Does the Buyer Pay the Realtor Commission?

The question of who pays real estate agent commissions, particularly the buyer’s agent, often leads to confusion for those navigating the housing market. This article aims to clarify the typical payment mechanisms in real estate transactions, shedding light on the traditional structure and emerging scenarios where buyers may directly compensate their agents. Understanding these dynamics is important for both buyers and sellers as they engage in property transactions.

Traditional Real Estate Commission Structure

Historically, the home seller covered the entire real estate commission from the proceeds of the home sale. This commission is typically a percentage of the final sale price, often ranging from 5% to 6% of the home’s value. For instance, on a $400,000 home, a 5% commission would amount to $20,000. This total commission is then divided between the listing agent, who represents the seller, and the buyer’s agent.

The split between the listing agent and the buyer’s agent has commonly been around 50/50. While the seller directly pays this amount at closing, the cost is generally factored into the home’s listing price. In this way, the buyer indirectly contributes to the commission through the overall purchase price of the property. The commission amount is not an extra charge; rather, it is disbursed from the seller’s proceeds.

This traditional model ensured that buyers typically did not need to bring additional funds to closing for their agent’s compensation. The system was embedded in the Multiple Listing Service (MLS) rules, where listing agents would offer cooperative compensation to buyer agents. This practice simplified the payment process for buyers, making professional representation accessible without an upfront out-of-pocket expense.

The Role of the Buyer’s Agent

A buyer’s agent is a licensed real estate professional dedicated to representing the home buyer throughout the property acquisition process. Their primary responsibility involves prioritizing the buyer’s best interests, which includes a fiduciary duty encompassing confidentiality, loyalty, and full disclosure.

Buyer’s agents offer a wide array of services designed to guide buyers from the initial search through to closing, such as:
Understanding the buyer’s specific needs and budgetary constraints to identify suitable properties.
Leveraging MLS access to find homes that match these criteria.
Arranging and accompanying buyers on property showings.
Assisting with market analysis to determine an appropriate offer price.
Preparing and drafting purchase offers, ensuring necessary contingencies are included to protect the buyer’s interests.
Negotiating with the seller’s agent to secure the most favorable terms and price for the buyer.
Coordinating inspections, appraisals, and other due diligence.
Guiding buyers through the closing process, ensuring all paperwork is handled correctly.

Circumstances Where Buyers Directly Compensate Agents

While the traditional model largely saw sellers covering buyer agent commissions, several scenarios now exist where buyers may directly compensate their agents. This shift reflects evolving industry practices and increased transparency regarding compensation.

Buyer-Broker Agreements

One common scenario involves Buyer-Broker Agreements, which are legally binding contracts between a buyer and their agent. These agreements outline the agent’s services, responsibilities, and how they will be compensated. Historically, if the commission offered by the seller was less than the agreed-upon amount, the buyer was responsible for paying the difference. For example, if an agreement specifies a 3% commission for the buyer’s agent, but the seller only offers 2%, the buyer would be contractually obligated to pay the remaining 1% directly. Many states now mandate a written buyer agency agreement before an agent can show a client a home.

Flat Fees or Hourly Rates

Another evolving compensation model involves agents charging flat fees or hourly rates directly to the buyer. Instead of a percentage of the sale price, an agent might charge a fixed amount for their services. Some agents may offer an hourly rate for specific services, such as property tours or contract review, allowing buyers to customize the level of representation they need.

For Sale By Owner (FSBO) Transactions

In “For Sale By Owner” (FSBO) transactions, where a seller chooses to market their home without a listing agent, the traditional commission structure may not apply. FSBO sellers might not offer a commission to a buyer’s agent, or they may offer a reduced rate. In such cases, if a buyer wishes to have professional representation, they may need to agree to pay their agent directly. Buyers might negotiate for the seller to provide a concession at closing to help cover these fees, or they may pay the agent out-of-pocket, typically ranging from 2% to 3% of the purchase price.

Impact of Recent Industry Changes

A significant legal settlement by the National Association of Realtors (NAR), effective August 17, 2024, is fundamentally reshaping how buyer agents are compensated. Under the new rules, listing brokers are prohibited from offering compensation to buyer agents via the MLS. This means buyers are now directly responsible for negotiating and paying their agent’s commission, unless otherwise negotiated with the seller. While sellers can still offer concessions to help buyers cover these costs, such offers must be made outside the MLS and negotiated directly. This shift aims to increase transparency and may require buyers to fund their agent’s fees upfront or as part of their closing costs.