Two of the most frequently asked questions Realtors hear from first time home buyers and sellers is: How do Realtors get paid? Do I have to pay an agent to buy a home? This post aims to clarify who is responsible for paying realtor fees, how realtors get paid, and who is responsible for paying the closing costs.
In most real estate deals, there are two agents. Listing agents work with sellers, and buyer agents work with buyers.
Sellers agree to pay their listing broker a fee, often 6% of the sales price, to put their home up for sale and market it. The listing fee is paid when the deal closes. If the property doesn’t sell, the seller is not on the hook for any payment.
Buyers do not pay a commission to real estate agents. Instead, buyers’ agents a portion of the net proceeds of sellers’ listing fees (detailed below).
Sometimes, only one agent is involved in a deal instead of two, a situation called dual agency. In some states, dual agency is forbidden by law because agents are expected to represent the interests of their clients. One could argue that one agent who negotiates a deal between the buyer and seller possibly represent the best interests of both parties simultaneously. In any case, an agent operating under dual agency would collect the 6 percent fee without spitting it with another agent. The buyers still would not pay anything.
Buyer Agent Commission Percentage
Here’s an example deal that illustrates how Realtors get paid. Using 6 percent of the purchase price as the listing fee on an $800,000 property that closes, the seller will owe a $48,000 commission to the listing agent.
At the closing, the escrow company will pull aside the total commission and divide the proceeds into the portions owed to the two agents involved in the deal, usually 50 percent each. After closing, the escrow company sends the money to the agents’ real estate company (not directly to the agents).
Most real estate agents don’t walk away with the full commission mentioned above, as there are several fees taken out of their paycheck.
Let’s say your buyer’s agent grosses $24,000 in commission on the home you purchase. Sounds like quite a hefty paycheck, right? However, they must share a part of their profits with their brokerage to cover their desk fee, licensing fees, marketing fees, and more.
Listing Agent Commission Percentage
Beyond sharing a portion of the commission with the brokerage, a real estate agent representing a seller has fronted the money for the professional listing photos of the home, a floor plan, social media marketing, general advertising, and other expenses that come with selling a home.
Other expenses come out of the listing agent’s paycheck, too. So, although the commission check may total $24,000, the listing agent might net $12,000 to $18,000. Some agents will walk with even less.
Buyer Closing Costs
Both buyers and sellers will be responsible for certain closing costs. The amount of money and types of line items that buyers and sellers are responsible for varies by state, county, and city. For example, closing costs in the state of Washington are split 50/50 by buyers and sellers.
Typically, closing costs range from 2 to 5 percent of the home’s purchase price for buyers. Keep in mind, you will know well in advance – when you get your loan estimate from your lender – what you will pay. Loan estimates detail everything you will be expected to pay when you make your purchase.
Earnest Money Deposit (Refundable)
A good faith deposit – also referred to as ‘earnest money’ – is a deposit that a buyer puts down to prove to the seller that they are serious about purchasing the home. In exchange for the deposit, the seller takes the property off the market, essentially reserving it for the buyer.
Depending on where you live, the deposit is typically 1 to 3 percent of the purchase price. In most cases, the deposit is refundable. Earnest money is held in an escrow account by an independent third party. The third party is typically a title company because they manage all of the paperwork for the sale of the home.
Note: never pay earnest money to a real estate agent, only a third party.
Home Appraisal Fee (Nonrefundable)
If you are obtaining a mortgage, your mortgage lender will require an appraisal on the home. Appraisals determine the value of the home to ensure that the amount of money you borrow doesn’t exceed the value of the home. The appraiser determines how much the house is worth by researching similar homes in the neighborhood. For example, if you are requesting a mortgage for $500,000, but the appraisal determines that the home is only worth $400,000, the mortgage lender will only approve a loan for $400,000.
Home Inspection Fee (Nonrefundable)
A home inspection involves hiring a certified home inspector to conduct a thorough analysis of the home you wish to buy. Inspectors look at the home’s heating and air conditioning system, plumbing, electrical systems, roof, attic and visible insulation, walls, ceilings, floors, windows and doors, foundation, basement, and other structural components.
Unless you are obtaining a VA or FHA loan, you are not required to order a home inspection (VA and FHA loans require a home inspection). However, even if the home you plan on purchasing appears to be perfectly intact, and there aren’t any visible problems, it is still highly recommended to order a home inspection. This is the best way of knowing if any larger issues are happening in the home that might not be visible to you. If serious defects show in the inspection report, your real estate agent can negotiate to have some (or all) of the repairs paid by the seller.
Before you buy a home, a process called a ‘title search’ will take place. This process involves having a title company look through the property records to ensure the seller is the legal owner of the property. The title search will also check to make sure that there aren’t any outstanding debts on the property, such as unpaid plumbing or electric bills. If there are outstanding debts on the property, title insurance will protect you against having to pay them. The buyer and seller split the cost of title insurance.
Homeowners insurance is a form of property insurance that covers damages from natural disasters such as wind, hail, lightning, etc. Homeowners insurance is required on the day of the home’s closing, so you must secure this. You can shop around to a few different insurance companies and compare prices before committing to one – it is not necessary to go with the first company you find.
Mortgage Origination Fee (Nonrefundable Lender’s Fee)
You will learn this quickly when you go through the home buying process: everything comes with a fee. Obtaining a mortgage is no exception. The mortgage lender will charge a fee to finalize and manage all of the loan documents, which is the mortgage processing fee.
Mortgage Insurance (Nonrefundable Lender’s Fee)
If a buyer is unable to make 20 percent down payment, the mortgage lender typically requires the buyer to purchase mortgage insurance. Mortgage insurance protects the mortgage company if the buyer is unable to pay their mortgage.
Credit Report Fee (Nonrefundable Lender’s Fee)
When buyers seek a loan, the first thing a lender does is review the buyer’s credit history via a credit report. Mortgage lenders want to know about a buyer’s outstanding debt and whether they pay their bills on-time and in-full.
Flood Certification Fee (Nonrefundable Lender’s Fee)
This certification is used to obtain the government-required document that helps to determine whether or not the property sits in a flood zone.
Discount Points (Nonrefundable Lender’s Fee)
Paying an optional “discount point” means you are paying a certain amount of money in exchange for a lower interest rate on your home loan. Paying one point is equivalent to lowering the interest rate by one percent. Discount points add to the buyer’s closing costs, but they reduce the loa amount that the buyer will pay over the long term because they reduce the interest rate. If you only plan on living in a home for a few years, buying points is not advantageous.
Underwriting Fee (Nonrefundable Lender’s Fee)
Underwriters evaluate a borrower’s credit and capacity to buy a home. Based on what they find, the underwriter determines the best loan program for the borrower. The fee that covers the cost to finalize the loan process is called the underwriting fee.
Escrow Fee a.k.a. Closing Fee (Nonrefundable)
The escrow fee pays the company that conducts and oversees the closing during the escrow period. You will see line items for things like a title search and document preparation. Recording fees go to the local government (city or county) that records the deed.
Seller Closing Costs
Lawyers, if used, charge by the hour. If sellers use them to handle parts of a real estate deal, they’ll be responsible for those fees.
The broker’s commission explained above, is the fee charged by the listing broker for marketing the property.
Real Estate Excise Tax (REET)
REET is a sales tax on the transfer of real property, also known as a ‘documentary transfer tax’ in some states.
Sometimes, sellers agree to pay property taxes, a loan discount point, or attain home warranties on behalf of the buyer to help move a deal forward.
This kind of policy protects buyers against title defects that pop up like unpaid taxes or liens that were not found during the initial title search.