Real Estate Commissions
Everyone deserves to be paid for valuable services they render to others, and real estate professionals are no different. But as a prospective homebuyer, you’ll want to be sure you understand how compensation factors into your transaction.
Common questions include:
What is the standard compensation structure?
For the most part, real estate professionals are compensated by commission, based on a home’s selling price. Commission rates are not standardized, but vary, as does how the sales commission will be divided between the agents on the selling and buying side of the transaction. There is consistency, however, in how commissions are paid. When a seller signs a listing agreement, their contract is with a brokerage firm. All fees must pass through that brokerage firm. Typically, the seller’s representative—and your buyer’s rep—will be paid by the listing broker after the transaction closes.
What services can I expect to receive?
This depends on what level of service you have established as a homebuyer. If you have not formed an agency relationship, you are probably considered a customer, rather than a client, and you will likely receive a lower level of service. The terms vary from state to state, and each buyer’s representative can set their own guidelines within their state parameters and their brokerage practices. So you should clarify, preferably in writing, the services you are entitled to receive before you start viewing properties.
It’s also important to understand that if you do buy a home, your buyer’s rep will probably receive compensation (through the listing broker), regardless of whether you are a customer or a client. So more times than not, it’s in your best interest to formalize an agency/representation relationship, so you’ll receive the highest level of service possible. (Learn more about agency relationships.)
Will I pay more to be represented as a buyer?
In the vast majority of cases, the answer is no. When a house is listed for sale, the seller’s contract spells out the commission rate that will be awarded to a buyer’s representative. This is known up front and typically covers all, or at least most, of your representative’s compensation.
If it doesn’t, the choice is yours. You can scratch this house off your list, or decide to view it, knowing that any remaining compensation will need to be addressed. But even if the seller’s listing contract doesn’t entirely cover your buyer’s representative’s compensation, and you must pay the difference, it’s quite possible that these relatively small differences will be more than offset by other purchasing terms negotiated with the seller.
Can I avoid real estate commissions altogether and buy directly from a seller?
Yes, this is an option that some buyers explore. However, it’s important to understand that nothing is truly free and this approach still carries a price. Unrepresented sellers (for-sale-by-owner properties) frequently lack adequate information about how to price their home, or attempt to inflate the price in lieu of paying a real estate commission.
As an unrepresented buyer, it will be much harder for you to know if you’re overpaying. Real estate professionals have developed keen pricing insights that go well beyond simply evaluating data through the Multiple Listing Service (MLS). And if you are overpaying, it will create further complications in securing financing.
For these, and many other reasons, a high majority of consumer-to-consumer housing transactions never reach closing. Real estate professionals play a valuable role in keeping your home-purchase on track, starting with selecting and touring properties and continuing through negotiations, inspections, financing and closing. This is especially true in today’s market, where alternative buying opportunities, including short sales, have added even more complexity to some real estate transactions.