Many people don't really understand how using a Realtor to buy a home works. There is a lot of confusion and misinformation about how a Buyers Realtor gets paid. This post explains exactly how it works and why you really should use a Realtor when buying a home.
First of all, the seller is the one who pays the Buyers Agents commission. Here's how it works. The listing agent will negotiate with the Sellers and agree on a percentage of the homes sale price as compensation. For illustration purposes, let's use 6%. So the listing agent has an agreement with the Sellers for them to pay 6% in commission when the house sells. This is not all for the listing agent, however - this 6% pays both the listing agent and the buyers agents commission. Now when the listing agent lists the property, they state how much compensation the Buyers Agent receives in the listing. The norm in this market for a traditional sale is 2.7%. Banks usually pay 3% to the Buyers Agent. With short sales and some traditional sales, the payout will only be 2.5%. So the Seller is the one paying the Buyers Agents commission - the Buyer is not paying any commission in the greater majority of these transactions. There is one major exception.
The exception is when Buyers and their Agents agree, in their written Contract to Represent, that the Buyer will pay the agents commission or the difference between what the Seller pays and a specific number. Why would a Buyer agree to this when Sellers pay the commission? Consider this scenario: A Realtor is helping a Buyer buy an investment property in Minneapolis for $20,000-$40,000. Make no mistake, there are many homes in Minneapolis and St. Paul in this price range or even lower. By the way, if this sounds appealing to you, there are also other factors to consider - City required repairs can cost as much or more than you paid for the house - and they are very stringent and many times require you to use a licensed contractor.
The Realtor has taken the buyer through 10 to 20 homes in Minneapolis before they found the right one. They have spent, say 40 hours with the client, driving them around, using up gas and their time. The Realtor also provides their expertise in dealing with the city of Minneapolis, the required repairs for the house, etc. If the purchase price is $20,000 and the Buyers agent Payout is 3%, then the Realtors commission would be $600. But wait - Realtors also have to pay a portion to their brokerage - usually anywhere from 10%-50%. So that $600 is now $300-$550 depending on the brokerage split. Then the Realtor has to pay taxes on top of that. It doesn't sound like it would be worth it to anyone to do this, now does it? Especially since the investor will probably cash flow the home from month 1.
So in a scenario like this, the Realtor will establish a base commission and the investor/buyer will have to agree to it in a written contract before they write up an offer on any homes. Again, this is usually used only when the buyer is buying a home under $100,000 and not all agents use it.
So what does it cost a Buyer to use a Realtor to buy a home? There is one fee from the Realtor's brokerage. It's called a Broker Commission, Broker Admin Fee, Broker Fee or a few other names. It covers the brokers investment in the transaction, which is basically the payroll for the administrative staff that go through and process the completed purchase agreements, etc. The fee is usually between $350-$425 and is paid at closing, either on the settlement statement or separately to the agent.
That is all a Buyer is going to pay for using a Buyers Agent. If you chose not to use a Buyers Agent and had a lawyer draw up your contract, you would most likely pay more than that $350-$425 you would pay to your agent's brokerage.
Other benefits? Your Realtor will have access to more information than you will. A big portion of the listings and information on the internet are outdated, sold, expired, canceled or just wrong. You could spend hours looking at homes, find a few that you love and then find out they sold months ago. Your Realtor has access to the most up to date information, as well as other information that doesn't show up in the public view of listings. To start the search, your Realtor can get your criteria from you, that is your minimum amount of bedrooms, baths, garage stalls, sq footage, yard space, cities, price range, whether or not you are looking for a foreclosure or traditional sale, etc and set you up on an auto search that will search for homes matching your criteria and email you new listings as they come on.
Another benefit - Your Realtor will know the market. Besides personal experience, they have tools to look up comparable active properties, pending sale properties, and recently sold properties. They can then create a CMA, or Comparative Market Analysis, which will give you a good idea of what to offer on the property. They also have experience dealing with Banks, Lenders and other agents. They know the process and are an advocate for you when dealing with Sellers and their agents. They write up the offer with you, present it and negotiate until you come to an agreement. If there is an issue after the acceptance of the purchase agreement, such as something that you found in the inspection and want repaired before closing, they negotiate that with the Sellers Agent and make sure it is taken care of. They can guide you through the process, recommend lenders, inspectors, title companies, handymen to do work after the sale, etc and make sure you are comfortable with every step. They provide their expertise and explain the different aspects of the purchase agreement, such as the different contingencies like the Inspection Contingency or the 10 day Right of Rescission after receipt of condominium documents, etc.
Remember, this is their full time job ( in most cases). They provide valuable expertise, advice, contacts and negotiation skills in a major transaction for you. Having an agent gives you an edge and you are handicapping yourself if you choose to go without one.
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