Getting ready to buy a home? If you choose the traditional way of buying (using a Realtor with standard commissions), then you will need to find a buyer’s agent. But, before you sign an agreement with a buyer agent, there are some things you need to know.
We asked Jay Villella, a Realtor with years of experience, to help us breakdown what exactly a buyer’s agent is, how they work, what you need to look for, and what you need to know to ensure you are getting the most of your agent (personally and financially).
What is a buyer agent?
A "buyer agent" a real estate licensee who works on behalf of a buyer. It's their job to help a buyer client find a property, give them real estate advice, help them negotiate, and generally protect the buyer's interests with respect to real estate. The buyer agent is legally and ethically obligated to act only in the best interests of their client (the buyer). They owe what are called fiduciary duties toward the buyer and can face criminal and civil charges if they fail to uphold these duties. The duties real estate agents owe their clients are: honesty, disclosure, care, confidentiality, obedience, loyalty, and accounting.
When you hire a real estate agent, you should be getting someone who is knowledgeable about the market and about real estate in general. They should then use this knowledge and experience to help you make good decisions regarding real estate.
How does one "hire" a buyer agent?
Any person with a real estate salesperson or broker's license can act as your buyer's agent. To "hire" them, you and they must sign a contract spelling out all of the duties and responsibilities the agent will take on in exchange for compensation. There are laws regulating the types of things that must in these contracts like how long the contract lasts and the amount or type of compensation.
In Pennsylvania, it is illegal for an agent to accept compensation for acting as a buyer's agent without a written and signed buyer agency contract.
At the closing, the agent's company usually receives a commission from the seller agent's company. The buyer agent's company has no ability to control the amount of compensation they receive from the listing company. However, it is entirely possible for you as a consumer to negotiate the compensation your buyer agent will receive. For instance, if you want to pay your buyer agent a 2% commission, you can do that and if the compensation offered to your agent by the seller is more than that, the agent is free to rebate it back to you at the closing provided this is disclosed to the lender. On the flip side, if you agree to pay your buyer agent 2%, but the seller is offering less, then you'll have to pay the difference. The only way to negotiate a commission with your buyer agent is to have a written buyer agency contract in which all of these terms are spelled out explicitly.
You buyer agent's company then pays them some portion of the commission money they received depending on a variety of factors we'll discuss below. In addition, a large number of companies also charge their buyer clients an "administration" or "processing" fee directly. Your individual buyer agent may ultimately receive some, all, or none of that additional fee. It really doesn't matter what the fee is called, it is essentially just more revenue for your agent's company.
What I've just described is a typical transaction, but wait a minute! Isn't it a little strange that the buyer agent works for you, gives you advice, and has many financial responsibilities toward you but they're being paid by the seller? Aren't there conflicting incentives here? Yes and no.
One could say the buyer agent's compensation is ultimately coming from the seller, but one could just as easily say everyone's (lender, title agent, Realtors®, etc) compensation is ultimately coming from the buyer since the buyer is the one bringing money to the table in the first place. The seller is exchanging their house for cash, and of course most of the cash ends up going to the seller but a significant amount of it ends up elsewhere [see previous blog about commissions here].
Now that I've described a basic buyer agent compensation scenario, let's talk about some situations that routinely confuse consumers:
- Who are these people calling me from Zillow/Realtor.com when I click on "contact agent?"
Simply put, the agents calling you back have paid Zillow to have their photos and contact information appear on other agents' listings in the hope that they'll be able to work for you as your buyer agent. Zillow makes it seem like these agents are the designated experts or "premier agents" for particular listings, but in reality it's a "pay-to-play" system with absolutely no quality control at all. The more an agent pays, the more often their name will be displayed on listings. An agent can show you a home without acting as your buyer agent. They hope that by showing you a home, you will eventually decide to hire them. Please be aware that unless you have a signed buyer agency contract, the agent showing you the home is NOT acting on your behalf and does NOT have fiduciary duties toward you.
