"How do agents get paid" is, hands down, the most common question I get asked by non-real estate agents. I often hear comments like "I don't need a buyer's agent because I can do it all myself and don't need to pay someone." I'll let you in on an apparently well kept secret: buyers don't pay their real estate agents at all.
So, who gets what?
When a home owner decides to sell a house and hires a real estate agent, the agent and the home owner sign a listing agreement. That agreement includes the terms of the agent's commission which is usually done as a percentage of the final sale price of the home. Let's do some fun math:
$510,000 - the asking price on our imaginary house
$500,000 - the price the buyer and seller settled on after negotiations
5% - the pre-negotiated commission (the actual % that agents charge varies)
$25,000 - the total commission paid by our pretend seller ($500,000 x 5%)
$0 - the amount paid by the buyer. woo!
Before you quit your job and get your real estate license, let's talk about how that $25,000 gets split up.
Most nice, friendly, honest agents split their commission equally with the agent representing the buyer. (The % offered to the buyer's agent is disclosed in a portion of the MLS that is visible to only real estate agents.) so,
$12,500 - seller's agent
$12,500 - buyer's agent
Then, the agent has to give a portion of her take to her office. Office "splits" vary greatly across the industry. My office split is around 64 : 36 meaning the office keeps 36% of any commission I earn. Some offices are 50 : 50 , some are 90 : 10. For this example, let's use mine for both the seller's and buyer's agents.
$4,500 - each office
$8,000 - each agent
This is our gross revenue and still isn't even factoring out taxes and expenses ranging from health insurance to gas to photographers and stagers.
Ok then. Will using the listing agent save me money?
I've noticed this trend a lot lately. Buyers hear about this $8,000 commission to the buyer's agent and want to somehow get their hands on it. (Hey, I get it. Buying is expensive.) So, they DIY it. They go around to open houses, schedule showings with each individual listing agent, and use the web to find the house they want. Then, they have the listing agent on the house they want write the offer for them.
Here's the problem: the listing agent just gets to keep the full commission in that case. It's called "double-ending" a deal and there is an ongoing debate if doing this is even ethical. The listing agent is contracted to the seller and has no fiduciary duty towards the buyer. This means they are looking out for the seller, not you. Sure, the amount of money you offer may be 2.5% of the sale price less intending to take what would be the buyer's agent's commission as a price reduction but it's almost always the home owner taking less money, not the listing agent. And if a home owner is willing to take less money, they'd be willing to regardless of if you have your own agent. Having your own agent, in fact, may get you an even lower sale price because that person is negotiating for you only.
Get a buyer's agent. Get a great one who knows more than you about the neighborhoods and schools and construction and who negotiates solely on your behalf. I mean, they are free to you after all!
*Please note that commission is negotiable between the seller and the listing agent. The numbers in this article are purely an example.
Caity Salvatore founded Nestment.com when she was sick of hearing her friends complain about their real estate agents. She is out to prove that great agents do exist, and works as a matchmaker between home buyers/sellers and real estate agents. She spends her days interviewing agents and bingeing on Dunkin Donuts.