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How does a Real Estate Agent get paid on the Buyer’s side?

How does a buyer’s agent get paid? 

We often get asked why a real estate agent can claim that representation for a buyer is at no cost to the buyer.  To be clear, we agents do get paid, we don’t work for free any more than anyone else can, but it’s not via an out of pocket expense to the buyer.

The reasoning behind the question lies in the idea that if a seller has lower expenses in a sale, then the house can be had for less money, and therefore whatever savings exist will of course be passed along to the buyer.

This logic of course is not really logic, and there is nothing to say that a seller will only take x amount of profit in a sale and then any and all savings go to a buyer.  In fact, the seller would like to pocket any savings every bit as much as the buyer would.  So in reality, it’s mostly just wishful thinking on a buyer’s part that they can share in an agent’s commission if they cut the agent out.  There isn’t a seller that I know of who doesn’t want to sell their home for as much as they can get for it.

Let’s start by rejecting the premise that a seller will willingly give up any and all savings they realize in a real estate transaction just so the buyer can have them.

In fact, let’s start from a completely different premise, which is that a seller will pay good money to hire an agent who is well versed in marketing and negotiation in order to represent them and to maximize the sales price and net proceeds the seller sees at closing.  (If you want statistics that show that even after paying an agent a seller generally nets more by using an agent, just click here for those statistics.  That is the focus of another article.)

So a seller decides to hire an agent.  They may hire someone they know, someone they used in the past, or they may research, interview, and hire someone they don’t know at all.  Regardless of how they pick their agent, the next step is the same across the board; a written employment document is created. 

That written agreement, known to us as an Exclusive Right to Sell, or maybe an Exclusive Agency Agreement (which are different from each other), is generally known outside of real estate circles as a listing agreement.   That listing agreement sets the compensation to be paid by the seller to the listing agency in writing.  This is done long before the property ever actually goes on the market.  The relevant point here is that compensation is set in writing ahead of time.  In Arizona, part of that written agreement further spells out what the listing broker will offer a buyer’s broker for bringing a buyer to the table. 

You read that right.  The listing agency pays the buyer’s agency; the seller does not pay the buyer’s agent directly.  

The money went somewhere…

What happens if the listing agent brings the buyer themselves? 

Technically they are entitled to the entire commission agreed to in writing.   The seller does not necessarily realize any savings. 

Let’s be clear about this though, all commissions are negotiable and many listing agents will offer what is called a variable commission.  What this means is that they will give the seller a break if the same agent both brings the property to market and brings the buyer to the negotiating table. Again, we are going beyond the scope of this topic, but variable commissions do exist. 

What we are saying here is that the seller has already agreed to pay a set commission long before the buyer ever found out a given house is for sale.  The listing agent has agreed to pay some of that commission to a buyer’s agent who produces a ready, willing, and able buyer who comes to a meeting of the minds with the seller. 

If a buyer bypasses a buyer’s agent and tries to go directly to the listing agent to buy the home, the commission does not simply go away creating a savings for everyone to share.  The listing agent simply gets paid for doing the work required for the buyer’s side of the transaction as well as the work required for the sellers side. 

Either way, the compensation for work done on the buyer’s side will be earned by somebody. 

From a buyer’s perspective, a buyer can choose to have an agent represent them and have a fiduciary relationship with a professional looking out for their best interests on their side, or they can simply try to deal with the listing agent, someone who is contractually bound to represent the best interests of the seller.  Either way, the seller is bound by the written agreement to compensate the listing agent a set amount regardless.   That number won’t necessarily change, and the price of the house won’t necessarily change either.   In fact, homes do tend to sell at or close to the appraised value most of the time when an agent is involved.

So the bottom line for a buyer is this: the end result should be the same regardless of representation or not.  The seller will pay the listing agent a set amount of money and really doesn’t care if there is a second agent involved.  A listing agent generally relies on other agents to not only bring the buyer but to do the work involved in getting the deal closed (and please believe me when I say that doing the due diligence on a real estate purchase and keeping the buyers’ loan on track is the harder of the two jobs).  This system works.

And the buyer doesn’t have to pay anything extra to have a buyer’s agent.

Do you have questions?  Please reach out to us today!  You can call right now at 480 385 9107 or email us at vince@agentswithoptions.com and one of us will get back to you right away!

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