Making Sense of Real Estate: Part 2
How Do Buyers Agents Get Paid?
Have you ever wondered how real estate agents representing buyers are compensated? Or perhaps, you are in the market (or thinking about buying) and you haven’t chosen to be represented by a real estate agent because you are unsure how the process works. In this post I am going to address an often misunderstood topic in real estate transactions: how a buyers agent gets paid.
First, let’s address the basic concepts of compensation. Real estate agent’s may be compensated through any legal exchange of goods and services. Theoretically, this creates a wide range of potential forms of compensation. In practice, however, typical transactions will consist of money for services rendered.
I am certain most readers will understand without explanation why this is the most common exchange. Still, I find an explanation proves helpful in understanding compensation for real estate related services.
Money pays the bills. While it is feasible to compensate an agent with a pair of jet skis, jet skis don’t go very far in meeting ones financial obligations. It’s important to remember that the money an agent makes is used for putting food on their tables, paying their own mortgage and even covering expenses they incurred while helping their clients during the transaction. Still, it’s important for the consumer to understand that compensating an agent may go beyond an exchange of money.
Similarly, most real estate agents are not in business alone. Whether an agent is a Licensed Broker or a Licensed Salesperson, most have previously committed portions to a broker or support staff. For example, a Licensed Salesperson will generally agree to compensate their brokerage firm a portion of every transaction in exchange for a variety of services, such as marketing, administrative assistants or office space. A salesperson could not, therefore, accept a good or service that would not meet that commitment.
In a buyer-client relationship, the compensation is generally paid by the seller. It seems counter intuitive that anyone other than the buyer would pay the buyer’s agent and it may be a source of confusion or hesitancy for some buyers. The short explanation is that when a seller signs a listing contract they agree to pay a specific amount for the selling agents services. This compensation usually includes an offer for any buyer’s agent who brings a ready, able and willing client and works the transaction to closing. For example, a seller may agree to pay 6.5% of the sale to their agent and 3.25% may be designated for a buyer’s agent. While the types and amounts of compensation vary, the process is generally the same.
There are a few more points worth mentioning. It’s not uncommon for a buyer to be faced with a situation where the home they would like to buy does not include an offer of compensation to the buyer’s agent, or the compensation offered may be very low. This can happen with any transaction, but it is more likely to occur when a homeowner is selling their own home, or when the purchase price is low. In order to address this possible eventuality, I suggest including it in your initial conversations with a real estate agent. Also, addressing this issue in the beginning and expressing your desire that your agent be properly compensated will set the buyer-client relationship on a good foundation.
Questions? Comments? Let me know!