If you are diving into the process of buying your first home, you have likely already figured out that there's a lot to learn: real estate terminology, how to make an offer, what you're agreeing to when you sign a purchase contract, and what you can afford to pay or borrow. A good real estate agent can serve as a guide, pointing you in the right direction, giving you a heads-up when bumps are on the road ahead, and, if something comes up that is beyond the agent's scope of knowledge, helping you find a specialized guide to solve that problem.
However, when you're already saving up for the biggest purchase of your life, it makes sense to ask one major question before hiring an agent: How is this person going to get paid?
There's good news for you as a home buyer: Both the agent representing the seller and the agent representing you, the buyer, will be paid out of the seller's proceeds at closing. Although you pay the seller for the house, you don't need to add anything in for the agents' pay. The seller is responsible for seeing that the agents involved receive their payment, which is commonly set as a commission; that is, a percentage of the selling price.
One of the biggest misconceptions that buyers have is that they'll save on agent commissions by having the seller's agent—commonly, the one you meet at an open house, or talk to if you call the number on the "For Sale" sign—handle the entire transaction.
This is called "dual agency." And while the agent might offer to bring the home price down a tad to compensate you for not bringing your own agent, that supposed savings might be offset by not having someone who will put your interests first and negotiate accordingly.
Dual agency is not allowed in many places, as it can create a conflict (either perceived or real) when you have the same person attempting to advocate for both sides. In some parts of the United States, the same agent can represent both sides as a "transaction broker," where the person steps away from being an advocate for either side and simply mediates the transaction. This arrangement can also be tricky, as the real estate agent might find it difficult to let go of the advocate relationship he or she might have previously developed with one side.
Regardless, whether someone is working as a dual agent or a transaction broker, it is often the case that the agent will simply take the full commission offered to both sides anyway, which leaves the buyer and the seller in the same position. If you decide to work with the home seller's agent, tread very carefully and ask a lot of questions.
Say a house is advertised for sale for $400,000. You are interested in it, and ask your agent to help you take a closer look, and possibly help you make an offer. The sellers, meanwhile, have already agreed with their agent upon two things: how much both the seller's agent and the buyer's agent will be paid. The latter amount is usually posted on the local listing service accessible by agents.
Most likely, both of these amounts will be a percentage of the sales price. Sometimes the total commission is split evenly, and other times one side might be offered more or less than the other, depending on the parties' motivations.
For example, a seller who wishes to add an incentive to buyers' agents to show the property might pay his agent 2.8% of the sales price, but offer the buyer's agent a higher rate, at 3.0% of the sales price. More commonly, the seller's agent will charge 3% and offer the buyer's agent 2.5%, in recognition of the fact that the seller's agent spends many times more hours on the deal, and invests in marketing and so on.
On average, you will see percentages in the ballpark of 2.25% to 3.5% offered to each side. Still, this is always negotiable, and there is never a "standard" rate.
If, continuing with the example above, you offer to buy the house for the list price amount of $400,000, then, the seller's agent will be paid an $11,200 commission, and your agent will be paid $12,000.
In the days leading up to the closing of the home sale, your agreement with the seller might change. For example, if the appraiser hired by your lender says that the house is worth $50,000 less than you offered for it, the seller might agree to a price reduction (though it would be equally possible that you would be asked to come up with a higher down payment to make up for the difference in what the lender will agree to owe you). Or perhaps inspections will reveal a major flaw in the house that warrants a reduction in price.
In either case, the agents involved in the transaction might receive a lower commission as a result (taking a percentage of the final purchase price).
However, another common scenario is for home defects to be dealt with separately. So, let's say the seller agreed to credit you $5,000 for repairs to the property. The credit will be handled at the closing, while the agents will still each receive their respective percentages of the agreed-upon sales price. The real estate agent's commission is based off of the final selling price, regardless of credits, taxes, inspection costs, and so on.
Even though the commission amount for the buyer's agent is determined by the seller, as a buyer you might still have some flexibility in the amount your agent gets paid. For instance, if you strongly feel that your agent has not represented your interests or you find out that the agent has made a major mistake, you are free to ask that your agent credit some of the commission to your costs at closing. This is not a common occurrence, but can and does happen as a method of remedying certain issues. Keep in mind that an agent is under no obligation to cut his commission at closing, but it is something that you can discuss if you feel you have a strong reason for the agent to credit you. If you and your agent agree upon any such reduction, it must be cleared with your lender prior to closing.