How Real Estate Commissions Work
- The Listing Agent & Seller agree to a gross commission which is split between the seller’s agent and buyer’s agent
- Upon completion, the commissions are deducted from the seller’s statement of adjustments (profit) and the notary sends the funds to the real estate brokerage.
- Real estate agents work for a brokerage, and all commissions are received by the brokerage.
- The broker then pays the agent.
As a buyer, your expectation should be that when purchasing a property and having a real estate agent represent you in your purchase that you should not have to pay any real estate commission.
Listing Contract & Agent Fees
When the home is first listed, the seller and realtor enter in to a listing agreement in which they agree to a gross commission, listing agent commission, and buyer agent commission.
The listing contract and the contract of purchase and sale (agreement to purchase) are two entirely separate documents. The listing contract is solely signed by the seller, seller’s agent, and the seller’s brokerage, and the buyer has no signing authority or disclosure on the listing contract or gross commission. Whereas, the contract of purchase and sale is an agreement on the sale of the property with regards to price, dates, and terms. At the time of writing a contract to purchase, the commissions are already pre-determined.
Buyer Agency Agreements & Discount Brokerages
Most buyers that are working with a realtor will be under a buyer’s agency contract, in which they agree that they have a realtor working solely for them and in their best interests. In this agreement, there is a stipulation that the buyer’s agent will receive a commission from the seller based on the industry expectation, and if the seller is offering less than the standard that the buyer will have to make up the difference.
If the seller chooses representation by a discount brokerage, this discount brokerage typically offers a significantly lower co-operating commission than the industry expectation. In this situation, should a buyer choose to write an offer on that property, they will have to compensate their agent’s brokerage for the agreed upon fee less the amount paid by the seller. (unless waived by the buyer’s agent)
Because the expectation of most buyers is that they do not have to pay a commission, this can be a reason why discount broker represented houses consistently stay on the market for longer than average days on market. While sellers may be paying lesser commissions on the front end, discount brokers typically sell homes for less money due to a lower amount of exposure, marketing budget, and unwillingness of buyer’s to pay commissions.
Who Pays The Real Estate Agent When Purchasing?
If we’re discussing things technically… On closing day, the buyer will receive a statement of adjustments that shows all of the debits and credits that result in an amount of funds required to close. The reality is that the commission is never a part of the buyer’s statement of adjustments, and therefore is NOT paid by the buyer. The gross commission split between the seller and buyer’s agents is always on the seller’s statement of adjustments at closing, and deducted from their proceeds of the sale price.
While some other “thrifty” sites may tell you that the buyer pays the commission as a part of the sale price, the fact of the matter is that at the completion day on the buyer’s statement of adjustments there is no mention of a commission. Ultimately, if you’re buying a home then you’re probably off the hook for paying any commission directly to your realtor.
It can be argued that the buyer INDIRECTLY pays the commission as a part of the purchase price, and that the seller factors in the commission to the final selling price that they are willing to accept. In which case you’re probably wondering, can I negotiate the commission?
Technically you can’t, as the commission is pre-determined by the seller, seller’s agent and their brokerage. You do not directly pay the commission so a discount would not affect you as a buyer. However, some buyers are curious about the following options when it comes to skimping on commission that they believe they “indirectly” pay:
- Buying Through the Listing Agent
- Asking for a “Kickback” on Commission
- Buying with a Realtor
Buying Through the Listing Agent: Limited Dual Agency
The act of one agent representing both the seller and the buyer (aka dual agency) has, for the most part, been banned. In 2018, the Real Estate Council passed a rule that stated that agents are not allowed to perform dual agency unless all of the following requirements are met at the discretion & approval of the council:
- The property is in a remote location.
- That location is under-served by real estate professionals.
- It would be impracticable (i.e. not possible) for the parties to have different real estate professionals.
Ultimately, the council has made it clear that dual agency is banned – and that there is no way of getting around dual agency in a market like Vancouver where we clearly do not meet any of the 3 exceptions.
Related Article: Dual Agency Banned in Most Cases in BC
In the case of dual agency, the agent representing both parties gets to keep the entire commission because they are doing more work by representing both sides. One of the reasons for banning dual agency is that, on top of the fact that each party involved has different goals, that collecting a double commission is a conflict of interest that skews some agent’s judgement in terms of what is truly best for their client.
Buying a Home Without a Realtor: What to Keep in Mind
It is a new law by the Real Estate Council of BC that every buyer that wants to remain unrepresented be fully aware of exactly what it means to be unrepresented. As a buyer looking to purchase a home without a realtor, you will need to sign a document acknowledging that you understand that any agent you come in to contact with as an unrepresented buyer has no duty to you as a client, therefore they have:
- No Loyalty to You
- No Duty to Avoid Conflict of Interest
- No Requirement to Fully Disclose Information
- No Duty to Protect Your Confidentiality
You should also keep in mind the risks of buying a home without a realtor:
There’s a lot of legal information that you may not know. Buying a home isn’t as easy as you may think. If you’re buying a home without an agent you’ll need to know contract law, how to properly fill out a contract of purchase and sale, subject removal rules, terms and warrants to include, and much more. For what is probably going to be the biggest asset of your life, it’s likely you want to have an experienced realtor working on your side.
You won’t have full access to the comparable sales data. Market value is mostly determined by sales, as listing prices aren’t much help since the seller can list at, above, or below market value. In order to avoid overpaying for the home, you’ll want to have access to a realtor’s database on the MLS to pull comparable properties and sales that are great reference points for the home you’re purchasing. Right now, realtors are the only ones who have easy & complete access to this information online as many of the public sites are only able to display limited information.
Not everyone is a good negotiator. Negotiating effectively is a skill – it takes communication, knowledge, and resources. Even if you are a good negotiator, you probably haven’t negotiated many home sale – and it’s way different than price matching at the grocery store. An experienced realtor, on the other hand, has negotiated hundreds of times before and has a sense of what works and what doesn’t.
You don’t know what you don’t know. A realtor should have the experience of hundreds of homes, and as a result of that will know the red flags and potential problems to be aware of. If you don’t buy a home as often as your realtor (ask your realtor how many deals they do a year, not all of us are the same), then you may not know what to ask or what you are legally entitled to. Knowledge is power, and when you’re buying a home it’s good to know what to look for.
Related Article: If you’re wondering about what a realtor does to help when purchasing a home then check out our blog on What Does the Buyer’s Agent Do & Why Should I Hire One?
Choosing a Realtor that Offers a Kickback on Commission
There are a few agencies who offer to pay buyers to lure their business, but that type of business practice is considered an odd concept among many agents.
The reality is that experience translates over in to the ability to negotiate more aggressively, as top agents will have more knowledge of the market and experience in working with different transactions/people/negotiations. Top agents often charge more than newer agents, and it is because of experience. Most experienced agents will have a better track record on saving you money on the purchase price.
At the end of the day, one of the main reasons you are hiring a realtor is to have them negotiate effectively on your behalf which will save you money. An agent’s ability to hold firm on their commission and fight for their livelihood is a pretty good representation of how they will act when negotiating on your behalf. If agents can’t even negotiate effectively for themselves, how can you expect them to do that for you?
If you’re thinking about buying or selling in the future and are looking for a realtor to help guide you throughout the process then give us a call at 604-765-0376. Prefer text? 604-319-0200. or email [email protected] to start a conversation. We’re happy to help.