The following are a few facts about the traditional home purchase process where both the home seller and home buyer have their own separate agents. This information also assumes the home buyer is not working with an agent that provides a rebate on the commission.
1 - The home buyer does not know what his or her agent will be paid.
With the current commission system, the seller and the seller’s agent determine both the seller’s agent commission and the buyer’s agent commission in the listing contract. Since the buyer is not involved in with this contract, the buyer does not know what his or her agent will be paid. It could be 2%, 3%, or more of the purchase price since each property will offer a different buyer’s agent commission. So even if two houses sell for the same price, the buyer’s agent’s commissions can be different by thousands of dollars.
2 - Home buyer’s agent’s services are not "free".
The first thing real estate agents like to tell home buyers is their service is "free because the seller pays the commissions". What they should say is their commission will be taken out of the money the buyer gives to the seller to purchase the house.
Some sellers offer a bonus commission to encourage more agents to bring buyers. For the seller, offering an agent a higher commission is a lot less expensive than lowering the price of the house. And in the end, the buyer pays more for the house to cover the higher commission. This creates an unethical situation where buyer’s agents can be motivated by a higher commission rather than what is best for the buyer.
But the opposite is also true, an agent may not tell a buyer about a property offering a low commission. This is less likely because buyers usually have to sign an agreement with their agent that requires a minimum commission. So if the seller’s commission is not high enough, the buyer will be required to make up the difference out of pocket. These agreements only benefit the agent. If the agent makes a higher commission, the buyer does not get a refund.
3 - The home buyer must pay a commission even if he or she does not use an agent.
As mentioned above, the seller and the seller’s agent control both commissions in the listing contract. The contract usually states the seller’s agent will receive all or most of the buyer’s agent commission if the buyer does not have an agent. Agents tell home sellers they should receive a bonus commission since they "found the buyer". They do not mention they are not providing any additional work or service for the seller or the buyer. They also do not mention the seller is giving away thousands of dollars for no reason.
As for the unrepresented home buyers, they are forced to include the bonus commission in their offers. The seller after all, is looking for a minimum price after commissions. If the buyer’s offer is not high enough to cover the bonus commission, the offer will be rejected.
Consider a $200,000 house which is about average in the US. The typical buyer’s agent commission for this house is roughly $5,000. This amount can easily cause a sale to fail if the buyer can not afford to include it in the offer.
4 - The current commission system is unethical.
Seller’s agents claim to be working for the seller’s best interests. But the current commission system does not support this claim.
It is unethical to claim a bonus commission while providing no additional work or service. It puts the seller at a disadvantage when negotiating a price. It also completely disregards the amount of time and effort a buyer has put into finding a house. The current commission system is set up to financially penalize both the seller and the buyer if a buyer does not use an agent. It eliminates competition from home buyers in order to increase real estate agent’s commissions.
Conclusion
To put it simply, giving the buyer control of the buyer’s agent commission eliminates the abuses and unethical situations above.
There are several benefits for home buyers:
1 - It allows the home buyer to establish the cost of real estate services before starting to look for a house. The cost can be the traditional percentage, a fixed fee, or eliminated all together if the buyer decides to do the work.
2 - Home buyers do not have to worry that their agent is being influenced by the seller’s high or low commission offers.
3 - Home buyers will avoid paying extra if the seller’s commission for the buyer’s agent is too low.
4 - Since buyers control the buyer’s agent commission, this creates more competition which helps keep commissions low.
Home sellers also benefit in the following ways:
1 - Home sellers are not forced to offer a commission "high enough" to attract buyer’s agents.
2 - Helps home sellers preserve the value of their homes because they are only paying one commission if they choose to use a real estate agent.
3 - Increases the chance of a sale since the buyer’s agent commission is eliminated for unrepresented buyers.