A lot of misconceptions about REALTOR commissions have popped up over the years. During the 1950s, there were some attempts to force an industry-standard rate, but the Supreme Court ruled it was illegal price-fixing. Since then, there has been no official standard for commissions. Still, misconceptions that seem linked to actions taken during those years seem to percolate to the top of conversations, just like old rumors taking on new twists and turns. We want our readers to be knowledgeable of such topics so they can make the best decisions for themselves. For this reason, we want to address the top 3 REALTOR commission misconceptions.
1. Buyer Representation is FREE for Buyers
For a long time, sellers have paid most commissions for homes sold. For that reason, it may seem like buyer representation is free for buyers; however, sellers are not required to pay a commission to a buyer’s agent. If a seller does not offer to pay a commission, and the buyer chooses to move forward with purchasing the home with representation, they would be responsible for paying their REALTOR. Likewise, if the buyer and their REALTOR agree on a specific commission before looking at homes and the seller only offers part of the compensation, the buyers may be responsible for paying the difference.
Your REALTOR will ask you to read and sign an “Exclusive Buyer Agency Agreement” before viewing homes. Make sure you read and understand it before you sign it. This document outlines the responsibilities of the agent, firm, and buyer, including the compensation to be paid to your REALTOR.
You may be wondering why sellers still pay commissions if they aren’t legally required to. Well, it’s a very good incentive for home buyers. Industry professionals also cite the benefits of seller-paid commissions for minority and low-income buyers, groups who often struggle to save money for down payments and closing costs. Overall, it improves the chances of a home selling.
2. Commission Rates are Set By the REALTOR
It may appear as though REALTORs are the primary driving force for setting commission rates, but commission rates are negotiable and set by consumers when they agree to pay a specific percentage of the purchase price. Just like the system of supply and demand, consumer pressure has brought the national average commission rate down to 5.4% in 2023 from 6.1% in the 1990s.
With that said, REALTORs also need to work for a minimum threshold to cover their business and living costs. They do a considerable amount of work before they’re paid and many employ office staff to meet client needs. Because of the commission business model, REALTORs aren’t paid for the work they do if they don’t complete the transaction a.k.a. closing. Not every client reaches closing, because they change their minds after viewing homes or are unable to secure financing. Television shows and online “influencers” give the impression that REALTORs make a lot of money and live luxury lives, but the average REALTOR only makes about $52,000 per year (median) before taxes.
3. Home Buyers Can Save on Commission by Using the Seller’s REALTOR
Some buyers prefer to engage solely with the seller’s REALTOR, under the impression that skipping buyer representation can streamline the process and also lead to financial savings. They often believe that by having only one REALTOR involved—who would hence receive the entire commission—the home’s selling price could be lowered. However, this notion about commission reduction frequently proves to be a misconception. Moreover, opting for a single REALTOR to handle the transaction can adversely affect the buyer’s interest in the sale.
When sellers sign a listing agreement with their REALTOR, the REALTOR agrees to represent their best interests. Unless the seller agrees to relinquish some of their representation, the buyer will not be receiving the same protection. Even if the REALTOR becomes a dual agent, neither party will receive the same amount of representation a single agent would provide, because they must treat each party equally. By using the same REALTOR as the seller, buyers could end up paying more for the home due to reduced powers of negotiation.
As you interview REALTORs, keep in mind that commission can vary due to location, education and licensing, experience, and services provided. Like other professions, you often get what you pay for. So, carefully weigh what each REALTOR offers with your own personal goals. You may not need all the bells and whistles to buy or sell your home, but you probably don’t want to cut yourself short on experience.