You’re buying a home and you’re trying to figure out all of the costs associated with it. Already you’re overwhelmed with so much information. But alas, the one good news you’ve been waiting to hear has been delivered to you gracefully by your Realtor.
You don’t have to pay commission when you buy a home.
But wait — if you’re not paying for the services of your real estate agent… who is?
Let’s dig deep into this concept to figure out (a) if your Realtor is lying to you and (b) who really pays the real estate commission when you’re buying a home.
There is no such thing as a ‘standard’ commission. Any real estate agent using the word ‘standard’ when they talk about commission is either simplifying the concept of remuneration, or they don’t have a clear understanding about how real estate commissions work.
Using the word ‘typical’ might make more sense, but the truth is there is no prescribed mandatory commission rate. You can pay as little as 0% commission (yes, this is possible), or you can pay as much as 6% or even higher. There is no standard.
Real estate agents have typically charged around 5% for commission. When a seller signs a listing agreement to offer their property for sale, they’ll agree upon a total commission, as well as the portion of the commission that should be payable to what’s called a co-operating brokerage, also known as the buyer’s brokerage. While commission is negotiable, agents providing full service typically charge around 5%.
So let’s say you’re selling your property, and you’ve agreed to a 5% commission for the services your real estate agent is providing. How is that commission split between your listing agent and the buyer’s agent?
Usually, a buyer’s agent earns 2.5% which is half of the 5% commission you pay as the seller. In essence, the brokerage you list your property with keeps 2.5% of the total 5% commission, while the buyer’s brokerage is paid 2.5%. From these amounts, the brokerages deduct their brokerage fees and other costs prior to paying the real estate agent, who in turn pays their marketing costs, operating expenses, licensing fees and whatever else they spend money on… and taxes… before earning their share of the commission.
So if a seller is paying their brokerage 5% commission, and the buyer’s agent is being paid 2.5% out of that, isn’t it the seller who’s really paying all of the commission — meaning the buyer isn’t paying commission at all?
Not exactly. And this is where the misunderstanding of how commissions work begins.
When you think of it, it’s really quite simple to understand why a buyer effectively pays at least their brokerage’s share of the commission. Why? Because the 2.5% commission paid to the buyer’s brokerage is factored into the final selling price.
Let’s say a property is listed for $1 million dollars. A 5% commission would be $50,000. That would be split 2.5% to the listing brokerage and 2.5% to the buyer’s brokerage. That means each brokerage earns $25,000 for their respective services.
Sure, the seller will first receive $1 million dollars for the sale of their home. Then they deduct commissions, lawyer fees, their current mortgage balance and other costs prior to arriving at the net figure. Which means they’ve paid the 5% commission plus taxes.
But here’s the big question: who PAID $1 million dollars for the home to begin with?
The buyer, of course. So if the buyer paid the $1 million for the home, they’ve essentially paid at least for their own brokerage’s share of the commission. As an example, there are rare instances where buyers approach listing agents directly and try to negotiate the commission to see if they can save on the purchase price of a home by dealing directly with the seller’s agent. This doesn’t always work, but some have been able to negotiate not having to pay the buyer’s brokerage commission, giving the buyer the power to pay up to 2.5% less on the purchase price.
The most extreme example of a buyer not having to pay a commission is when a seller decides to sell their home on their own (FSBO — otherwise known as for sale by owner). These days, FSBO sellers can even pay a flat fee to a discount brokerage to list on the MLS. They may offer a 2.5% commission to a buyer’s brokerage, but let’s say a buyer foregoes working with an agent and tries to negotiate directly with the seller. Theoretically, a savvy buyer could shave up to 5% off the purchase price by dealing directly. (In fact, they may end up discounting the purchase price even more because statistically, homeowners who try to sell themselves aren’t really successful at attracting enough buyers to cause competition leading to a higher selling price. Ask me how I know and I’ll give you specific examples.)
There you have it — as a buyer, you are paying the commission when you buy a home. It’s factored into your purchase price. And while the seller is ultimately responsible for paying the commission out of their proceeds, you have to remember that you paid the sale price of the home first.
So… knowing that you, as a buyer, actually are paying the commission (albeit indirectly), how do you make sure what you’re paying as a purchase price for your home is worth it? And how do you hold your buyer’s agent accountable to the commission they earn?
The answer is by availing of their full service, market knowledge, and commitment to making sure your home buying needs are met. There’s no point having your buyer’s agent earn a full 2.5% commission if they’re not providing you with full service. This is what separates a real estate agent who is a true advisor versus an agent who’s just an order taker.
Your buyer’s agent should be able to give you insight into what makes a good purchase and what doesn’t. They should be able to properly navigate you through your buying journey — from start to finish. They should connect you with other professionals who will assist in your purchase such as mortgage brokers, insurance agents, home inspectors and lawyers just to name a few. They should fight to get you the best purchase price and terms, or if you’re in a multiple offer situation, guide you through the risks involved and help you get the home if you really want it.
A valuable buyer’s agent should have intimate knowledge about the real estate market. They should be available for you and patient enough to answer your questions, give you advice, and pretty much hold your hand throughout the entire transaction.
Since you are paying for the commission when buying a home, make sure your buyer’s agent earns it. Make them accountable to the services they promise to provide. And make sure you work intimately with them so you can achieve your goals of home ownership.