Handing over cash to a Realtor

So you’ve decided to sell your house. Generally, when people go to sell a house, the first thing that comes to mind is hiring a Realtor. Have you ever wondered how a Realtor gets paid? Who pays the Realtor and what they actually do for that paycheck? And how much does a Realtor actually make?

In this post I’m going to explain who pays the realtor, how a realtor gets paid and what they do for that money.

Mostly I write, and speak on my youtube channel, about For sale By Owners. The purpose is to give you tips and strategies to help you make more money and sell  your house fast. I teach how to sell your house yourself. In this post I’m going to do something a little different. I’m going to give you some information that will help you make decisions. Decisions like, do I want to sell my house myself or do I want to hire a real estate agent to do it and pay them?

So I’ll get right to the point.

It’s The Seller That Pays The Realtors

It’s actually the seller that pays for all the Realtors. The seller pays for both Realtors. That’s right. They pay for the agent that list his house. And they also pay for the buyer’s agent, the person who’s buying his house. So essentially the seller is paying for the person that’s going to sell their house for them and they’re also paying for the real estate agent that’s going to be negotiating against them.

Now, you might not think that makes a lot of sense, and you’d be right.  It really doesn’t. We’re going to go over how that came about and why it is the way that it is.

Look At It Like This.

Look at it like you’re going to court for some reason. Let’s say Somebody is suing you or you’re suing somebody for divorce, car accident, business deal gone wrong, whatever. When you go to court, you hire an attorney to represent you and your adversary, whether it be someone suing you, the state or whatever, they have their own attorney, an attorney that represents them.

Or maybe your involved in a business deal like a buyout or something. In that case, again, each side has it’s own attorneys representing them and their best interests.

And so you go to court, or you sit around a table, and you fight it out and the two parties with their separate representation come to an agreement or the judge after listening to both sides issues a judgment. It’s just like that in real estate only the seller pays for all of the representation.  The seller pays for all the Realtors.

How It Was

Now, it used to be back in the day before the Internet real estate was a lot different. Everybody worked for the seller and that was normal. One brokerage listed the house in the big books and another agent from another brokerage could find a buyer for the seller. That’s how it was thought of. Find a buyer for the house, not find a house for the buyer as we think of it today with the new “representation” model of real estate. It was all the agents job to get the house sold and get paid.

When a seller wanted market a house,  to list a house, you basically had to have a broker because instead of the Internet  the broker had these big, thick books and in those books they put all the houses that were for sale.

If you wanted to buy a house, you got a hold of a brokerage and you went and you sat down and you looked through those books looking for houses that you wanted to view. Then an agent would take you around and look at those houses until you picked one. The real estate industry held all the information. Agents could pick and choose what they wanted to show you.

It was in everybody’s best  interest to get that house sold for the seller. Nobody was really working for the buyer. Not directly. It was Normal for the person selling the House to pay the Realtor

How It Is

Nowadays with the internet it’s a lot different because buyers can go online, they can find out all the information that they need to be fully informed. Buyer’s can see all the homes that are for sale, they can find out when the home was last sold, find out how much the home is selling for and how much it sold for the last time it sold.  All that information that used to be held close by the real estate industry is now available to the public. Free of charge.

How It Works For Realtors Now

So the real estate industry did a big shift. Instead of just marketing and selling your house for you, they invented a different model and they call it representation. Now the seller and buyer both have representation. Exclusive representation in fact. Brokers and their agents will still market and sell your house for you but the marketing has become, oh, how can put it, easy. Really easy. So easy in fact a home seller can easily do it themselves so hence the change in an attempt to remain relevant.

Now the person selling the House, they have representation. The Realtor or brokerage that is listing their house for them. And the person that’s buying the House, they have representation. Both parties each haver their own Realtor that represent them but the seller pays for both.

They even use words like fiduciary. How that works is you actually sign an agreement that says that you’re an exclusive listing agency or you’re an exclusive buyer’s agency and you have a fiduciary duty to your client.

When you’re a buyer’s agent and you have a buyer, you negotiate for that buyer and you do everything you can to get a better deal for that buyer. You’re actually negotiating against that seller’s agent . And the seller is paying that buyers agent.

What Real Estate Agents Do For You

So let’s go over a little bit about what each agent does. What those Realtors do for their pay.

Listing Agent

You hire a listing agent to sell your house for you. They come over meet with you. It generally takes about 45 minutes to an hour. The listing  agent will  go around your house and they show you what you need to do to get your house ready for market. They might go over some staging tips with you. It’s possible the agent  might go over some cleaning tips with you, some ways to keep your house ready to show. They might suggest you take the pictures down off the wall. There’s a whole list of things that are helpful to do when you’re trying to sell your house to make a better presentation.

They’ll also help you price your house and they’ll do that by doing a comparative market analysis or a CMA, which means that they’ll pull comps from the area, houses that are similar to yours that have sold in the last six months. Then  they’ll use those comps to help you to come up with a price for your house.

