Why Do Home Sellers Pay the Buyer's Agent Commission?

May 29, 2023
Home Property

In 1913, a pivotal year for innovation, Henry Ford introduced the Model T, while the National Association of Real Estate Boards (predecessor to the National Association of Realtors, the “NAR”) implemented a rule requiring agents to divide their commission equally with any Association member who brought a buyer. Legally, the broker that furnished the buyer was classified as a “sub-agent” of the listing agent. As such, both the listing agent and the agent working with the buyer were both representing the seller.

The fiduciary duty of both the listing agent and the agent working with the buyer was to the seller. Both brokers had a legal obligation to represent the seller and to help them obtain the best price for their property. This meant they were required to inform the seller of confidential information the buyer that could be relevant to obtaining the best deal. For example, if a buyer stated how much they would pay to agent working with them, the “sub-agent” was required to relay this information to the seller. In such a world, it clearly made sense that the seller would pay the commission for both agents.

Such a “sub-agency” arrangement has clear drawbacks. First, it leaves the buyer without any legal representation. Second, it puts the “sub-agent” in an awkward position of needing to appeal to the buyer so that they will work with them, yet ultimately also having a fiduciary duty to the seller. This complicated relationship caused confusion over the years and over time many people assumed that the buyer’s agent that was working with them represented them and their interests. Surveys conducted in the 1980s revealed that 73% of buyers disclosed their maximum price to the agent working with them, unaware that the agent working with them had a legal obligation to the seller.

In the 1980s, despite the formal legal obligation of the “sub-agent” to the seller, several courts found that agent’s working with buyers also could reasonably be expected to have certain fiduciary obligations to buyers they were working with. As such, the “sub-agency” model ultimately became untenable and in the early 1990s there was a formal recognition of a buyer’s agent that was no longer a “sub-agent” of the listing agent. Many in the real estate industry resisted the move to an official buyer’s agent, worried that it would disrupt the prevailing fee model of the seller paying the commission for both brokers.

Despite the legal change in who the agent working with the buyer represented, home sellers have continued to pay the commission of the agent working with the buyer.

Due to the unique path of history, when you sell your home, you are the one who is paying for your agent and the buyer’s agent. While both agents no longer represent you, you do have control over the amount and method of compensating them. You have more choices than the typical 5 or 6% commission that is split equally between both agents. If you want to sell your home for the highest price, research shows you will get better results if you use a contract where you reward the agent for delivering higher sale prices. Additionally, by working with your agent to set a competitive commission for the buyer’s agent you can save even more money.

At ListWise our goal is to empower homeowners to make smart financial decisions and help them get the best price when they sell their home. We can help you find and compare multiple agents that fit your specific needs, and we make it easy to hire the agent of your choice using an incentive-based commission contract so that you get the best price for your home.

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