- What if my buyer agent works for the same company that is listing the house I want to buy?
This is a situation called "dual agency." The real estate company in this case is a "dual agent" meaning it represents both sides of the sale. It might seem impossible for the company to uphold all of their fiduciary duties since they conflict. For example, the company should be trying to get the highest price possible for the seller, but it should also be trying to get the lowest price possible for the buyer. However, since the individual agents involved are separate people, they can in fact do just that. A company has the advantage of having more than one mind and ability to execute intent. In my opinion, it's not problematic for a consumer to hire a buyer agent that happens to work for the same company as a particular listing agent because it's the individual people who do all the work and uphold the fiduciary duties, and it's entirely possible for these individual agents to operate totally separate from each other even if they work with the same company.
- What if my buyer agent is also the listing agent?
This is also "dual agency" but in my opinion, it is highly problematic, even though it is legal here in Pennsylvania. It's simply impossible for a single individual human being to uphold competing fiduciary duties toward both buyer and seller. I really don't think it's more complicated than that, and I would advise you to pick either a different agent or a different house. When this situation has arisen in my professional practice, I refer the buyer clients to another agent.
- How do referral companies and rebate programs work?
Sometimes, you can be connected to a buyer agent through a referral company like a corporate relocation benefit or special interest programs like Homes for Heroes® or Dave Ramsey's Endorsed Local Provider program. All of these referrals are "pay to play." Basically, your buyer agent agrees to pay the referral program a portion of the commission (anywhere between 20% and 40%) at the closing. If you pick an agent because they were referred to you by your corporate relocation program or you found them on something like they Endorsed Local Provider program, they're going to be paid significantly less to work with you.
Other companies sometimes offer "rebates" at closing. Basically, the rebate company takes a hefty chunk of your buyer agent's compensation at closing and then gives you a little bit of it. Any company promising to "save you thousands" or "help with the down-payment" is really just taking a portion of the the buyer agent's pay, keeping most of it, and then giving you a little bit.
It's human nature to try to seek out higher pay if possible, and unfortunately programs like these can potentially make agents hesitate to put as much effort into working for you since they're going to end up being paid so much less than they would for a client they connected with directly.
Some Things To Consider:
Buyer agents get paid only when you close on a home. They are fully aware they could show you dozens of homes only for you to decide to continue renting, or buy a new construction home, buy a "for sale by owner," or buy a friend or family member's house thus causing them to work for no pay at all. When you hire a buyer agent, they are motivated by the commission-only compensation structure to help you find the right home for you, and the quicker the better. Very often, buyer agents end up showing homes and giving advice without any compensation and I believe this is part of why commission levels remain high: the reward has to be worth the risk.
Because working as a buyer's agent is financially risky, a skilled and knowledgeable buyer agent will almost always want to have a consultation with a potential client prior to showing any homes. They want to make sure they are going to be using their time and expertise to serve someone who is eventually going to pay them. To my mind, it's a red flag if a total stranger is willing to show you a house at a moment's notice because you happened to click on their name online. I don't think it's reasonable to expect high-quality advice and representation in that scenario, and maybe that's part of why so many consumers are unhappy with the level of service they receive from agents.
It's undeniable the real estate industry has some major dysfunctions causing harm to consumers. However, consumers can and should take some simple steps to protect their interests. If you are serious about buying a home, interview several agents. Ask for references, ask for resumes, and do even just a little bit of research on them by searching on social media. Look at online reviews and check their sales history. Ask for referrals from friends, family, and colleagues who have had good experiences with their agents. When interviewing agents, question them about their knowledge of the market, their experience with buyer transactions, and their policies regarding dual agency, rebates, and fees. Putting in a couple hours of work to find a high-quality professional buyer agent could potentially save you tens of thousands of dollars and many headaches on your journey toward a new home!
Disclaimer: We source quality resources to help inform our members based on their years experience in specific roles within real estate and committment to putting consumers first. Jay was not paid, nor did he receive anything in exchange for this article.