But now there’s been a paradigm shift, with the recognition that since buyers are actually paying the commission they have a right to know what it is.
Doherty says she focused on her total closing costs, but she knew the commission percentages the agents would receive from the proceeds of the sale.
Buyer’s agent Marian Marsten Rosaaen of Compass real estate brokerage “spent about two hours with me going over all the possible paperwork involved with buying a home, explaining how commissions worked and what would happen if I found a place that she happened to be listing,” says Doherty, a congressional staffer. “She was completely transparent, so I understood from the beginning how the commissions worked.”
Although most of these buyers hired an agent to help them navigate their real estate transaction, there are still some misconceptions about how agents serve clients, how they get paid and how buyers can make sure they’re hiring a reputable one.
“Some buyers go to the listing agent of a home they like, thinking maybe they’ll have a better chance at winning a bidding war if they negotiate directly,” says Holly Worthington, a principal broker with Compass real estate brokerage in Chevy Chase, Md. “But that generally doesn’t work because most listing agents want buyers represented, especially during a bidding war.”
When a buyer initially consults with a buyer’s agent, the agent should discuss how representation works for buyers and sellers, the process of making an offer and market conditions, says Worthington. Some real estate agents work exclusively as buyer’s agents and never work for sellers to avoid any conflicts of interest.
While contracts vary from one jurisdiction to the next, buyers typically sign an agreement with their buyer’s agent outlining the length of time they will work together, how the contract can be cancelled and how the agent will be paid.
Buyers have sometimes been told that the services of their agent are “free” because commissions for both the listing agent and the buyer’s agent are paid as a deduction from the seller’s proceeds from the home sale. But since the buyers are the ones making the purchase, they are actually the ones paying the commissions.
How buyer’s agents get paid
Sellers typically negotiate the commission with their listing agent and decide how much of a commission to offer a buyer’s agent based on their agent’s recommendation about market practices. Since the commissions are deducted from the proceeds of the sale, it makes sense that sellers need to know the sum of the agent payments to estimate their personal profit or loss on the sale.
Buyers don’t know how much the listing agent is paid and until recently, they typically didn’t know how much their own agent would be paid, either.
A 2020 lawsuit settled between the U.S. Department of Justice and the NAR means that the amount of a buyer’s agent commission can be made publicly available on multiple listing services sites. The details of whether this will be mandatory or optional are still being worked out, but some brokerages such as Redfin and multiple listing services such as the Northwest Multiple Listing Service in Seattle have been publishing buyer’s agent commissions for more than a year.
“In the Seattle market you can already see buyer agent commissions, so recently when I was selling my house there, I reviewed them and saw that most people were offering 3 percent, but some were offering 2 1/2 percent,” says Daryl Fairweather, chief economist for Redfin real estate brokerage who now lives in Milwaukee. “The market right now favors sellers, so I offered 2 1/2 percent, too. Eventually, when the market shifts back to favor buyers again, we may see buyer’s agent commissions increase again.”
Fairweather anticipates the greater transparency around commissions could lead to lower commissions for real estate agents. The average commission sellers offer to buyer’s agents has declined in recent years, according to a recent commission survey by Redfin.
Commissions vary and can be negotiated by the seller, but in many markets, commissions of 2½ to 3 percent for each agent are common. Real estate agent commissions in many other countries such as Australia, Britain and Singapore are far lower than in the United States, typically close to 2 percent total, according to research by the Economist.
In the United States, the average commission offered to buyer’s agents in 2020 was 2.7 percent, according to Redfin. In 2012, the share of sellers offering 3 percent or more to buyer’s agents was 59.7 percent. That share dropped to 44.8 percent in 2020. In the Washington region, the average buyer’s agent commission offered was 2.6 percent in 2020. In that market, the decline in the share of sellers offering 3 percent was sharp, dropping from 72.9 percent in 2012 to just 18.2 percent in 2020.
