Buyer’s Agent Commissions

We are in one of the strongest sellers markets of this century. Pair that with a dramatically changing real estate industry where more tools are available to buyers and sellers than have ever existed before, how agents are compensated, specifically the buyer’s agent commission has become a very buzzy topic.

Before we get started, I want to be clear, buyer’s agent commissions can be a complex discussion. It is a violation of anti-trust laws to have fixed commissions so it’s important to understand that real estate commissions are always negotiable. I want our readers to understand this article is meant to provide information that allows everyone to make informed decisions that are best for them.

Now that my disclaimer is out of the way, lets get in to it. I’m writing this article because the topic of buyer’s agent commissions is becoming more and more prevalent in conversations with our sellers. In years past, the vast majority of home sellers had come to accept that a 3% buyer’s agent commission offering made up the majority of listings in the MLS, so it’s best to not deviate. That is starting to change.

Buyer’s agent commissions do vary across the country:

I’ll start by saying that buyer’s agent commissions do vary in different geographical locations across the company for many different reasons. Some locations have a significantly higher average sales price so the norm in those areas is actually lower than 3% and settles closer to 2.5%. In Texas, the majority of listings in the MLS in major markets is still 3% but we are seeing more and more listings pop up with the buyer’s agent commission being lower, ranging from 1%-2.5%.

Builders are notorious for adjusting commission offerings based on the current market demand:

This isn’t just happening in the resale market. Builders are beginning to test lower commissions as the demand for new homes has sky rocketed. This has been very surprising for real estate agents since builders have long been known to offer huge incentives to agents who bring them buyers. After the market crashed in 2008, we would see buyer’s agent commissions being offered as high as 5% or 6% or 3% plus a huge bonus. As the market has changed and demand has increased, builders are maximizing profits by minimizing expenses.

Real Trends, a Colorado based real estate research firm has shown a decline in the average commission amounts year over year for the last several years. In 2018, the average total commission (for both listing agent and buyer’s agent) was 5.03%. In 2019 that fell to 4.96% and then 4.94% in 2020

At least 3 or 4 times a week, one of our sellers asks me my opinion on what to offer a buyer’s agent for their listing. The answer varies based on lots of different factors. I’ll breakdown my thought process below:

• Do you have a home that is likely to see a huge demand and receive multiple offers?
  • If the answer is yes, you may be able to offer a lower than 3% commission and still generate high demand. But, keep in mind, you want to be maximizing your chances of a bidding war, so a lower commission can be a limiter to achieving that.
• Is your home or property going to be challenging to sell?
  • If yes, it may not be a good idea to push the buyer’s agent commission down because you want to do whatever you can to attract agents to bring you a viable buyer. In this instance, it may be worth offering a higher commission or even a bonus.
• What’s happening with your competition? Are there a lot of other active listings you are competing with?
  • If the competition is heavy and all of the other listings in your area are offering a 3% buyer’s agent commission, you could be hurting yourself by testing the waters with a lower commission.

Risks of offering a lower Buyer’s agents commission

Let’s take a minute to make sure you understand the risks. Real estate agents are human and they driven and motivated by money. Most agents are 1099, independent contractors on a commissions only compensation plan. Which means, it’s human nature for them to be thinking about what their income will be on the home their client buys. We would be silly to think that their actions and decision making processes are not consciously or subconsciously driven by their compensation. With that said, if you are offering a 2% or 2.5% commission and every other listing in your area is offering 3%, there is a very real chance, that is negatively affecting your ability to maximize your outcomes. You have now disincentivized the agents that you are hoping brings you a buyer which can do you more much more harm than good.

An even bigger problem is that you will likely never know for sure if that is the reason your home is not commanding an offer because it’s extremely unlikely that agents would be focal about that with their feedback. So if your home is not selling AND you are offering a lower commission, it starts to become difficult to figure out whether it’s the commission or the price or the location or the condition/staging.

In closing, my advice in general is to focus on maximizing your net proceeds (profits) and try to avoid limiting factors that keep you from achieving that. Remember that in the end, it’s always your decision whether you will accept an offer or not. If the offer doesn’t meet your bottom line needs after factoring in the commissions, closing costs and other related terms, you have the power to reject or counter that offer and negotiate until it meets your needs.