Closing a real estate deal can be a long and arduous process from the time a property is first listed for sale until everyone gathers at the settlement table to sign on the dotted lines. And no one will go to that settlement table unless and until a buyer makes an offer on the property.
Some real estate agents specialize in bringing buyers to the table, showing them homes until they find one that's just right, then helping them to negotiate the numerous steps involved in the purchase. But it's the seller, not the buyer, who typically pays this agent's commission.
- Most real estate agents are compensated with a commission that's based on a percentage of the sales price.
- The seller typically pays the commission for the buyer's and seller's agent out of the sales proceeds.
- All commissions are paid to the seller's brokerage, which then pays its agent and the buyer's brokerage. The buyer's brokerage then pays its agent.
- If you work with multiple buyer's agents, only one of them will be paid commission—usually the one who helped you write the offer.
Agents Work for Brokers
Some buyers believe that an agent's brokerage pays them, and this is true to an extent. But the money doesn't come directly from the agent's company.
Real estate agents are prohibited from being paid commissions directly by consumers. All real estate commissions are therefore first paid to the seller's agent's broker—more commonly referred to as the listing agent—then the listing agent's broker pays the buyer's agent's brokerage. An agent's 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 their brokers' licenses.
A few real estate agents are paid salaries by their brokers and they work as employees, but this is uncommon. Most agents work on a commission basis.
How and When Does the Money Change Hands?
Real estate commissions are paid like this:
- The seller pays the listing brokerage.
- The listing brokerage pays the listing agent.
- The listing brokerage pays the buyer's brokerage.
- The buyer's brokerage pays the buyer's agent.
The seller effectively pays your buyer's agent to negotiate on your behalf.
There are circumstances under which a buyer might pay a brokerage directly, such as when there's no commission offered because the property is for sale by owner. But the commission is typically 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.
Compensation is typically made at closing when it's deducted from the seller's proceeds from the sale.
Buyers don't have any say in how much commission is paid by the seller, and they don't have to worry about personally compensating their agents. Of course, they're free to do so if they want to sweeten an offer made on the home by offering to pay a portion of the seller's commission. But again, the buyer cannot pay her agent directly.
When you ask a buyer's agent to show you property, you're implying that you'll eventually write an offer through that agent. "Procuring cause" is the complex process that determines which buyer's agent is entitled to the real estate commission when a buyer works with more than one agent.
Generally, it's the agent who actually writes the offer who gets paid. You might ask an agent to spend weekends driving you around, sharing knowledge and helping you to select a home. Then you switch to another agent who shows you the home of your dreams. This agent actually writes the offer for you when you decide this is the property you want to buy.
In this case, the first agent would most likely not receive any commission or compensation for her time and effort.
Some 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 three basic types of buyer broker agreements. The most popular is an exclusive agreement which binds that agent to you and you to that agent. You can't buy a property without owing a commission to that agent, even if the agent doesn't end up writing 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.
How Much Is the Buyer's Agent's Commission?
The commission is pre-determined by the seller and stated in the listing agreement. The terms and amounts are typically stated in MLS listings as well.
The industry average for buyer's agents is somewhere between 2.5% and 3% of the sales price, depending on local custom and the seller's wishes. But the exact amount the buyer's agent receives depends on how his broker compensates him. Most agents work on a commission split with their brokerage houses. The split can vary from 50% of the buyer's agent's commission all the way up to 100%—the agent might receive the entire commission.
Then again, the brokerage might take 100%. Some discount brokers may pay their buyer's agents a salary, especially if the brokerage is giving some sort of a kickback to the buyer. And some agents like the reliability that a salary provides.
Dual Agency Concerns
"Dual agency" is a situation in which the same agent represents both buyer and seller. In this case, the agent would receive the entire commission—she would not be compelled to share it with the buyer's agent because she is the buyer's agent.
If you think this seems unfair, some states agree with you. Dual agency is illegal in Alaska, Colorado, Florida, Kansas, Maryland, Oklahoma, Texas, and Vermont. Other states simply require that the agent disclose her status to both buyer and seller. Dual agents are also sometimes referred to as "transaction brokers."