There is a big misconception in the real estate industry that when you are searching for a home, working with a real estate agent is free of charge. While there are many benefits to working with a Realtor during your home search, these professionals are getting paid and although this payment flows through the proceeds of the home’s sale, this payment ultimately comes out of the buyer’s pocket.
As a buyer, your agent and the seller’s agent split a commission fee — typically 5–6% of the purchase price of the home. And while this fee is technically paid by the seller, it’s factored in to how much sellers list their home for. Since these fees get baked into a home’s listing price, and you’re the only one who has to pay money at closing, the commission gets passed onto you when you buy a home.
Now, there’s nothing wrong with the fact that you are paying for a service that you’ve requested. In fact, it’s common sense that you would pay for this service, right? In other markets such as Australia, there two different types of brokerages – those that sell homes and those that assist buyers in purchasing homes. This eliminates the risk of double ending (when the same agent represents both buyer and seller) and is a concept that might be worth further exploration in our own market.
Technically, if a buyer has a Buyer Representation Agreement signed with his or her real estate agent, a commission rate is agreed upon (typically 2.5-3%) and should a seller not offer a commission to a buying agent, this amount would need to be paid by the buyer directly. While it is uncommon to see a listing offering less than the standard commission to the buying agent, the industry has started to see some buyers negotiating this amount with their agent and it’s something that should be explored further based on the services provided by that particular agent.
Educating buyers on how the system works is a great first step as many buyers enter the home search process unaware of how the industry is set up. If you are getting into the market soon, consider the following:
- Speak to friends and colleague about their experiences in purchasing a home and ask if they would recommend a real estate agent to assist you with the process. Don’t go with the first real estate agent you meet at an open house. You need to interview many people to ensure you will be on the same page throughout the home buying journey.
- A Realtor can be a valuable part of the home search process and their services, understandably, come at a cost. Ensure you review the Buyer Representation Agreement that you sign with your Realtor in detail and understand the commission rate they will be earning.
- While you may not pay commission to your agent directly, this commission is paid by you in the form of a higher selling price that you end up paying for a home.
- If you are working without a real estate agent, ensure you understand how the commission is structured with any home on which you are making an offer.
Although the real estate industry seems to have a set of conventions that are ‘the way it is’, it doesn’t mean that is the way it needs to be. As a consumer, you have a choice, and it is important that you understand the options available to you, even if one of those options is to buy on your own. Once people are aware of the true cost of representation, and Realtors are transparent enough to ensure that buyers understand it as well, the buying process will be considerably more comfortable.