Who Pays Broker Fees When Buying a House?

Understanding who is responsible for real estate broker fees is important for anyone entering the housing market. While traditional practices have historically shaped expectations, recent developments have introduced new considerations regarding how these fees are handled during a transaction. This clarity helps buyers prepare financially and understand the various ways agent compensation is structured.

Understanding Real Estate Commissions

Real estate commissions compensate agents and their brokerages for professional services during a home sale. These fees are typically calculated as a percentage of the property’s final sale price. National averages for total real estate commissions have recently been around 5.32% to 5.44% of the home’s sale price.

This total amount usually covers the services of both the seller’s real estate agent, known as the listing agent, and the buyer’s real estate agent. The commission percentage is generally agreed upon between the seller and their listing agent when the property is first put on the market. From this total commission, a portion is then offered to the brokerage representing the buyer’s agent. This split incentivizes the buyer’s agent to bring qualified buyers to the property. While negotiable, the commission compensates agents for their market expertise, marketing efforts, negotiation skills, and transaction paperwork management.

The Standard Commission Payment Flow

Historically, sellers were primarily responsible for paying the entire real estate commission. This practice meant the seller’s proceeds covered fees for both their own agent and the buyer’s agent, with the amount deducted from seller funds at closing.

The total commission is typically transferred from the seller’s funds to the listing brokerage. The listing brokerage then splits a pre-agreed portion of that commission with the buyer’s agent’s brokerage. Individual agents receive their share from their respective brokerages, often based on their agreed-upon commission split. This structure meant buyers traditionally did not directly pay their agent, as compensation was integrated into the sale price and handled by the seller at closing.

However, recent changes, particularly those effective in August 2024 from a significant settlement, have altered this dynamic. While sellers may still choose to offer compensation to a buyer’s agent, buyers are now primarily responsible for compensating their own agent. This means that while the flow of funds at closing might appear similar, the contractual obligation and negotiation around buyer agent compensation have shifted. Commissions are included on the buyer’s Closing Disclosure form, regardless of who pays them, to ensure transparency.

Scenarios Where Buyers May Directly Pay

While sellers often covered agent commissions, buyers may directly pay in several less common situations. These scenarios often arise from specific agreements or unique transaction circumstances.

Buyer-Broker Agreements

One common instance is through a buyer-broker agreement, a contract between a buyer and their agent outlining services and compensation. Some agreements state that if the commission offered by the seller is insufficient, the buyer will pay the difference. This ensures the buyer’s agent is compensated adequately. The buyer’s obligation to pay the difference is typically specified in this contractual agreement.

For Sale By Owner (FSBO) Properties

Another situation occurs with “For Sale By Owner” (FSBO) properties. In FSBO transactions, the seller does not use a listing agent and may not offer a commission to the buyer’s agent. If a buyer uses an agent to purchase an FSBO home and the seller declines to pay the buyer’s agent’s commission, the buyer may agree to pay it themselves. The buyer could pay the agent’s fee out of pocket, or negotiate with the seller to include the commission amount in the home’s sales price, effectively rolling it into their mortgage.

Flat-Fee or Limited-Service Brokerages

Buyers utilizing flat-fee or limited-service brokerages may directly pay for specific services. Unlike traditional percentage-based commissions, these brokerages charge a fixed, upfront fee for certain services, regardless of the home’s sale price. This model can appeal to buyers seeking more control over costs or who only require assistance with particular aspects of the home-buying process. The buyer pays this fixed amount directly to their agent or brokerage.

Commission Rebates

Commission rebates offer a unique scenario where a portion of the agent’s commission is returned to the buyer. This is not a direct payment to the agent, but rather a reduction in the buyer’s overall cost. Commission rebates are legal in most states and are generally not considered taxable income by the IRS, as they are viewed as a reduction in the home’s purchase price or an adjustment to its cost basis. For example, a rebate of $3,000 on a $300,000 home would reduce the buyer’s cost basis to $297,000, impacting future capital gains calculations.