Wondering who pays the buyers’ agent’s commission when you’re buying your home? In this article, we look at the traditional way real estate agents have been paid.
When someone wants to sell their home using a real estate agent, they sign a written contract with their agent. This contract includes how much total commissions the seller is responsible for paying from the proceeds of the sale. (More on that in a minute). Commissions have always been negotiable, but typically are between 5% and 6% of the sale price. Sometimes sellers will go a non traditional route and sell by owner, or they will use a discount brokerage that may only charge 3%-4%. However, the majority of homes are sold using a licensed real estate agent.
How commission is split up between agents
Typically, agents work under a real estate broker who is licensed to have agents working under them. The broker is responsible for helping their agents with legal issues, as well as liability insurance. Commissions are split between the brokerage office for both the buyers’ and the sellers’ agents.
When you complete the listing agreement with your agent, the agreement will specify how much commission each brokerage receives. Often, the listing brokerage receives a larger percentage of this commission. It’s not unusual for listing agent’s brokerage to collect 3%-4%. The buyer’s brokerage, (also called the selling brokerage because they brought the client) receives 2% – 2 ½% commission.
When escrow closes, the escrow company (or title company or lawyer) pays the agents’ brokerages based upon the agreed upon commission split. From these proceeds, the agent’s broker pays insurance costs, office fees, office profit margin and lastly – your agent. How much each agent receives, varies with the brokerage. However, it’s not uncommon for brokerage offices to keep 20-25% of your agent’s commission.
Who really pays your agent’s commission?
Who pays your agent’s commission? The buyer or the seller? Well, that depends upon how you look at the transaction. 
The sellers’ perspective
From the seller’s perspective, commissions are paid based on the total purchase price of their home. So, if the commission is 6% of a $300,000 home, the escrow company keeps $18,000 of the proceeds of the sale to pay the different real estate brokerages. From the sellers’ perspective they’re receiving less than the total purchase price, and so, it would look like they’re paying both the buyers’ and sellers’ commission. This is how most people understand real estate commissions to work.
But let’s look at it from a buyer’s perspective.
The buyers’ perspective
Many times, buyer’s agents don’t communicate how they’re being paid. At best, they may say, “There’s zero cost to you.” Or, “Don’t worry about it. You don’t have to pay me anything.” What you may not have realized was that part of the money you are paying for your new home, isn’t going to the seller. Instead, it’s paying each agent’s commission, including yours.
That’s good for the buyer, right? After all, there’s nothing out of pocket for the buyer. Maybe.
In reality, part of the money you’re borrowing to buy your new home, isn’t buying your house at all. It’s going toward each agents’ commission. So if you’re borrowing $300,000 and the agents receive 6%, $18,000 of what you’re borrowing and paying interest on, is paying the agents.
The need for transparency in commissions
In the past, what the buyers’ agent was receiving in commission was not readily transparent to the public. (That’s about to change.) We noted in an article last year by Reader’s Digest that your agent might be getting a kickback that wasn’t disclosed. This created several ethical problems and a class action lawsuit against the National Association of Realtors®.
In the past, when a seller’s agent had a difficult time selling a home, they might offer special incentives to the buyers’ agents to sell their home. For example, a seller might offer an extra 1% bonus for a full price offer within the first 15 days of the listing. While the buyer’s agent knew their was extra money in it for the agent, the buyers would not. The other ethical dilemma occurred when buyers’ agents would look at how much commission a seller was willing to pay (viewable only to the agent in the MLS).
If your agent knew that one seller would pay them 2% while another listing was offering 4% that might influence your agent. Or if there was an additional, but undisclosed bonus, your agent might be influenced to encourage you to look at homes with a higher profit for the agent. They might not even tell you about the home with the lower commission, even if it was possibly a better house for your family. This lack of transparency, created opportunities for abuse by agents on both the listing and buying side of the transaction.
What’s changing in the new commission structure?
Beginning in August 2024, commissions and bonuses to buyers’ agents will no longer be pre-determined. Instead, buyers must either agree to pay their agents, and/or negotiate with the seller to pay their agent’s commission. This does two things. First, it eliminates hidden financial incentives that might influence a buyer’s agent. Buyers and sellers will ultimately have a say in how much commission their agents will receive. Secondly, buyers’ agents will be required to sign a “Buyer’s Representation Agreement” with their buyers. In the agreement, buyers and their agents will be able to negotiate how the agent will be paid, and how much.
In some cases, buyers may agree to pay their agent out of pocket for representation. First time home buyers with limited funds, may need their agent to be paid from the seller’s proceeds. In this scenario, buyers’ agents will be required to request payment directly from the seller as part of their clients purchase offer. Either way, buyers should know that they’re seeing every house that meets their criteria.
With the modern Internet some sellers have complained that buyer’s agents didn’t do as much work as they used to. Their thinking is that agents should not be paid the same percentages as they were 20 years ago. If a buyer finds their house on the Internet, why should they be forced to pay the buyer’s agent the traditional commission? Realistically, those that are not willing to do so may find their houses take longer to sell, especially homes in the first time home buyer price ranges.
Of course these changes may add to what is already a daunting task of selling or buying a home but this should provide much more transparency.
Conclusion
Understanding how your agent’s commission is paid is important. You should understand that even if an agents in the past has told you, “Don’t worry about it. It won’t cost you anything”, that’s not totally accurate. With the new rules being required for real estate listings coming in August, there will be even more transparency. That can’t help but be a good thing. In our next article, we’ll discuss other changes happening to real estate commissions so be sure to check back.