Understanding the Changes in How Buyer's Agents Get Paid

Understanding the Changes in How Buyer’s Agents Get Paid

The real estate industry is constantly evolving, and one significant area of change this August is how Buyer’s Agents are compensated. Recent shifts in industry practices and legal rulings are leading to changes in the agent compensation model. Whether you're a homebuyer or seller, it's essential to understand how these changes could impact your real estate transaction.

TRADITIONAL MODEL: SELLER PAYS THE AGENT COMPENSATION

When a seller lists their home, historically they agree to a compensation package to their real estate agent (the listing firm) as part of the listing agreement. This compensation is usually a percentage of the sale price of the home.

Sharing the Compensation: The listing firm, with the seller's agreement to allow for "cooperation and compensation," offers a portion of that compensation to buyer's agents as an incentive for bringing a buyer to the sale and executing a purchase agreement for the property.

This compensation split is predetermined in the listing contract, and historically was displayed in the MLS (Multiple Listing Service) as a "guaranteed" payment to the Buyer's Agent. Due to recent regulatory changes, the public display in the MLS is being prohibited as of August 17, 2024.

• As the buyer, under this model you generally don't pay the compensation directly out of pocket. As the buyer, you bring the funding for the home purchase to the closing via your mortgage and the required "cash to close" amount.  The compensation is then dispursed out of the proceeds of the sale either directly to the buyer's firm, or to their listing firm, who then pays the buyer's firm according to the listing contract.

ALTERNATE COMPENSATION MODELS MOVING FORWARD

As a result of the regulatory changes implemented this August, there will be several ways Buyer's Agents could receive compensation from a real estate sale.

1. Seller offers Buyer Agent Compensation: The seller commits in the listing agreement with their agent to offer compensation to the Buyer's Agent, similar to how it is done now. The main difference is that this cannot be communicated on the MLS.
2. Buyer Negotiates Agent Compensation: If a seller does not offer compensation up-front, the buyer can choose to make the compensation to their agent part of the offer to purchase the home. This may become a negotiation - the seller could accept it, reject it outright, submit a counter offer for a lower amount, or perhaps agree to pay it if the buyer agrees to raise the purchase price by the same amount. 
3. Buyer Negotiates a "Seller Concession": The buyer may negotiate a "seller concession" or "contribution to buyer's closing costs" amount as part of their offer.  The buyer can choose to use this amount to pay for any part of their closing costs, which could include loan fees, insurance premiums, down payment, or agent compensation for example.  
4. Buyer Pays Their Agent's Compensation:  When a buyer hires a Buyer's Agent to work directly for them and advocate on their behalf, they will sign a representation agreement and agree to compensation for their agent as part of that contract.  If a seller does not agree to contribute all or part of that agreed compensation, the buyer can choose to pay their agent out of pocket at the closing.  This would be dispersed by the title company and will increase the amount of money the buyer will need to bring to the closing table.
5. A Combination of the Above:  There will be many different scenarios that could be presented during the process of selecting a home and deciding to write an offer.  It's possible that agent compensation could be a combination of all of these scenarios.

Whether you're a buyer or a seller, it's important to understand these changes and how the decisions you make regarding compensation could impact you during your purchase or sale.  Having the right real estate agent by your side who will help you navigate these decisions is perhaps more important than ever.

Are you looking for expert advice on navigating these changes? Contact us today to learn how we can help you make the best decisions in your real estate journey. Whether you're buying or selling, we're here to provide the insights and support you need.

*Real Estate commissions and compensation are not set by law and are fully negotiable by agent and firm. Before signing a Buyer Agency Agreement or Listing Agreement, be sure you undersand and agree with the compensation model and services provided.