Sep. 6, 2010 - Understanding Real Estate Commissions
If you are buying a home vs. selling a home, you likely have some questions as to:
1) Do I need an agent?
2) How much does "my" agent get paid and for what?
3) How does "my" agent get paid, and who pays "my" agent?
Let's take a look at the chart I made, below.
Generally speaking, there are three phases for a home buyer.
#1 - The period of time and process to making an offer and that offer being accepted which I am simply calling "to offer accepted" in the chart.
#2 - The Due Diligence Period which is the time you need to DO most things, and the period within which you have a legal "out" to cancel the escrow. Generally this is a 3 day to 21 day period of time, depending on the terms of your particular contract. MOST of the "outs" are in the first 5 to 10 days for most real estate contracts.
#3 - The period from "legal outs phase closed" to Close of Escrow when the house becomes your house.
In the boxes below those phases, I offer a few examples of fairly common scenarios.
- In the first example in the chart, a majority of the commission (1.5%) is "earned" during the Due Diligence period. For most buyers of resale homes this would be the most common scenario.
The buyer has a VERY limited period of time to FIND something that would cause them to NOT want to buy THIS house, cancel the contract, and get their Earnest Money returned. So from the buyer's perspective, managing that fast moving and short phase WELL, is likely the WHY they need or want an agent, and where the agent earns most of what they are paid IF the agent does that phase well and especially if the buyer needs to cancel during that phase.
Of course if you cancel, the agent does not get paid at all...until you eventually buy a house and close escrow. But doing that phase well, so that you are sure you DON'T want to or need to cancel, is still of considerable value in MOST real estate transactions.
Doing that due diligence period WELL from the seller's perspective has a very different definition than doing it WELL from the buyer's perspective. THAT IS WHY you need an agent who believes that YOU, the buyer, are the one paying him/her. Who ACTUALLY pays it is a huge debate. But DO NOT hire an agent who answers "the seller pays me". The ONLY correct answer, from the buyer's perspective, is "you pay me via the sold price, and the amount is determined by the seller before the home is listed for sale, and paid on the seller side of the closing statement." No agent can tell you "how much the seller is offering", until you pick a house. Every house has a different seller, and each seller can name a different amount.
- In the 2nd Example I am showing a fairly common New Construction scenario. The commission in the mls would say 3%/1.5% meaning 3% on the first $100,000 ($3,000) plus 1.5% on the balance of the purchase price (not including home upgrades added after the initial price is accepted). This example reflects the seller's perspective more than the buyer's perspective with very little paid to "find the house and do the due diligence". Most of the monies paid are to help the buyer in choosing upgrades and get through the LONG period of time (often 3 to 6 months) from the time the offer is accepted, until the home is built and escrow is closed.
- The 3rd and last example in my chart (though there could be any number of other examples, depending on your particular needs) reflects most people who need more assistance with choosing the right house in the first place. It also reflects a buyer who may make several offers before getting a house, or who cancels during the due diligence phase on one or more homes, before buying the home they close on.
What you "need" should be determined with the assistance of a real estate professional, given there are too many things that will happen, and you may not know in advance of hiring an agent what those things may be. They are different for different people. You can determine which of these areas is MOST important to YOU. You may not want an agent to help you choose a house the same as most people don't want the saleslady to help them pick a dress :) You may want the agent to give you lots of advice on what to offer for the house you choose, or you may just want the agent to offer the amount you tell them. You may want the agent to do a lot more things during the due diligence phase than they are "obligated" to do. You may need more help in the last phase if you are "barely" qualified to get a mortgage.
There are about a dozen different scenarios. A good first step is for you to weight these three by the % important to you on a scale of 0-100%.
Typical Buyer needs:
Phase 1 - 40%, Phase 2 - 40%, Phase 3 - 20%.
Typical Seller wants Buyer to have:
Phase 1 - 10%, Phase 2 - 10%, Phase 3 - 80%
The seller does not what your agent to tell you that HiS/Her house is not the right house for you to buy, so would not want you to spend much time on Phase 1.
The Seller would not want your agent to help you determine that you should exercise a legal out or spend a lot of time figuring out things that may be wrong with his house during that legal out phase, so would not want you to do Phase 2 "correctly".
The Seller would want the agent for the buyer to spend most of their efforts on making sure you close escrow on HIS/HER house. So what a seller pays for and what you hire an agent to do, are not the same.
As the buyer, you want your agent to spend the MOST effort and most diligent effort on Phases 1 and 2.
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