Buyer Beware! Top Myths/Facts About Hiring a Buyer's Agent
We live in an age of instant access and “Do It Yourself”. With websites like Realtor.com and Zillow.com many homebuyers don’t see the value or reason for having a Buyer’s Agent. This article is the first in a series about why its best to hire a Buyer’s Agent and what you may not be considering when you decide to go it alone.
Reason 1: “I’ll save money by going directly to the Listing Agent”.
Fact or Myth? It depends.
To fully understand whether you’ll save money as a buyer by going directly to the agent representing the seller ("Listing Agent") we need to understand a thing or two about the contracts at work in most real estate transactions.
Who Pays your Buyer's Agent's Commission
When a seller signs a listing agreement with an agent to sell their home, they agree to pay a commission to the listing agent’s brokerage. Every property that is listed for sale on the MLS is, as the National Association of Realtors explains, “a private offer of cooperation and compensation by listing brokers to other real estate brokers”.
What many people don’t understand is that the seller is agreeing to pay the entire commission. The listing agent, by posting a property on an MLS is offering to pay a buyer’s agent a portion of that commission if the agent “procures” a buyer. Yes, "procures" is a weird old word but it is a big deal in the real estate world. Again, the commission offered by the listing agent varies and while the commission is now disclosed to the seller, most buyers will not know what percentage is offered as a Buyer's Agent commission, as this information is not available publicly.
Note: most of the listings on Realtor.com or Zillow.com or similar websites are syndications of the 800+ MLS around the country. They are just rebranding of a MLS.
Here's the important take away: Neither the buyer nor the seller pays the buyer’s agent’s commission; the seller’s listing agent (or brokerage to be exact) does. Practically speaking, the seller pays all commissions from the sales price at closing, but the contract for a commission is technically between the agents' brokerages. This "technicality" is a big deal and often a point of confusion for both agents and clients.
Why sign a Buyer Broker Agreement
Okay, you say, why then do most buyer’s agents require clients to sign a “Buyer Broker Agreement” that seems to say the buyer has to pay his/her agent’s commission? The purpose of the Buyer Broker Agreement serves three main purposes:
First, it is an agreement with an agent that you will work exclusively with them. Real estate agents, with a few exceptions, work on commission. If they don’t close the deal, they don’t get paid. For this reason, agents want a commitment that if they’re taking the time (away from other clients, family, other commitments) to go show you a home, and you decide to buy that home, that they’ll eventually get paid. Buyer’s agents want to know you’re not going to waste their time. For this reason, many top buyer’s agents will not agree to show you a single home without signing a Buyer Broker Agreement first. Some buyer’s agents will show you a few houses to establish a relationship and make sure your styles are compatible, but all buyer’s agents will eventually want you to sign a Buyer Broker Agreement. It’s just good business.
Second, the Buyer Broker Agreement is a way to let other agents know that you are represented. Most listing agents would love to keep the entire commission that the seller has agreed to pay when a seller agrees to list with them. That’s why when you walk into an open house or a model home, the agent who greets you wants to know if you, “have an agent”. And here’s the thing, it may not be enough that you simply say you have an agent. Many builders and listing agents (especially in high dollar sales) want proof that your relationship with your buyer’s agent predates when you followed their signs and walked into their open house/model home. The proof of your relationship with your agent is the Buyer Broker Agreement.
Finally, a Buyer Broker Agreement is an agreement that if your agent finds you a home that is not on the MLS (and therefore there is no agreement with a listing agent to get paid) that you, as the buyer, will pay your agent’s commission. Because most “For Sale by Owner” homes are not on the MLS, there is no offer by a listing agent to pay your buyer’s agent and your agent only gets paid if you or the seller agree to pay them.
Will using the listing agent save you money?
Let’s come back to our original question: Will you (as a buyer) save money by going directly to the listing agent? The short answer is: No, not unless you negotiate directly with the listing agent to return a portion of their commission to you. And that’s sort of a big ask.
