I’m looking to buy a house in the next few months and I read your post about Dual agency, the devil’s breath. I’m obviously going to look for a good buyer’s agent, but I wanted to ask you a silly question. How and when does my agent get paid? I’d hate to have any surprises here.
Excited in Erie
“No surprises” is a pretty good way to approach this business. I wish more people, especially agents, felt this way. Hassles, delays and surprises are the bane of any real estate deal so keep those standards high my friend.
As far as how agents get paid, there are a couple of methods, but only two that are common. Just like our friends in the legal business, real estate agents have the same basic options for charging their clients—it’s just that lawyers are sooooo much better at it than real estate agents.
The two types of compensation most often found today are contingency commissions and flat fee. There are a number of exceptions and variations on this and if you want to argue and get all nit picky, you should probably stop reading and definitely never email me again. Sorry…I haven’t eaten in a few hours. Let me go take care of that first…
OK—I’m back. I was answering your question about how agents get paid, right? See? I remember. Contingency and flat fee…
Let’s break them down, shall we?
Contingency or “6%” model:
By far the most common method of paying a buyer’s agent is to have them get a percentage of the sale price at closing. In other words, you don’t actually have to write them a check—they get their money from the seller’s agent. Confused? Yeah so are most people the first time they see it, but hang in there.
Imagine a pie. It doesn’t matter what flavor, just any round pie will do. Let’s say the pie is the total price of the house you’re about to buy. Unless you are really really good at what you do, you’re probably going to get a loan to buy that house.
At closing, your bank will send a check or wire the money for your loan. For the sake of simplicity, let’s say you are buying a $200,000 pie. You’re probably thinking the seller gets all that deliciousness, but that’s not true; especially if agents are involved.
On the settlement statement at closing, there is a line for the real estate broker(s) to get paid. If the commission is the typical 6%, you will see an outlay for $12,000 to the agent or agents.
If you buy from the listing agent (like an idiot) then that broker keeps all the $12k. If you use your own buyer’s agent (like a genius) then they split it—usually $6k each, but not always. That’s between the agents and it’s set up way before you get involved.
Again, all of these can vary, but this is a typical version of a contingency commission.
The upside of this method is that you won’t have to out of pocket any pie. Also, if the deal falls through for ANY reason at all—no pie for nobody. Real estate is an all or nothing deal most of the time so agents tend to get a little bitchy when things get delayed or fall through.
I’ll reserve my feelings on the pitfalls for a buyer here, but only because I promised you a breakdown of both methods.
Here’s the other option.
Flat fee or Fee for services:
Once again, like the legal profession, brokers can choose to be compensated another way. Flat fee or “fee for services” is exactly what it sounds like. The broker performs a service for which he or she collects a flat fee. The size of the fee is quoted up front and can be collected before or after the service is performed.
Brokers and agents often do a variety of services for fees such as staging a home, help with pricing, specific marketing plans, negotiating a contract and even help with closing a transaction.
Let’s say you have a house you and your relatives inherited from your weird rich uncle. One of your relatives wants to buy it from the rest of you. This is a great time to call a real estate broker to help put the deal together.
The broker can not only help you establish a fair price, but can even help you put the paperwork together describing all the details. Then, in this case, once all is finished, the estate will pay the broker their fee for the services they performed.
Banks sometimes will contact a broker when a loan is heading to foreclosure. The bank will request a BPO (Broker Price Opinion) for which they agree to pay a fee. If the broker isn’t too busy, the deal is struck with an email and once the broker provides the report, the bank pays the fee.
There are some brokers, like me for instance, who ONLY work on a fee basis. I almost never sign on for a percentage at closing. My business is built on a menu of services for which clients will pay me a pre-set amount. I’ll address all the many reasons why you should like this model in a separate post, but for now I will say that my clients love this arrangement.
Here are the highlights of why many people like this model.
First, there is absolutely no chance my advice or opinions will be biased by the fact that I will only get paid once the deal closes. (For an in-depth discussion of this phenomenon, see my post “Where have all the good agents gone?”
Second, the clients can now select exactly where they do and don’t need my help.
Let’s say a seller is an interior designer, an outside sales person or an attorney; there is no way I can add enough value to the staging, showing or paperwork to justify 6% of their home sale with my expertise in this case. In other words, they don’t need any help in those areas so why should they pay for them.
You see, the 6% model is fine for lots of people–I’m just not one of them.
Sellers who use that model have either no time or no interest in performing any of the functions necessary to sell their home. Those sellers should use a full service broker.
At this stage of my career, I have no particular interest in showing homes, hosting open houses, taking pictures, staging homes and pretty much anything that an ambitious home owner can do themselves.
So you see–my clients and I are of the same opinion and that’s why this model works for us.
I have a friend who has lots of money and lots of time, but he routinely hires professional contractors to do his landscaping and mowing, fix his car, work on his electrical system and so on. He can do it–he’s very smart–he’s just not interested in it. So he pays full price to have others do it for him.
My clients pay me for a variety of services, but the important factor here is that I choose what services to offer and at what price and they choose what they need from me. There is no “I’m going to charge you 6% if/when this is over no matter what services I performed or didn’t perform” arrangements in my world.
I’m not knocking the “6%” model–I’m just saying it’s not for me or my clients.
If you want to see an awesome example of this type of practice, check out my real estate site OhioMLSFlatFee.com And yes…I might be a little biased.
Keep the questions coming and I’ll do my best to answer them all as quickly as possible. Send me a message here any time. I read and reply to every email so don’t be afraid to ask me anything.
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