How Are Buyers Agents Paid?

Where is my money going when I pay a real estate commission?
One of the veins of this lawsuit complaint was that the sellers did not know "they were also paying the buyer's agent." I think it is wise to share with you where the money goes when you pay a real estate commission to your listing agent and I would also like to address whether or not you need a buyer's agent in the process-and that might be the muddiest of all of these conversations. Stay tuned, I feel that there will be a part three! :)
First- When you work with a listing agent you negotiate a commission rate to sell your home and typically an understanding of the services the listing agent will provide such as those previously listed. Let's say you agree to a 6% commission rate to sell your home. Your contract and paperwork, called a listing agreement, clearly states that you agree to pay the listing firm the agreed upon percent. The agent who works for that firm understands how the money will be allotted and it may go a little something like this:

• The firm keeps a portion of it, called a split, and in many cases that split can be as much as half of the commission. From the agent's half he/she pays taxes including self employment taxes, errors and omissions insurance, car insurance, the professional photographer, videographer, stager and appraiser who measured the home. He/she has both annual dues and quarterly dues to the realtor associations, yearly CE classes, and so much more before he/she takes a penny of that home to the family.

The listing agent may have also decided to share some of that commission off the top(before the split) with the partnering agent and firm (the buyer's agent/firm) This too is fully disclosed on the listing agreement and was the crux of the recent lawsuit complaint that involved the DOJ.

Why did the listing agent opt to give half of his/her commission to the buyer's agent's firm even before all of the expenses and debits listed above?
On nearly all of my listing agreements I have previously offered compensation to the buyers agent and their firm from the 5% I negotiated with the seller because I thought it was in the best interest of my sellers to do so and it was disclosed on the paperwork they signed. Think of it like a reward poster for a lost puppy. By offering the "reward" I have enticed all eyes to look out for this little lost puppy. By offering a split to the buyer's agent and their firm I am encouraging all buyers agents around the county to promote my listed property to the buyers in their own networks. I am encouraging them to share it with their potential buyers and thus enlarging the pool of prospects for my sellers. Simple supply and demand dictates that the larger the demand for the single house I have listed the higher the price will be when it sells and it has long been practiced that offering a co-brokering commission drives demand and thus profit for my sellers. And don't forget-that 5% commission previously negotiated all belongs to my firm if it is one of our own buyers that comes forth with the best offer.

As for the DOJ, they did not think this was clear to the sellers who brought forth the law suite and they also do not believe it is a practice worth maintaining and that buyers should be paying their own agent directly. It is my strong belief and advice to my clients that by not offering a piece of the commission to be shared with the buyer's agent and their firm you are in essence knocking a large percentage of buyers out of the market-shrinking the buyer pool for your own listed home and hampering the American Dream for a large selection of the population. Buyers pay a significant downpayment, closing costs, inspections, appraisals and if they also pay their own agent directly it will mean some buyers will no longer be able to achieve home ownership-especially first time home buyers. When a listing firm offers a commission to the cooperating brokerage it is baked into the sales price like any other concession and it is essentially financed by the buyer. In conclusion-

• No, the sellers did not pay the buyers agent, the listing firm did.
• No, the sellers were not scammed, they signed listing agreements with these details in it. Did they read them though? That question certainly demands an answer.
• No, your agent does not have to offer a buyer's agent commission or concession of any kind. The best plan for YOUR specific property should be discussed and agreed to by you and your agent. And as always your commission is completely negotiable so make a plan with your agent that brings you the best results.
• Yes, my professionalism in this industry has always meant that I and my team explain these options and the contractual paperwork thoroughly, and we will continue to do so as we serve sellers every day.
• And if we think this law suite had unhappy clients (sellers), I can only imagine what the courts will look like a few years from now when these changes create unrepresented buyers who feel they were disadvantaged by the new system.