For most people, real estate transactions are significant investments that require the assistance of experienced professionals. According to the National Association of REALTORS® Profile of Home Buyers and Sellers, 86% of buyers recently purchased their home through a real estate agent or broker, while only 6% purchased directly through the previous owner.
It’s no doubt that Realtors® play a valuable role in most transactions in the U.S, yet many home buyers and sellers are unaware of how their compensation works. Let’s take a look at the facts and details surrounding how real estate agents are compensated in a home sale.
Facts About Agent Compensation in a Home Sale
1. Compensation is Negotiable
One of the first things to understand about real estate compensation is that it is always negotiable. The seller of a property decides what fee they are willing to pay for their broker's services, and how much the listing agent should offer to the buyer's agent who brings a successful buyer to close the transaction. This flexibility empowers consumers to have open discussions with their brokers to ensure they understand and agree upon how they will be compensated.
2. Compensation Cannot Be Included in a Mortgage
It's important to note that currently, compensation cannot be included in your mortgage. Most mortgage lenders do not allow agent compensation to be added to home loans. Listing agents offering compensation to the buyer’s agent by including it into the pricing of the property for sale is a vital aspect of the home buying process, particularly for first-time and low- and middle-income home buyers.
If buyers were required to pay real estate compensation out-of-pocket on top of their closing costs, it could make homeownership even more challenging to achieve, especially for those with limited financial resources. Listing agents (representing sellers) factor buyer’s agent compensation into the pricing of homes to increase the number of buyers who can afford to make an offer.
3. Market Forces Determine Compensation Rates
Real estate commissions are not set in stone but rather fluctuate based on where the property is located and market conditions at a given time. According to RealTrends, who have been tracking real estate commissions since 1991, commission rates are currently lower than they were in the 1990s. This fluctuation underscores that the market decides compensation rates.
4. Competition Among Brokers Benefits Consumers
Local Multiple Listing Service (MLS) broker marketplaces provide opportunities for both small and large brokerages to compete, offering different service and pricing models. This variety allows consumers to choose from numerous compensation models, considering their individual needs and preferences. When making what is likely the most significant investment in your lifetime, having such choices can be highly beneficial.
5. The U.S. Real Estate Market is a Global Standard
The U.S. real estate market model is widely regarded as one of the most consumer-friendly in the world. In many other countries, buyers often navigate complex markets that require working with multiple brokerages to access fragmented inventory. This can make the process more time-consuming, impersonal, and costly. In contrast, the U.S. model simplifies the experience, provides greater certainty of success for both buyers and sellers, and ensures the accuracy of housing inventory, all while keeping costs comparable or lower than those in other countries.
In addition to simplifying the home shopping experience, the compensation model used in the United States benefits consumers in several ways. It involves listing agents offering compensation to buyer agents, who pay for access to the MLS in order to find opportunities for their clients. As a result, sellers have access to the largest possible pool of potential buyers, and buyers have access to a wide range of housing options in one place. This open and interconnected marketplace ensures that both buyers and sellers have a broader selection to choose from, ultimately benefiting everyone involved in the transaction.
Frequently Asked Questions about Agent Compensation
Is there a "set compensation rate" real estate brokers charge consumers?
No, there is no set compensation rate. Compensation is determined by the market, and it is always negotiable. The local MLS broker marketplace model and options like a success fee create unprecedented competition among real estate brokers, allowing consumers to choose how and whom they want to pay.
Why not require buyers to pay compensation directly to their broker instead of the listing broker paying the buyer broker?
The industry is headed in this direction, but requiring buyers to pay compensation directly may be a significant financial burden, particularly for first-time and low- and middle-income home buyers. This could make homeownership even more challenging for many, potentially leading to a lack of professional guidance during the complex home-buying process.
How does the U.S. model compare to other international broker marketplaces?
The U.S. approach is considered the most consumer-centric model. It simplifies the real estate experience, provides guidelines for accurate housing inventory, and keeps costs competitive or lower than those in other countries, making it easier for consumers to navigate the process.
Why should real estate professionals make the money they do in compensation when so much information is available online?
Finding a home is just the start of what a real estate agent does; they offer essential guidance in navigating the legal, financial, and community aspects of a purchase. They also maintain the information that online housing portals rely on. The average annual income for a real estate agent is relatively modest, and the majority are small businesses, many of which are run by women entrepreneurs.
How does the current approach to compensation benefit small businesses?
Local real estate marketplaces level the playing field among brokerages, allowing small businesses to compete with larger ones. This creates unprecedented competition among brokers, providing different service and pricing models for consumers.