Last updated on September 3rd, 2024 at 03:01 pm

Last Updated on September 3, 2024 by

Real estate commissions have almost always been paid by the seller from the proceeds of the sale of their home. An entirely new process has just been implemented which calls into question just who pays the real estate agents compensation. The new rules require all buyers to sign an agreement with their agent before they can see a house. These new real estate rules were created to comply with the U.S. Justice Department rules of disclosure.

The new rules state that the buyer can negotiate the terms of the agreement with the Realtor such as who will pay the buyer side fees.  We say new rules because they have been mandated which is interesting. After all, real estate agents have always been willing to negotiate everything that was not unlawful.  

Regarding that representation agreement, your agent will express their desire for some provisions at the time this is discussed.  Your agent will go over every line of the agreement with you and should you wish to make changes they can be made at that time.  

The custom, home sellers paid commissions

For many decades, home sellers have paid commissions for both the buyer and seller.  Generally, the custom was that the two agents split the amount down the middle.  The funds are paid at closing to the real estate brokers on both sides.  

The brokers would then compensate their agents for the work in closing the deal. The home seller must agree to let the listing agent compensate the buyer’s agent.  They can not do so without your explicit approval of the contract.

The key point here and I will expand upon it is that individuals at the federal government have concluded that there is, was collusion on commissions.  This could not be further from the truth.  Everyone has heard about the 6% commission.  It would seem that if everyone was charging 6% that must be collusion. The fact is that not everyone charged 6% and it seems the national average is less than 6%.

Commissions are not now and never have been fixed

 I wonder if four gas stations at the same intersection selling gas at the same price per gallon qualify?  Of course not.  One gas station sets the pace and the others not wanting to lose business quickly modify their prices.   I came from the oil industry and can tell you that these gas station owners don’t talk about price.  

Real estate agents don’t meet in smoke-filled rooms to discuss how they are all going to charge 6%.  Further, it’s inconceivable to me that a seller believes that they can not discuss or negotiate the commission with a real estate agent about the percent or dollar amount or exchange of gifts.  

Just because a real estate agent is open to discussion about their commission does not mean they would agree to work for say 1%.  This element comes in the listing agreement where the selling agent states they need X% to cover not only their costs but the costs of the agent bringing the buyer.

Real estate agents are independent business owners

Buyers, sellers, and the general public often read articles that completely distort who real estate agents are. Some of the statements made in this blog such as “Real estate agents don’t meet in smoke-filled rooms” is what I believe. Having said that, it is possible that some do? Yes. Is it possible that a real estate agent will break the law or act in an unethical way? Yes.

Do the actions of a minute percentage of real estate agents mean that all other real estate agents are the same? No. I will read occasionally that someone had a bad experience with a real estate agent. Unfortunately, this happens for a wide variety of reasons. I do not want a single buyer or seller or prospective buyer or seller to judge all real estate agents by the actions of one.

If you ever have a serious problem with a real estate agent, contact their broker immediately. Work with the broker to solve the issue. Don’t just complain if you have not been part of the solution. Walk away satisfied.

real estate rules who pays commission

Sellers’ agents rarely bring buyers

It’s rare that a seller’s agent will bring home buyers. This does not discount the marketing efforts which help the process greatly.  I can tell you that if this were the case, and the situation reverted to a “dual agency”, most agents would discount their rate.  Every agent knows what they are worth and what they need to stay in business.  This is why they tell the buyers what they want.

If a buyer decides that they do not want to pay a stated commission amount, they can offer an alternative.  This is the point where the government says sellers are often intimidated by the agent.

Adults involved in a real estate transaction have obligations.  The seller is obligated to sign a contract and state what they want to achieve from a sale.  The seller must explain to the listing agent what they think is fair compensation.  The listing or seller’s agent is responsible for creating the documents necessary to list the property.  

