The TRUTH About Buyer's Agent Commission - Where Does the Money Really Go?| Ep. 20
The Truth About Buyer's Agent Commissions
Setting the Record Straight
In my earlier videos and shorts across various platforms, I've argued that buyer's agents are grossly overpaid. Today, I want to clear the record. While I certainly ruffled some feathers – and honestly, that was partly the point – I wanted people to really think about how much money goes to buyer's agents when purchasing a home.
Most home buyers don't think about this cost, especially since for the past 20-30 years, it's been standard practice for the seller to pay the buyer's agent. From most buyers' perspectives, having a buyer's agent has felt free. But when you look at closing statements and see that a buyer's agent is making 3% of the final purchase price, that's a huge chunk of change.
Breaking Down the Numbers
Let's look at what a buyer's agent actually makes when they help someone purchase a home. For easy math, let's use a million-dollar purchase price – which isn't uncommon among DIY home buyers I work with, who tend to be highly educated.
At the standard 3% commission rate, that's $30,000 to the buyer's agent. At first glance, it seems outrageous – $30,000 just to open some doors and fill out pre-made contracts? However, that $30,000 doesn't go directly to the agent. Here's how it typically breaks down:
1. **Brokerage Split** (25%): $7,500 goes to the brokerage
2. **Referral Fee** (25%): Another $7,500 goes to referral sources (like Zillow or other agents)
3. **Taxes** (30% of remaining $15,000): $4,500 goes to taxes
4. **Net Income**: $11,500 remains before business expenses
From that $11,500, agents still need to cover:
- Insurance premiums
- Office/desk fees
- Transportation costs
- Phone and technology expenses
- Marketing expenses
- Other business operating costs
The Industry's Inefficiency Problem
This breakdown reveals why you don't see many truly wealthy buyer's agents. To make six figures, they need to sell 10-15 million-dollar-plus homes annually at a 3% rate. Many agents driving flashy cars are often just playing the status game for marketing purposes.
The real issue isn't that agents are greedy – it's that the industry is incredibly inefficient. Think about it: you as the buyer are paying $30,000 (whether directly or through the purchase price), but your agent only sees about a third of that. The rest goes to entities that provide little to no direct value to you as the buyer.
Why DIY Home Buying Makes Sense
This inefficient system is why I encourage people to learn how to represent themselves and skip the buyer's agent. The question isn't whether agents are bad people – they're not. The question is: Is a buyer's agent bringing $30,000 of value to a million-dollar home purchase? What are they doing that an educated person cannot do on their own?
While they provide convenience and organization, is that worth $30,000? For most people, the answer is no. This is especially true when you consider that by representing yourself, you can either:
- Make your offer $30,000 more attractive without spending extra money, or
- Negotiate a $30,000 price reduction since the seller isn't paying a buyer's agent commission
The Need for Industry Change
The current system of dual commissions – 3% each for listing and buying agents – is fundamentally inefficient. Adding more professionals to a transaction inherently increases costs. We need to move away from cooperative broker relationships and toward a system where:
- Sellers agree to a specific listing agent commission
- Buyer's agent compensation is negotiated separately
- Buyers have the freedom to represent themselves without penalty
Looking Forward
My goal is to make housing more accessible by reducing transaction costs. For my friends and especially my children's generation, the ability to purchase a home shouldn't be hampered by exorbitant fees. By understanding and questioning these costs, we can work toward a more efficient and affordable real estate market for everyone.