Remember, the listing agent has an agreement with their seller that the seller will pay 6% (give or take) as a commission for getting their house sold. When you, as a buyer, go directly to the listing agent and ask the listing agent to make an offer for you, typically what happens is the listing agent is paid the entire 6% commission and neither you nor the seller saves money.
Indeed, going directly to the listing agent without negotiating the commission is the worst way you can go. You heard me right, the worst way you can go! Why do you ask?
Myth 1: Seller will accept a lower price.
First, let’s start with the idea that you’ll pay less. Many buyers think that if they are unrepresented and go directly to the listing agent that the seller will accept a lower offer price.
From the seller’s perspective, there is no incentive to accept an unrepresented buyer’s offer over an offer at the same price that is made with a buyer’s agent. The seller is still contractually obligated to pay whatever commission is in their listing agreement with their agent and so the seller's net will be the same.
Where the advantage of being an unrepresented buyer comes from is that your offer will be more attractive to the listing agent because he/she will get paid double. Will the listing agent be motivated to get your offer accepted if it means he/she gets paid twice as much? You betcha ya!
Myth 2: The Listing Agent will take a smaller commission.
Now, the agent may agree to lower his/her commission to get your offer through but he/she is not obligated to do so and many agents will not negotiate their commission on either the seller side (with the seller) or with you (as the buyer). Why would they? Because getting 5% is still better than 3%? Sure. But if the agent isn’t desperate to get the closing, why would they compromise their commission when another unrepresented buyer or someone with a Buyer Broker Agreement directly with them (or their team) won’t ask for a commission cut.
Here’s the thing. You won’t know if the listing agent will negotiate his/her commission until you start negotiating. And once you’ve begun the process of negotiating with a listing agent on your own, you are on your own. If you try to bring a buyer’s agent into the mix, the listing agent will likely say, “Sorry, I’m not going to pay your agent a commission, you came directly to me.”
Now before you say, “I’m good with that. I know how to negotiate '' there are several additional aspects of the real estate process you will want to take into consideration before you decide to go it alone.
Myth 3: The Listing Agent is the Same as a Buyer's Agent
First, When you go directly to the listing agent, he/she typically will have you sign one of two documents (again, the contracts are key). The first option is an “Unrepresented Buyer Disclosure” which basically says, “Hey, I don’t represent you and you’re on your own”. The listing agent is obligated, by law and contract, to the seller with fiduciary duties including loyalty, obedience, full disclosure, confidentiality, and reasonable care. When you go directly to the listing agent, his/her duty is to the seller, not you.
The second form the agent may have you sign is a “Limited Agency Consent Agreement”. There, in black and white, the agreement tells you a limited agent represents both the seller and the buyer but the agent’s duties are “limited” because the agent “cannot provide to both parties undivided loyalty, full confidentiality and full disclosure of all information known to the agent.” For this reason, a Limited Agent must remain neutral in the representation of a seller and buyer, and may not disclose to either party information likely to weaken the bargaining position of the other; such as, the highest price the buyer will pay or the lowest price the seller will accept.
So, to put it another way, when you go directly to the listing agent he/she has no duty to make sure you get the best price, indeed their duty remains with the seller to get the seller the best price, or alternatively, you and the seller will agree that the listing agent will “remain neutral”.
Myth 4: A Buyer's Agent's only job is to show me houses and I can do that on my own
That brings me to another point...If you’re not represented by a buyer’s agent, how do you know you’re getting the best price? Do you have someone with access to the MLS who will pull sales history for free? A qualified buyer’s agent will help you determine what a good offer price is, provide sales history on the property you are interested in, determine what competition there is, help decide the best strategy in making an offer and counteroffers, establish advantageous contract deadlines, and communicate directly with the listing agent.
Also, once your offer has been accepted you will not have an advocate by your side to explain and walk you through the disclosures that should be provided by the seller, explain the inspection process, and assist in explaining documents at closing.
The bottom line, if money is your motivating factor, decide on a buyer’s agent and negotiate directly with your agent about their commission. Be upfront with your expectations and needs and get your agreement in writing.