How Your ‘Free’ Buyer’s Agent Increases The Cost Of Homeownership (And What Homebuyers Can Do)

Merriam Webster’s first definition of free is “not costing or charging anything.” Residential real estate agents often advertise their buying services as “free,” and this is considered legal in almost every state in the country. While buyer’s agents typically meet the latter half of this definition by not charging money for their services, they do in fact cost consumers money when buying a home. While the cost is typically hidden and paid by the seller, it is built into the sales price, increasing the amount you will pay and finance.

Unfortunately, most buyers don’t how much their real estate agent costs because they are not privy to that information. Why is this? The vast majority of the time, sellers pay your buyer’s real estate agent a commission at the close of escrow. The commission is offered through MLS and typically hidden from the public. As absurd as it sounds, most states don’t require the buyer’s agent to disclose how much the seller is offering in commission. If you are buying a $500,000 home, your agent is likely making between $10,000 and $15,000 in commission, but it could be as low as a penny or as high as $20,000. Do you think your agent will be incentivized differently if one property pays them one cent while the house next door pays them $20,000? As a broker, I can tell you they are.

Northwest Multiple Listing Service in Washington recently made waves by allowing brokers to publicly disclose agents’ commissions. In an effort to protect the status quo, most MLS actually prohibit brokers from publishing the commission offered to the buyer’s agent. In a slap to the face of transparency, MLS can distribute heavy fines to brokers who disclose or disseminate information on the buyer’s agent commission. Knowledge of commission offered on the homes they are purchasing allows buyers to know what their agent’s financial incentives are, and to better negotiate a rebate or credit in order to lower the cost of buying.

If your agent is getting paid $20,000 and they agree to give you half of their commission, you would receive $10,000. If your agent gives you $10,000 on a $500,000 home, then you essentially paid $490,000 and lowered the cost of your purchase. This is difficult to achieve when you have no idea if they are getting paid $1 or $20,000.

Given that Seattle is the home of the publicly traded Redfin, a company that rebates money to buyers, it’s not entirely surprising that the state would be leading the way in terms of transparency. The National Association of Realtors is the largest trade association in the country, and all 50 states have state realtor associations, which have immense influence on relevant state laws. While transparency in regards to commissions (which are often in the tens of thousands of dollars) seems like a no-brainer, not all parties want the consumer to be so informed.

According to the Department of Justice and common logic, “rebates can save consumers several thousand dollars in a single transaction.” Unfortunately, as the Department of Justice also states, “ten states have enacted laws that forbid brokers from offering refunds, denying consumers the benefits of price competition and driving prices higher than they would be in a more competitive market.”

Having previously owned a company that rebated 20% of commissions to buyers, and now working for a VC-backed proptech company that gives up to 50% of our commission to buyers, I can tell you many agents don’t want you to know that buyer rebates are an option, nor do they like discussing their financial incentives to sell a particular home. Having sold many properties to investors who are also real estate brokers and agents, I can also tell you most agents are aware that they can and will ask for a buyer rebate or referral fee when purchasing a property for themselves in a state where they are not licensed and cannot receive a commission. In fact, most agents prefer a rebate over a commission referral for themselves because they can often circumvent their broker taking a cut of the commission.

Federal loans such as VA, HUD, Fannie and Freddie will not allow your agent to give money to your down payment; however, they will allow your agent to give you money toward your closing costs and prepaid expenses. Since closing costs are typically 2%-3% of the purchase price, in the majority of states you can almost always utilize a buyer rebate to lower your out-of-pocket expenses or buy your interest rate down even lower.

As a consumer, you will be better informed if you ask your agent how much commission they are getting paid on each home. Perhaps you might even be inclined to inquire with your state lawmakers about passing a law that mandates transparency and buyer agent commission disclosure. In the meantime, open up the conversation, and negotiate a chunk of the pie for yourself through a buyer rebate. You can lower your payment and better afford those granite countertops, or perhaps finally start that 529 college savings account for the little one.

No matter your feelings buyer rebates, transparency and truth are always the best policies. MLS across the country should not fine brokers for being transparent and disclosing broker fees offered to buyers. If MLS continue to block transparency, then now is the time for state legislators to require mandatory disclosure of MLS-offered commissions, so that the consumer can understand their agent’s incentives and have the opportunity to negotiate a lower payment or closing costs if they choose. We are all better served in a world that encourages truth and transparency.