This post is not legal advice. For legal advice, consult an attorney in person and do not rely on a blog.
Earlier this week, I authored a post giving some historical context and practical tips for buying a house without using an agent. The Big Question, of course, is this: Will that save me any money? It should if you approach the transaction correctly.
As an initial matter, you must understand where the money starts and where it goes in a typical transaction. It starts, of course, with you, the Buyer. It’s not uncommon to hear someone say, “Oh, sure I used an agent to buy my house — he was free! I didn’t pay him anything!” That is simply not true. Remember that, of all the parties involved in the transaction (seller, buyer, listing agent, buyer’s agent, title insurance, escrow, lender, mortgage broker, etc.) only one brings money — you, the Buyer. Everyone else gets paid from the Buyer’s money. So while you may not pay your agent directly, you most certainly do pay him out of your pocket (or, more accurately, out of the money you have borrowed from the bank, and which you must repay, with interest).
And exactly how does your agent get paid with your money? Well, the seller previously signed a contract with the listing agent where the seller promised to pay a certain percentage in exchange for the agent finding a buyer. The “typical” percentage paid is 6%, although there is some degree of variability with figure. Per the rules of the MLS, that commission is then shared with the buyer’s agent when the house is sold (or, more accurately, with the buyer’s broker, but I won’t get into that for simplicity’s sake). Most sellers and listing agents agree to give 3% to the buyer’s agent, on the theory that anything less will attract less interest from buyer’s agents (I’ll get into the ethical issues of that dilemma in a future post).
The listing agent has a contractual right to the full commission. If you go without an agent (e.g., drafting the offer yourself (discouraged) or using an attorney), then the listing agent will not need to share any portion of the commission. While the agent has no legal obligation to accept anything less than the full commission as set by the listing agreement, the agent is free to accept less than full payment if he is so inclined. So, the buyer can structure the offer such that, if the listing agent cooperates, the selling price is reduced by 3% (or whatever percentage was to be shared with a buyer’s agent). The seller will presumably lean on the listing agent to reduce the commission, as everyone gets what they expected out of the transaction.
What about dual agency? Well, the listing agent is the agent of the seller. It is incumbent upon the listing agent, in dealing with the buyer under these circumstances, to explicitly make clear that she does not represent the buyer and is not concerned with the buyer’s interests. That may be an uncomfortable conversation, but it is one that any professional “agent” (i.e., any professional who represents the interests of a principal) must have with an unrepresented party.
Finally, what about all of the extra work for the listing agent? Yes, there may be a more work, such as being there for the inspection since there is no buyer’s agent. But don’t forget that, in any one transaction, a listing agent makes a very fair fee. What is the average amount of time a good listing agent invests in a listing? And, assuming a 1.5% commission to the agent (after the broker’s cut), what is the average fee? Given a median home price of $400k, the agent will make $6k. Assuming 50 hours of time, that’s $200 per hour. A little “extra” work (it is, after all, all part of the job) is not unreasonable if necessary to secure that amount of compensation.
So, if you’re thinking of buying a house, consider ALL of your options and figure out what is best for you. If you want to save a lot of money (we’re not talking pennies here), consider using an attorney instead of an agent (you should absolutely use a professional given the value of the transaction, and realistically these are your two options).