
A reader asks: "My wife and I have been looking at homes in Folsom, California, for almost a month with our real estate agent. He was referred to us by a coworker. Last week he told us we had to sign a buyer broker agreement but my family told me not to sign it. Now this agent won't show us any more properties. We don't understand. Doesn't an agent's company pay them? How do buyer's agents get paid?"
Answer: Many buyers are confused about how buyer's agents get paid. Like you, some buyers believe that the buyer's company pays them and, while this is true to an extent, that money doesn't come directly from the agent's company. The seller pays the buyer's real estate commission to the listing brokerage, along with the listing side of the commission.
You may hear agents say it is free.
Agents Work For Brokers
Real estate agents are prohibited from being paid a commission directly by the consumer. All real estate commissions are first paid to the listing agent's broker, and then the listing agent's broker pays the buyer's brokerage. That's because a real estate license must be placed under a real estate broker's license. Real estate agents are independent contractors, for the most part, who operate under a broker's license.
A few real estate agents are paid a salary by their broker, and work as employees of that broker, but that type of business arrangement is uncommon. Most agents work on commission.
Real estate commissions are paid like this:
Seller >> Listing brokerage
Listing brokerage >> listing agent
Listing brokerage >> buyer's brokerage
Buyer's brokerage >> buyer's agent
Buyer's Agents Usually Do Not Work for Free
When you ask a buyer's agent to show you property, you are implying that you will eventually write an offer through that buyer's agent. If you have no intention of ever writing an offer with that buyer's agent, you are taking advantage of that agent, which is wrong.
Procuring cause is a complex process that determines which buyer's agent is entitled to a real estate commission when a buyer works with more than one agent. Generally, the agent who writes the offer gets paid.
Therefore, if you ask an agent to spend weekends driving you around, sharing knowledge and helping you to select a home, it is only fair to be loyal to that agent.
How Much is the Buyer's Real Estate Agent Commission?
Unless the buyer has elected to personally compensate her agent, buyer's agents are paid from their broker who receives the commission from the listing broker. The real estate commission is pre-determined by the seller in the listing agreement. The industry average for buyer's agents is between 2% and 3% of the sales price, depending on local custom and the seller's wishes.
The amount the buyer's agent receives depends on how the broker compensates. Some discount brokers pay their buyer's agents a salary, especially if the brokerage is giving some sort of a kickback to the buyer. The brokerage won't take it in the shorts on their end of the split. And some agents like the reliability a salary provides.
But most agents work on a commission split, which could vary from 50% of the buyer's real estate agent commission all the way to 100%.
Why Buyer's Agents Ask for a Buyer Broker Contract
A buyer broker contract is an agreement between the buyer and the buyer's agent. There are 3 basic types of buyer broker agreements. The most popular is exclusive. An exclusive buyer broker agreement binds that buyer's agent to you and you to that buyer's agent. You cannot buy a property without owing a commission to that agent, even if the agent did not write your offer.
Agents who want to ensure that they have a legal and binding agreement that allows them to represent a buyer exclusively, and be paid for their efforts, will ask a buyer to sign an exclusive buyer broker agreement.
Buyers who hesitate to sign an exclusive buyer broker agreement with me, for example, are saying they don't care if I get paid, so I don't work with them. I work with buyers who agree that I will get paid. I'm no different than many other agents in that regard. Which is why I don't blame your buyer's agent for refusing to continue to show properties without a guarantee of compensation.
Do Buyers or Sellers Pay the Buyer's Agent?
This has caused a great deal of confusion in the real estate industry and with consumers. Generally, a listing agreement between the seller and the seller's listing agent specifies how much the listing brokerage will pay the selling brokerage for bringing a buyer.
Yes, you read that correctly. The seller, in effect, pays your buyer's agent to negotiate on behalf of the buyer, not the seller. C. A.R. buyer broker representation agreements state that if any entity other than the buyer pays the commission, then the buyer is relieved of the obligation to pay it.
There are instances where a buyer may pay a brokerage directly such as when there is no commission offered because the property is a for sale by owner. But typically the commission is paid by the seller to the listing brokerage. The listing brokerage divides the commission in some fashion with the broker of the agent who brings an offer.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.