What commissions are, where they originate and most importantly: how to avoid them.
Most real estate professionals are eager to ease the worries of their buyers with one simple refrain: real estate commissions are paid by the seller. But it isn't quite so cut-and-dry, because the cost of commission is baked into the purchase price of your home.
The agent commission is a respectable amount of the total purchase price, and most buyers already struggle to have enough saved for their down-payment and closing costs, so contrary to what many industry professionals will say -- the commission does impact people looking to buy a home.
The commission amount is determined by the seller's agent. They set a percentage of the total purchase amount aside (usually 5-6%) to split with the person that will help them and you during this process, a.k.a the buyer's agent.
A Realtor dictates on a listing agreement contract that they will list and sell the home. The Realtor puts in writing a commission that they believe to be fair based on the effort, time, and energy they think will be needed to sell the home.
The commission can be a flat dollar amount, or a percentage of the home's sale price -- with flat dollar amounts being less common.
The total commission is typically 5-6%. In a more competitive market it's usually 4-5%. Lots of companies claim to sell for 1% but that only covers the “selling side” of the fees, the buying side is listed in “fine print” at around 2-2.5%.
Realtors will try to find their own buyers within their network in an attempt to earn the entire commission amount before trying to list it on the MLS.
If they can’t find a buyer, they typically just put it on the MLS so that buyers outside of their sphere can see what they are selling.
When a Realtor decides to list a home on the MLS, they have taken the “role” of a Listing Agent.
That Listing Agent still has the right to keep all the commission if they bring a buyer to the seller directly. Which is called double-ending or dual representation. This can be a tricky position for the buyer as the listing agent is representing both parties interests at the same time, leading to a moral hazard.
When a Listing Agent lists the home on the MLS they have to co-operate with another agent if they bring a buyer; it's like a shared agreement.
The commission amount the buyer side agent is eligible to earn is listed on the MLS in the private notes section reserved for agents.
For a few reasons, with the most fundamental being: not every buyer is created equal.
Some buyers need serious hand-holding, and Realtors will work their asses off to help them through months or even years of searching and contract writing. While other types of buyers who enjoy doing the work themselves can be far less labor intensive. Some buyers and sellers feel that the amount of effort, time, and work Realtors put in is not worth the $18,000.
This is a rough outline of all the types of buyers I've met over the years:
- The Green Buyers (the first time home buyer)
- The Up-leg buyers (the second time home buyer)
- I'm looking for a deal buyer (Investor Buyer)
- The DIY buyer (I like to do things on my own buyer)
- I go direct to the listing agent buyer (I think I'm smarter than everyone buyer)
- I only want the off-market buyer (the don’t waste my time buyer)
If each of the buyers above requires a different set of skills, time, energy, and effort, why must the Realtor make the same amount of money on them?
So to run a healthy business realtors pad an outsized commission to handle the edge cases where buyers require a ton of attention.
I've heard lots of misinformed buyers say something along the lines of:
Well the seller pays the commission, not the buyer
which, although true, I like to remind them that:
You (the buyer) are paying the final price, so the commission is included in the price you pay.
It's obvious the buyer is ultimately paying the commission amount. They just don't get to decide anything about it including how much they have to pay. It's an all or nothing deal when you buy a home.
Sellers facing high commission will just pad the price of their homes, and in a sellers market, buyers will happily pay the difference.
Right now the industry doesn’t allow buyers to visit homes on their own or type their own contract without a Realtor representing you.
Here's a way for you to hack through that as a buyer if you're more of the DIY type.
This is a touchy subject, and as you'll read on Reddit and other discussion boards, there are a million different points of view. It’s a complicated subject but all in all, we agree that things should not be one-size-fits-all when it comes to getting assistance from a Realtor.
And to be honest it's touchy because you are dictating how much someone should or shouldn’t make, discussing their livelihood and existence in an industry.
We believe that the commission is for the buyers, to do solely as they please. You should use it as another tool to stretch your savings.
You essentially have three options:
- Go direct to seller
- Work with a service that gives you back commission
- Get your own realtors licence
Going directly to the seller seems like the most straightforward, but as most sellers are represented by a realtor, you will simply be giving the full commission to them.
This is due to the way commissions work. The seller actually splits their commission with the buying agent, and only licensed real-estate agents are eligible to receive commissions. If you're not a buying agent, then the commission you pay towards the house automatically goes to them.
You could get your own licence if you're up for it, but that can take time and a lot of effort just to save some money on your eventual purchase.
The last alternative is working with a service that gives you commission back on your home.
This is a list of services that can give you commission back:
|Better.com||up to 1% of purchase price|
|OpenDoor||up to 1% purchase price|
|KhouryFinance||50% buyers commission|
The devil is in the details with some of the offers so make sure you read the up-to-date terms of each offer before making a decision.
We've written before about How to search for a home without a realtor. So have a read over that if you're curious to learn more. No matter what service you choose, the tips will help you use them without letting anything slide through the cracks.