The seller’s agent is also responsible for stating what the compensation should be.  At this point, the owner or seller can state that they want to negotiate or pay x.  The agent has options.  The agent can say thank you for the opportunity but I can not work for X or the agent can state they need a minimum of X or simply agree to the seller’s proposal.

The next pain point is the sales price

There is nothing difficult in what is discussed so far.  The next pain point is the sales price.  More often sellers believe they should sell the house for more than the market will bear.  This is when the seller starts to receive real value from the relationship.  

The agent will explain what a fair selling price should be to attract a potential buyer.  There is likely to be a gap between the owner’s estimated value and the real estate agent’s research.  Regardless of the difference in opinion, the agent is obligated by their code of conduct to either accept the starting price offered by the seller or explain to the seller that they can not work with them if their price is listed.  

The beauty of this relationship is that it is two-way.  Generally, when there is a difference in the home sale price, the agent will suggest that the owner price be the starting price and adjustments will be made in the future if the house receives little or no attention.  

Nearly all homes are sold by sellers’ agents bringing clients

Back to that commission.  By this point, the amount should have been negotiated and agreed upon.  The agent will argue that the commission includes both theirs and a commission for the buyers’ agent.  The reason that I have brought this up again is that it is the Achilles heel of the entire process.  This is where things can fall apart quickly if there is any misunderstanding of the decades-long convention.  

Nearly all homes are purchased by people who are brought to the sellers’ house by a seller’s agent.  If you as a seller expect your property to be sold, you need to agree that your listing agent can share the commission that has been negotiated.

Now to the seller and the selling agent.  A new agreement is required before as I mentioned above an agent can show a house to prospective clients.  This agreement specifically discusses offers of compensation.  The agreement indicates which party will pay the buyer’s agent commission.  Incidentally, if there is no sale there is no commission paid to any party unless the agreement is paying by the hour or some other method regardless of a successful outcome.  

A new contract between the buyer and buyer agent

As a buyer, you will go through each line of the contract so that you fully understand that you are responsible for buyer agent commission unless of course there are other ways that the total commission can be paid.  Before you walk away from your phone or a computer screen, take a breath.  Many sellers will agree to do what has been done for decades and pay both sides of the transaction.  

Buyer’s agents will be compensated by the seller or seller’s agent.  By the way, that’s a new twist.  Agents (brokers) have always been compensated at closing by the closing attorney or escrow agent.  Now it’s optional that the seller or buyer can compensate agents (broker) directly.

Most people will probably prefer the old system and let the escrow agent work out the details at closing and issue all of the checks.  

agreement real estate commissions

A real estate agent can’t show a house without an agreement

Buyers have choices as they always have had but now they are listed out in new documents.  As a buyer, you can ask your agent to show you any house you find or only houses that offer a buyer’s commission from the seller’s proceeds.  The real estate agent can not show you only houses that are offering agent commissions to the seller’s agent.  Remember, your agent must be compensated by you or the seller.  There are other options, the commissions may be split between sellers and buyers but this is not as likely to occur.

Remember, you have to explicitly tell your agent if you want them to show only homes where you would not have to pay a commission.   Some agents will produce yet another form asking you to if they are audited by the Multiple Listing Service or the Justice Department.  There is some extra work involved now for the selling agent as the MLS listing does not include any reference to agent fees.

 Your agent will have to call every agent with a listing to determine if they are offering a commission and how much.  There is a system in the works offered by a third party to take care of this element but it is not yet available. 

A good agent will refer solo buyers to an agent for representation

I mentioned “dual agents” above regarding the representation of both the buyer and seller.  You should know that these arrangements are not common for good reason. One agent can’t effectively (an opinion) represent both in negotiating price and some other items.  Since the agent has a fiduciary responsibility to both individuals there are no truly private conversations.  

This situation often occurs when buyers see a sign or call the listing agent directly and start talking about buying a home.  State law and real estate commissions regulate dual agencies to help avoid issues that could arise.