Agents will take care of pictures and writing descriptions.

A listing agent will take care of all the transactional details for you. Once you get an offer,  they’ll take care of all the paperwork for you, which ironically, when you hire a real estate broker there’s a ton more paperwork a lot of which is to protect agents and brokerages. But they’ll take care of all that paperwork for you. There are contracts, state specific disclosures, sellers disclosures ect. ect, ect. .Just a lot of paperwork.

The agent will help you through the inspection process, the appraisal process and everything else associated with that real estate transaction all the way to the closing table.

And then they’ll go to closing and then the realtors get paid.

Buyers Agent

A buyer’s agent’s job is to help a buyer find a house. They have other duties to perform once they find that house but his main objective at first is to help that buyer find a house.

Once a house is found the agent will help the buyer to formulate an offer and negotiate a contract. Like a listing agent they will help the buyer with the appraisal and inspection process and all the transactional details and paperwork to get to the closing table.

According to the National Association of Realtors, 52 percent of buyers find their home themselves, the one they end up buying, on the Internet. According to that same source, 90 percent of buyers start their home search on the Internet. (Personally I think the number of buyers that find their house themselves is a lot higher. If I’m right and it is it doesn’t reflect well on the real estate industry. More and more tasks involved in a real estate transaction are being preformed by the buyer and seller making less need work for the agent.)

How A Realtor Stays Relevant

What that means is that most people don’t actually go out and look for a buyer’s agent to buy a house. They go directly to the Internet. Unless that buyer’s agent is referred by a family member or a friend most agents get hooked up with buyers through these Internet sites like Zillow and Trulia, realtor.com and and such.

A buyer will go directly to the Internet, to a site like Zillow to look at homes for sale. When they find homes they are interested in they click and can look at pictures, statistics, descriptions and find out everything they need to know about the house. If a potential home buyer wants even more “information” there is a button that can be clicked that puts you in contact with the “agent” This is where it’s gets tricky..

Most consumers think they’re contacting the listing agent, the person selling the house, but actually what you’re doing is you’re contacting an agent that pays to be on Zillow or such similar real estate portals. You put in your phone number and you click contact agent. One of these agents that the real estate site has sold your information to will contact you, not specifically to give you information, but to make you a client.

That agent will call you and then they’ll set up a showing for you and while they have you, they’ll try to get you to sign a buyer agency agreement. What that agreement does is it ties you to that agent. It says that if you buy a house, that agent is going to get paid one way or another. If the seller doesn’t pay them then you will have to. That’s a bad deal for FSBO’s or buyers looking at homes for sale by owner.

How The Seller Pays

When a home seller has a listing agreement with a brokerage the contract reads the seller has agreed to pay the broker. That fee is usually a percentage of the contract price and while it’s not legal to set fees it’s normally around 6%.  Then that listing brokerage is going to split that fee with the buyer’s brokerage. And that is how the seller ends up paying for both Realtors.

For Sale By Owner

But what happens if that buyer finds a for sale by owner? Then that buyers agent will call that for sale by owner, schedule a showing, talk to that owner and try to get them to pay the Realtor. Which that for sale by owner probably doesn’t want to do because that’s why they’re doing a for sale by owner.

You see how that works? Because now if the for sale by owner doesn’t want to pay the realtor, then the buyer is stuck with that whether they need that agent or not. And it ain’t cheap. Again, it’s the agency agreement that determines the buyer will pay if the seller doesn’t.

So that’s why real estate agents will sometimes shy away from for sale by owners and try and keep the buyers away too.

Avoiding Real Estate Commissions

The trick is to make sure that your house is dazzling, make sure it’s stunning so those buyers just cannot resist.  When you get them into your house, talk directly with the buyers. The agent will try to commandeer the conversation. Don’t let that happen.

Of course the best scenario is to get the buyer to call you directly bypassing any agent. You can do this up front in the description you write for the internet real estate sites like Zillow.com where you’ll market your home. Ask people to contact you directly for the best deal. If they have an agent and a signed agency you can raise the price to cover that expense if need be and there is no law that says you can not negotiate that agents commission. Find a way to make sure the buyer is included in all the negotiations. That the buyer knows all along the way what is happening. Often agents keep their buyers in the dark if it’s not favorable to them.

Protect Yourself As A FSBO

Pro tip: If you do raise the price to cover the agents commission write in the contract that the buyer agrees to make up the difference in cash between contract price and appraised value if any because of the Realtor pay. Make the buyer understand the price went up to pay their agent.

Finally

That is how the seller ends up paying for all the Realtor representation. It hardly seems fair but as my broker once told me, “if buyers had to pay for a real estate agent there would be no real estate agents.”

Go figure…

Joel

Leave a Reply

Your email address will not be published.