How to Buy a Home

Real Estate Agents

Who Pays the Commission?

The Buyer and Seller split it, probably roughly equally.

If you go to a website like realtor.com, which is written by realtors, you’ll that the “Seller Pays”, since the amount comes out the Seller’s settlement table in escrow. And since the seller pays, you may as well hire a Buyer’s Agent.

I think that’s a little misleading and probably a self-interested explanation. You could just as easily say: there’s only one source of money in the transaction, and it’s from the Buyer and their mortgage.

But it’s also an oversimplification to say the Buyer pays. The commission opens up a spread between what the buyer pays and what the seller receives, and acts exactly like a sales tax.

The standard theory of tax incidence suggests that who bears the cost of the the tax depends on the price elasticity of demand vs. the price elasticity of supply.

I don’t have a strong opinion on those elasticities, but I’ll eyeball it and say that both buyer and seller pay equally.

The Commission is Too Damn High

It’s 5-6%, and I think it’s too much, for a few reasons:

  • Prices are much higher these days, adjusted for inflation. Since the commission is percentage based, realtors are getting a larger inflation-adjusted check for the same job as before.

  • Buyers Agents aren’t as needed anymore. These days there’s the Internet, Zillow, Redfin, and more. Filtering and sorting by various criteria, color photos, and more are all available on your computer.

  • The paperwork is standardized. Although it may seem daunting, the “contract” is a standardized form with a bunch of checkboxes. They are virtually identical between transactions. Oh, and it’s all electronically signed and delivered.

  • For the Seller, I think most of what I said above is still true, but admittedly I do think the sell-side is a lot more work than the buy-side. The sell-side agents might deserve their commission.

How to Avoid Paying Full Commission

It’s surprisingly hard to sidestep the standard commission rates. The commission rates are set by the seller.

  • If you’re a seller and you don’t give the buyer’s agent full commission, buyers’ agents will refuse to show their clients your house – or at least steer them away.

  • If you’re a buyer and you don’t have an agent, the seller’s agent will just take the full 5-6% for themselves.

So are you stuck? Not at all. The new innovation is the commission rebate. The agent has an agreement in advance with you to rebate a portion of their commission to you.

  • For Buyers, a company like OpenListings can act as your Buyer’s Agent. They collect the full 2.5% Buyer’s agent commission they are due, and then rebate you 1.25%. For a $500000 house, that’s a $6250 check in the mail after it closes. That’s not insignificant.

  • For Sellers, Redfin now will sell your home for 1 to 1.5%. But of course there’s still the full Buyer’s commission of 2.5% to 3%.

  • If both parties use a discount brokerage, then both parties get to keep more money in their pocket.