A good real estate agent will ask the buyer if they are represented.  If they are not, they may refer the buyers to an agent in their office.  This way both sides receive adequate and legal representation.  The listing broker usually gets involved in these situations.

The real estate business is truly a free market regardless of government meddling.  Buyers and sellers could represent themselves if they were selling cars or lawnmowers.  They can still work without an agent’s services but due to the many legal issues involved in the sale of real estate, it’s better to let the professionals work out the details.  

A good example are rules promulgated by HUD. There is a large variety of protected classes of people. Any comments about any of these protected classes by a seller can result in jail time. If a seller for example stated that they did not want to sell to X group they can be sued by the Justice Department directly. The government has created a minefield that real estate agents are trained to avoid.

For sale by owners lost 30% on their sales in 2023

The home’s sale price for example.  Did you know that people who sold their own homes in 2023 lost 30% over similar homes sold by real estate agents?  Did you also know that on average, the commissions paid to realtors consumed a small portion of the savings when compared to when people sold their own homes?

For sale by owner sellers by and large sold their homes for a lower price than the market conditions dictated.  The good news is that there are great real estate agents who can represent you as a seller and help you get the maximum dollars for your home.  They have a fiduciary duty to do so and guess what?  The higher the selling price, the higher their commission if it’s based upon a percent of the selling price.  The cooperative compensation worked without any outside interference.

One last point on contract law. The government so far does not have the power to tell a buyer or seller that they have to buy a house or not buy a house. The government does not have the power to tell you if you need a real estate agent or not. Basically, anything that a buyer or seller agrees to with their real estate agent in writing is legal. My caution here is that you need to read and understand what you are reading. Don’t sign a document if you are not comfortable with it. Seek legal help if necessary.

To summarize:

SELLERS

  • You can negotiate anything with your experienced agent.  If it’s legal why not?  You may or may not get everything you want but then your agent may be in the same position.  It will work out
  • Sign the agreement that permits your real estate agent and broker list your property and to to pay a real estate commission to the seller’s agent/broker.  This is very important but it’s your call.
  • Complete the property disclosure document so your agent can upload it with the listing.  
  • Follow the advice of your agent regarding showings, cleaning your house, etc.
  • Allow the system to work.  Your home may not sell the next day.  Days on the market may be longer in some areas.  Have patience, and ask questions of your agent.  Your house will sell.
  • Price is not the only reason houses do not sell fast.  Do not be in a hurry to drop your price against the recommendation of your real estate agent.  Qualified buyers are out there.

BUYERS

* You can negotiate anything with your experienced agent.  Come to your agent with a list of what you need.  Ask them to send a link to a tool on this site to use for this process.

  • Sign the representation contract. This does not require you to buy a property.
  • Be sure you are pre-qualified to buy.  The process is fairly quick.  Your real estate agent may be reluctant to start showing houses until they know what you are qualified to buy
  • Some sellers do not want people to see their homes unless they have a pre-qualification
  • If you do not want to pay a commission to your agent, ask them to show only houses that pay a commission.  You must start the conversation, your agent can not just do it.

* Your agent will take you through the entire process upfront.  This will include referrals for lenders, insurance brokers, home inspectors, repair people, and more.

Ask your agent to explain why they are worth the commission

Your real estate agent is a wealth of knowledge.  If you have any doubt about their value to you ask them to provide documentation about how they plan to find your next house or sell your existing house.  FYI, if you are going to buy a house in another area after yours is sold, ask your agent to make a referral.  Agents have a very large network and your agent can help you find a home in any real estate market.

The National Association of Realtors has created a simple one-page explanation of the new rules.  I encourage all buyers to read that statement.

Note:

It’s important that you understand the information above. While it is believed to be accurate it should be verified. You can find more information at the National Association of Realtors site here.

If you have questions at any point, ask your agent. Your relationship should be one of mutual respect and trust. If this is not the case, consider dissolving your relationship. You must be able to communicate your concerns without believing you are being coerced in any way. I truly believe that we are where are because people did not communicate.

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