Why Does the Seller Pay the Buyer’s Agent?
Understand the long-standing real estate commission model where sellers pay the buyer's agent, and why this practice is shifting.
In real estate transactions, the seller traditionally compensates both their own agent and the buyer’s agent. This arrangement, where the seller covers the commission for both sides of the deal, has been a long-standing tradition in many U.S. markets. Understanding this system helps clarify a key financial aspect of buying and selling property. This structure evolved to facilitate smoother transactions and incentivize cooperation among real estate professionals.
Understanding the Standard Real Estate Commission Structure
The traditional real estate commission model involves a total commission percentage agreed upon between the seller and their listing agent, typically ranging from 5% to 6% of the property’s sale price. This total commission is paid to their respective brokerages, not directly to individual agents. For example, a 5% commission on a $400,000 home would be $20,000. This sum is split, with approximately half going to the listing agent’s brokerage and the other half to the buyer’s agent’s brokerage.
This practice emerged around the early 20th century, with the National Association of Real Estate Exchanges (now the National Association of Realtors, NAR) establishing a standardized commission structure. This “cooperative” commission system encouraged listing brokers to offer compensation to buyer brokers. This broadened the pool of potential buyers by incentivizing agents to show properties.
Sellers agreed to this arrangement because it streamlined the sales process and provided access to a wider market of buyers. By offering compensation to the buyer’s agent, sellers indirectly encouraged these agents to bring their clients to view the property. This led to quicker and potentially more profitable sales. This setup became embedded in the Multiple Listing Service (MLS) system, where offers of compensation to buyer agents were traditionally displayed.
The Role and Value of a Buyer’s Agent
A buyer’s agent is a licensed real estate professional dedicated to representing the buyer’s interests throughout the home-buying process. They act as guides, negotiators, and facilitators. Their services include helping buyers identify suitable properties, arranging tours, providing market insights, and offering access to the MLS database.
Once a buyer finds a desirable home, their agent assists in preparing and submitting offers. They leverage market knowledge to craft competitive terms and negotiate on the buyer’s behalf to secure the best possible price and terms. This includes addressing contingencies, scrutinizing property disclosures, coordinating inspections, and ensuring clear title checks.
Buyer’s agents also guide clients through the closing process, managing paperwork and coordinating with lenders and attorneys. Their expertise in navigating real estate laws and regulations helps ensure a smooth transaction. By providing these services, buyer’s agents facilitate sales, making the process more efficient and increasing the likelihood of a successful closing, which ultimately benefits the seller by securing a buyer.
Negotiating and Finalizing Commission Payments
The total commission rate is established through negotiation between the seller and their listing agent, formalized within the listing agreement. There are no federal or state laws mandating a fixed commission rate, but the national average historically ranged from 5% to 6% of the sale price. This rate is subject to negotiation based on local market conditions, agent experience, and the scope of services provided.
Commission payment, including the portion for the buyer’s agent, occurs at the closing of the sale. This amount is deducted from the sale proceeds, so the seller does not pay out-of-pocket at closing. The funds are disbursed by the escrow or settlement company to the respective brokerages of the listing and buyer’s agents.
After brokerages receive their share, they distribute a portion to their agents based on a pre-determined commission split. This split can vary significantly (e.g., 50/50, 60/40, or higher for experienced agents). While the seller traditionally pays the total commission, the specific split between the listing and buyer’s agents is agreed upon beforehand and communicated to the buyer’s agent’s brokerage as an offer of compensation.
Evolution in Real Estate Commission Practices
The real estate industry is experiencing shifts in commission practices, influenced by recent legal developments and settlements. Historically, seller-paid buyer agent commissions were a standard feature embedded in the Multiple Listing Service (MLS). However, new rules from the National Association of Realtors (NAR), effective August 17, 2024, have altered how commissions are structured and disclosed.
A key change prohibits listing agents from displaying offers of buyer agent compensation on NAR-affiliated MLS platforms. While sellers can still offer to pay a buyer’s agent’s commission, this information must now be communicated privately rather than through the MLS. This increases transparency and empowers buyers to directly negotiate compensation with their own agents.
Another change requires buyers to enter into a written agreement with their agent before touring properties, clearly outlining the agent’s compensation and payment responsibilities. This formalizes fee discussions that were less explicit in the past. These adjustments mean that while sellers are no longer automatically obligated to cover the buyer’s agent fees, they may still choose to do so as a strategic move to attract more offers or expand their buyer pool.