“The commission comes out of the proceeds of the sale but in practice many sellers increase the price of the house to cover the commissions,” Fairweather says. “It can be confusing to buyers, which is why it’s better to be transparent about agent fees.”
In theory, if buyer’s agent commissions drop further, it could trigger more agent requests to have the buyer pay the difference, Fairweather says.
“It’s very important for buyers to read the agreement with their agent and ask if there are any circumstances when they would be expected to pay the commission directly,” says Worthington. “It’s not typical at all, but in some cases a buyer’s agent could write into the agreement that they must be paid 3 percent of the home price. If they’re offered 2 1/2 percent, in theory a buyer would have to pay the difference but that is extremely rare.”
However, Fairweather says, buyers can simply hire another agent if one requests direct payment in the initial agreement, which makes it less likely that a buyer’s agent will make that demand.
Some jurisdictions, including D.C., Maryland and Virginia, allow buyer’s agents to provide a rebate of some of their commission to buyers, says Stephen Brobeck, a senior fellow with the Consumer Federation of America in Washington, D.C.
“Buyers should discuss their agent’s compensation when they hire them and ask about a rebate, especially in areas like D.C. where the purchase prices are high and commissions are therefore large,” says Brobeck. “Asking about compensation can also be a good way find out how transparent an agent will be with you throughout the transaction.”
Finding the right buyer’s agent
Typical ways to find a buyer’s agent are to ask for recommendations from friends and family and to look for agents who sell homes in the neighborhood and price range you prefer. Buyers can also research agents online, but a recent study by the Consumer Federation of America found that state real estate commissions are generally inadequate at providing consumer-friendly information.
“Our study found that 21 of the 51 websites we reviewed, which included all 50 states and the District of Columbia, made no mention at all of consumers, sellers or buyers,” says Brobeck. “We checked these websites to see if they had information that consumers need before picking an agent such as whether they have a current license, have been disciplined or have complaints against them and an explanation of when an agent must represent the interests of their clients.”
The report ranked Maryland’s real estate commission “good,” which means it provides a consumer page with a broad range of information including agent roles and representation. D.C.’s and Virginia’s sites were rated “fair,” which means there is some recognition of consumers, but that information is incomplete or difficult to find.
In addition to checking your state real estate commission for information, Brobeck suggests researching agent profiles on Zillow, particularly for detailed descriptions of buyer experiences with the agent.
In any market, buyers are advised to interview several agents, especially those who have experience in the price range and market where they hope to buy. In a tight housing market, Fairweather says, it’s especially important to hire an agent who knows what it takes to win a bidding war and has their finger on the pulse of the market.
“One of the most important questions to ask a buyer’s agent in this market with limited inventory is, ‘How will you help me find a home?’ because agents need to be very energetic to find listings right now,” says Worthington. “They need to call listing agents in neighborhoods where you want to live, write to the neighbors to see if they want to sell and network with other agents.”
The competitive housing market requires an agent who can help you write a strong offer, says Worthington.
“You can ask an agent about their track record with winning in a competitive market,” she says.
Brobeck suggests asking an agent if they will work with you all the time or will delegate the work to team members or assistants. Many buyer’s agents are part of a team of agents, which Fairweather says may be an advantage in a fast-paced market because someone on the team is always available to show houses or answer questions.
“The housing market is so competitive now that you need to pick an agent with a track record of being available at all times to show you a house and help you make an offer,” says Fairweather.
Even before you look for a buyer’s agent, Brobeck recommends searching online for the kind of house you want to buy so you can get a sense of price ranges in your area. Next, contact a mortgage lender and get preapproved for a loan before reaching out to buyer’s agents.
“If you’re prepared with an idea of what you want and have your financing in place, you’re more likely to get the interest and attention you need from a buyer’s agent,” Brobeck says. “A big benefit of a buyer’s agent is the hand-holding you get and the explanation of what’s happening throughout the transaction.”