Buyers Can Finally Negotiate What Their Agent Will Be Paid - And It’s Good For Everyone
You may have heard marketing lines like “Buyer’s Agents work for free!” Or “I will help you at no cost!” Well it is a little more complicated than that. While it has certainly been true that buyers don’t typically pay their agent’s commission directly, a real estate agent who works with a buyer is still entitled to a commission whether the buyer has awareness of it or not.
As of 2024, it is now a requirement to sign a Buyer Brokerage Service Agreement that defines the relationship between the Real Estate Agent and the home buyer and details everything from the length of relationship to commission and everything in between. To see a sample of the form, click here.
The Compensation Game: Who Gets What?
The breakdown of how everyone gets paid in a real estate transaction is a multifaceted process. It starts with the homeowner and their listing agreement, involves the listing agent who markets and sells the property, extends to the offered share for the buyer's agent, and ends with commission splits between brokerages and potential deductions. It's crucial for all parties involved to have a clear understanding of these dynamics to ensure transparency and fairness throughout the transaction.
For instance, on a $500,000 home with a 6% commission, the listing agent's brokerage would receive $30,000. To incentivize cooperation from buyer's agents (also known as selling agents), the listing brokerage typically offers a portion of their commission. This offered share is known as the cooperating broker's commission and is accessible to the selling brokerage. However, this specific percentage has historically not been visible to the buyers themselves. Once the home closes, commissions are dispersed to brokerages by escrow.
Each agent works under a brokerage or real estate company, and the commission is split between the brokerage and the individual agent at a negotiated rate. The exact split can vary but, for instance, if the selling agent's brokerage and agent have agreed on a 60/40 split, the agent would receive 60% of the offered share of the commission. In our earlier example of a home that sold for $500,000 where the listing agent offered 2.5% to the cooperating agent, the selling brokerage would receive $12,500 which they would then give 60% to the individual selling agent which would amount to $7,500.
It's important to note that many brokerages also have various expenses, such as transaction fees, insurance costs, technology fees, and more. These expenses are typically deducted from the commission before it's distributed to the agent. Therefore, the final commission received by the agent may be lower than the initially offered share. (And don’t forget about reserving a percentage for taxes!)
Buyer Agency Agreements: Past vs. Present
For years, working with a buyer's agent often resembled a handshake agreement. It was based on trust, hoping it would lead to a successful transaction. However, this approach had its shortcomings. Buyers had limited insight into how their agent got paid, which could raise concerns.
Enter Buyer Agency Agreements, a significant shift reshaping real estate transactions. They offer clear advantages to both buyers and agents, increasing commitment and transparency. Buyer Agency Agreements now clearly state the terms of the agent's compensation, bringing more clarity to the process.
One of the core principles embedded within these agreements is the buyer's commitment to ensuring a fair commission, even if the seller offers less. If the seller or the listing agent offers a commission lower than what is agreed upon in the Buyer Brokerage Agreement, the buyer must step in to make up the difference. This commitment underscores the agent's dedication to their clients' best interests.
The Changing Landscape: Implications of New Buyer Brokerage Agreements & The Lawsuit that Sparked Change
The real estate industry is no stranger to change, and in recent years, one significant transformation has been the emergence of new Buyer Brokerage Agreements. These agreements have evolved in response to a lawsuit that prompted changes across the industry, ushering in a new era of transparency and commitment.
The catalyst for this transformation can be traced back to a lawsuit filed by the U.S. Department of Justice (DOJ) in November 2020. The DOJ alleged that some National Association of Realtors (NAR) rules were illegal restraints on REALTOR competition, specifically concerning transparency regarding buyer broker commissions. While the lawsuit has gone through multiple phases, including a settlement and withdrawal of the settlement, it's likely that transparency regarding payment of commissions will become the nationwide rule.
Requirement for Buyer Brokerage Agreements
One key outcome of this legal challenge is the now-widespread requirement for buyers and buyer's agents to sign Buyer Brokerage Agreements. These agreements establish a formal and legal relationship between the buyer and their agent. They outline critical aspects of the buyer-agent relationship, including the scope of services, duration of the agreement, and, most notably, the selling agent's compensation. In the past, this commission was often not visible to buyers, leading to a lack of awareness. However, with the advent of these agreements, buyers can now negotiate in writing the exact percentage of the commission that their agent is entitled to receive from the sale.
Addressing Concerns and Industry Transformation
With these changes, some concerns have emerged regarding potential shifts in seller offers and the overall transformation of the real estate industry. Buyers may wonder if sellers will gradually offer lower commissions, potentially requiring buyers to consider a buyer agent commission as part of their down payment fund. While these concerns are valid, the industry has not shown clear indications of such a transformation at this time.
Navigating the Real Estate Journey
In the dynamic world of real estate, staying informed is key. Understanding these intricacies empowers you to make informed decisions, navigate contracts with confidence, and ensure that your interests are well-protected.
The lawsuit serves as a catalyst for increased transparency and accountability within the real estate industry, ultimately benefiting consumers. It's a journey where knowledge is your greatest asset, and your trusted real estate agent is your invaluable guide.
If you have any questions or are interested in listing your home or finding your new home with me, don’t hesitate to reach out!
