In real estate, when selling a home or home buying, there's often a misunderstood and confusing part of the buying process. Who pays for the buyer's agent? How are real estate agents paid, and where do real estate agent commissions come from?
Most real estate agents fall into two categories, the EXCLUSIVE BUYER AGENT or the seller's (listing) agent. As the names suggest, seller's agents work exclusively with sellers, while Exclusive Buyer Agents work exclusively with buyers.
When a seller hires an agent, they do so knowing that a percentage of the sales price will go towards them as a commission for their hard work. This commission, usually 4-6%, will be split between both agents. This raises the question, do buyers pay anything for their agent since it's the sellers that will be paying them out of the proceeds of the sale? Is there a buyer agent commission?
Read on to learn how commissions work in real estate and who pays for the buyer's agent.
How are Buyer's Agents Paid?
To understand how buyer's agents are paid you have to first understand how the traditional fee structure for REAL ESTATE AGENTS works. In essence, the real estate commission is built into the total purchase price of a home. Before the signing of an agreement with the seller and listing agent, they will determine what percentage this commission will be.
Another thing to understand is that agents are not paid directly by their clients. Instead, the brokerage they work for pays them. Once the seller's agent is paid through their brokerage the buyer's brokerage is then sent a check. It essentially works like this:
- The seller pays the listing brokerage
- The listing brokerage pays their listing agent
- The listing brokerage pays the buyer's brokerage
- The buyer's brokerage pays their buyer's agent commission fee (the buyer's agent fee)
In effect, the seller is paying your BUYER'S AGENT to represent you. The buyer agency compensation or commission, is split, always divided up at closing when it's deducted from the sale price. Buyer's don't have any say in how much the commission is and usually don't have to worry about personally compensating their agent.
Understanding “Procuring Cause”
If you're in the market to buy, then you need to understand how “procuring cause” works. This is a rather complex process that determines which buyer's agent gets paid the commission if you work with more than one agent. Only the agent who writes the offer that leads to the home sale gets paid.
If you hire one agent to show you different homes and share their knowledge, but then hire another one to write the offer then that first agent gets nothing for their hard work. To protect against this, most buyer's agents will ask that you sign an EXCLUSIVE AGREEMENT WITH THEM. This binds you to the agent, meaning that they will be paid the commission for any sale, even if another agent writes the offer letter.
However, procuring cause can get a little complicated as each state's realtor association has its own guidelines for establishing procuring cause. It can sometimes happen that the agent who wrote the offer letter gets the commission, despite you having signed an exclusive agreement with an earlier agent.
You can risk getting yourself into trouble if you purchase a home through a different agent than the one you first signed an agreement with. The best way to avoid this is to be upfront with every agent you meet about who represents you. Take some time to interview different Exclusive Buyers Agents before finding the one that's right for you.
Dual Agency Concerns
There are also "dual agency" situations in which one agent works as both the listing agent and buyer's agent. In this scenario, the agent receives the entire commission as there is no one else to share it with.
As a buyer, this is not a situation you want to be in as in most cases the dual agent will owe most of their loyalty to the sellers. Because of this, dual agency is illegal in some states. Others simply require that agents disclose their status to both buyers and sellers.
Best Practices for Working with an Exclusive Buyer Agent
Although the seller will be responsible for compensating your agent, you don't want to end up in a procuring cause dispute. To avoid this and get the most out of your EXCLUSIVE BUYER AGENT, follow these best practices:
- Always make it clear to other agents that you have another agent representing you.
- Sign an exclusive buyer-broker agreement and work only through that agent.
- Sign an agency disclosure agreement so you'll know exactly how your agent will operate.
- Don't call a listing agent directly for information, leave that to your agent.
- Be careful of what you say in front of a listing agent. They may use any information they can against you in negotiations.
- Follow open house protocol if unattended by your agent. Hand your agent's business card to the listing agent. Also, sign the guest's book with your agent's name next to yours.