Image courtesy of Pixabay, Hand Key House
A very common question home buyers ask is: Do I pay the commission to the real estate agent that finds me a home?
Most home sellers and homebuyers use a real estate agent when selling or buying a home. If you're a buyer, the great news for you is that when you hire a real estate agent to help you buy a home, it's free for you. The commission comes from the seller's side.
You've probably seen the signs real estate agents post in the yards of homes for sale. And you might have seen a "For Sale By Owner" sign occasionally as well. FSBO sellers wish to avoid paying a real estate agent's commission, or fee, so they try to sell the home on their own.
The vast majority of home sellers and homebuyers, however, use a real estate agent, which is the reason you've probably seen more agent signs in yards than you have FSBO signs. In 2014, only 8% of homes sales were done as an FSBO, with no agent involved, according to the National Association of Realtors.
Further reading — Real Estate Commission: Explained, Revealed and Compared
The traditional way, and the way most real estate agents make money, is through commissions earned when a property sells. The commission is a percentage of the sale of the home. This percentage could be 6% of the sales price of the home, but it doesn't have to be. In fact, the average commission used to be around 6% for a long time, but that rate has been dropping. As of 2014, the national average for commissions is closer to 5%, according to REAL Trends, a firm that tracks this data. And some agents get a flat fee instead of a commission.
Both the agent representing the seller and the agent representing the buyer earn money on the sale of the home. The money is usually split 50/50 between the seller's side and the buyer's side, but this could vary based on the agent and on the particular deal.
The commission money doesn't go directly to the agents; it goes to the brokerage they work under, companies such as Keller Williams, Century 21, or RE/MAX. The brokerage takes a cut, generally 40% but not always, and then the agents get 60%. Generally, the more experienced the agent and the more business they bring in, the more of the percentage they get.
So, in any particular real estate deal, the commission is typically split four ways: between the seller's agent (also called the listing agent), the seller's brokerage, the buyer's agent, and the buyer's brokerage.
When a seller hires a real estate agent, the seller is presented with a listing agreement. This contract lists all the details pertaining to the sale of the house, including how much commission the brokerage will earn. All sellers can negotiate this rate.
There are different strategies regarding how you negotiate. There's a saying, "You get what you pay for." If you insist on negotiating as low a percentage for the agent as possible, the agent might not work as hard for you as they would for a client who is paying them more. This is not always the case, but if selling your home quickly for as much money as possible is your goal, you might want to offer a higher commission.
There's an adage in business deals: good, fast, and cheap — pick two. This saying means that it's unrealistic to expect to receive all three. When you're selling a home, good refers to how high a price the agent gets you for the home, fast refers to how quickly the home sells, and cheap refers to how much commission the agent earns on the deal. Sellers are wise to determine their "two" before they negotiate a commission rate.
When the house sells, the brokerage will then take the commission from the proceeds. For example, if the house sells for $350,000, and the broker's commission is 6%, the brokerage will take $21,000, which will then be divided between the agents and brokerages involved. Sellers sometimes negotiate a deal with buyers to split this fee. But usually, this commission comes from the seller.
When you're in the market to buy a home, it's to your benefit to hire a buyer's agent. This agent is your representative and should help find you houses, take you to houses, let you in houses, and negotiate the best deal for you when you find a house you want to make an offer on. The buyer's agent will also walk you through the home buying process and recommend housing inspectors and home warranty companies after you are under contract. And the seller pays for all this!
When you hire a buyer's agent, you can't play the field, so to speak, by having more than one buyer's agent working for you at one time. You need to remain exclusive with the agent you hire. Therefore, it's a good idea to interview several potential agents before deciding on one.
Choose an agent who specializes or has experience dealing with the sort of property you want in the area you like. Ask how long their average listing sits on the market. Also find out how communicative they are. If you're in a hot seller's market, for example, you'll need a real estate agent who is responsive and can act quickly. Otherwise, you might miss out on the deal.
If you find after a while that the buyer's agent you picked isn't right for you, you can "break up" with this person. While you might not want to give the "It's not you, it's me" speech, you should let them know why you want another agent. Maybe the agent can do better now that they know what's wrong. Or you can just part ways and find another agent. You typically don't sign an agreement when you hire a buyer's agent as you do when you hire a seller's agent.
If you're in the market for a house, hire a buyer's agent. There's no downside for you. But choose your real estate agent wisely.
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