How Can a Buyer Pay for Their Own Realtor Representation?

May 27th, 2024

money

How can a buyer pay for their own realtor representation? I wrote an article discussing the lawsuits against the National Association of Realtors (NAR) and some of the largest real estate firms. By now everyone has likely heard about all these lawsuits. The litigation accused brokerages of inflating sales commissions and of monopolistic practices.

Homeowners could see a reduction in the cost of selling their homes now that the NAR agreed to resolve the case.

But could this mean an increase in cost for buyers instead?

The settlement calls for the NAR to get rid of long standing rules on commissions. And the Department of Justice is looking to make it easier for buyers to negotiate fees with their own real estate agents or even use no agents at all.

The move could mean major shifts in how buyers and sellers pay their real estate agents. It could also mean a shift in how much buyers and sellers pay their agents.

Seller closing credits from sellers to buyers may help. Sellers can offer a seller credit to a buyer, to help pay the buyer’s closing costs. This would free up cash to pay for the buyer to instead use to pay the commission to their own buyer real estate agent.

Sellers will look to build that amount into the sales price.

But this is exactly what they did when the seller paid both the listing agent commission and the buyer agent commission. In the end, is there any change at all? Maybe, if buyers can negotiate a lower commission with their buyer agent than the seller would have.

I think this is the point of the Department of Justice. When a cost is detached from the person using the service, the fees are not negotiated as much. When a cost is paid directly by the person using the service, they are going to sharpen their pencil, look at the value-add, and shop around. Historically, since the seller paid for the buyer’s real estate agent, shopping around and tough questions did not happen.

It is important to realize there is a limit on how much a seller can credit to a buyer’s closing costs. I wrote this article that discusses the limits of seller credits on various loan types.

Let me give an example of how a listing agent and buyer agent might have been compensated in the past:

  • $600,000 home sales price
  • Seller pays 3% of the sales price to their own listing agent
  • Seller agrees to pay 3% to the buyer agent
  • Seller pays 6% total to realtors, or $36,000
  • The seller considers the $36,000 when looking at the bottom line in the sale of their home.
  • $600,000 sales price
  • -$300,000 hypothetical mortgage balance
  • -$36,000 for 6% in commissions to both real estate agents
  • =$264,000 net proceeds to seller

And here is an example of how a listing agent and buyer agent might be compensated going forward:

  • $600,000 home sales price
  • Seller pays 3% of the sales price to their own listing agent
  • Seller pays 0% to the buyer agent
  • Seller pays 3% to the buyer in a credit to their closing costs (allowing the buyer to free up cash to pay their own realtor)
  • Seller pays 6% total, or $36,000
  • The seller considers the $36,000 when looking at the bottom line in the sale of their home.
  • $600,000 sales price
  • -$300,000 hypothetical mortgage balance
  • -$18,000 for 3% in commissions to their own listing agent
  • -$18,000 to pay for the credit towards the buyer’s closing costs
  • =$264,000 net proceeds to seller

This represents the same net proceeds to the seller, but it is just cutting up the costs in a different way.

But here is an example of how a listing agent and buyer agent might be compensated going forward if the buyer/s shop around and ask a lot of tough questions about the fee for service relationship they are getting into with a buyer real estate agent:

  • $582,000 home sales price
  • Seller pays 3% of the sales price to their own listing agent
  • Seller pays 0% to the buyer agent
  • Seller pays 0% to the buyer in a credit to their closing costs
  • Seller pays 3% total, or $18,000
  • Buyer pays their buyer real estate agent directly out of their own pocket
  • The seller considers the $18,000 when looking at the bottom line in the sale of their home.
  • $600,000 sales price
  • -$300,000 hypothetical mortgage balance
  • -$18,000 for 3% in commissions to their own listing agent
  • =$264,000 net proceeds to seller

In this case, if the buyer finds what they believe to be acceptable realtor representation, as an example for a $5,000 flat fee, then maybe the buyer feels they can afford to pay for that on their own without any help from the seller in the form of a credit to the buyer’s closing costs.

But will a realtor work for $5,000 when they would normally have received $18,000 in this instance?

That answer will all shake out in time. But let’s assume in this case the market settles on 2% as a more appropriate buyer agent. Maybe the buyer does ask the seller to help pay for their closings costs to free up cash to cover their buyer real estate agent commission. Again, the seller would just consider this in their bottom line:

  • $594,000 home sales price
  • Seller pays 3% of the sales price to their own listing agent, or $18,000
  • Seller pays 0% to the buyer agent
  • Seller pays 2% to the buyer in a credit to their closing costs, or $12,000
  • Seller pays 5% total, or $30,000
  • $594,000 sales price
  • -$300,000 hypothetical mortgage balance
  • -$30,000 for 3% in commissions to their own listing agent, and 2% to buyer’s closing costs
  • =$264,000 net proceeds to seller

You see what is happening here?! The bottom line to the seller stays the same each time. It is up to the buyer to decide what to pay their buyer real estate agent, and how to pay for it.

The market is still figuring out answers as to how this will take shape going forward. But I thought it would be helpful to show some illustrations of how I think this might look.

Conclusion

Do you still have questions about how Realtors should get compensated? Contact me to discuss your questions. Click here to schedule a call, or you can email me directly.

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Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.

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