Payment Concerns for the Real Estate License Exam
A discussion about how real estate agents are paid needs to happen before you take the Real Estate License Exam. Agents get paid if and when they fulfill their agency duties and complete the work of the agreement they’ve signed; helping someone sell or buy a property.
The problem with the real estate business is how you define the phrase accomplish what they were hired to do. And, because several people are involved in a typical real estate transaction, including a buyer and seller and possibly two brokers, who pays what to whom, why, and when isn’t as straightforward as when you get your paycheck every week at the office.
Who needs to pay a real estate agent
In many, if not most, real estate transactions you’re hired by sellers to be their agent. You owe them your fiduciary responsibilities and they pay you.
But what about when you’re hired by the buyer as a buyer’s agent? You owe your fiduciary responsibilities to the buyer. Yet, in many buyer agency arrangements, you’ll still be paid by the seller. You owe your loyalty and all your other fiduciary duties to the buyer but will be paid by the seller, because of a simple rule that you need to remember.
Generally speaking fiduciary responsibility does not follow the source of the fee. This means that you can represent Person A and be paid by Person B even if your job is to represent Person A against Person B.
Looking at an example of a seller paying a buyer’s agent may help you understand. Broker A is hired by Seller A as a seller’s agent. Broker A will be paid a fee, usually a percentage commission based on the sale price. To sell the house quickly and at the best price, Broker A puts the word out among other brokers in town that he has a house for sale.
Broker A may do this informally by phoning a few other brokers in the area or through a multiple listing service, which is a more formal arrangement for sharing listings, and he offers to split the commission with any broker who brings someone to him who buys the house. Most likely he eventually executes a written agreement for sharing the commission with the other broker.
Broker B is acting as a buyer’s agent for Buyer B and brings Buyer B to Seller A’s house. Buyer B likes the house and buys it. Broker B will be paid a share of the commission that Broker A offered. Remember, Broker A gets paid by the seller, and throughout the transaction, Broker B represented the buyer.
The seller doesn’t always pay the buyer’s agent’s fee. The buyer can and sometimes does pay his broker’s fee himself, an arrangement that is particularly true in the case of a buyer signing an exclusive buyer agency agreement in which the buyer must pay a fee no matter how he finds a property.
So even if the buyer ends up buying a house directly from an owner with no broker involved, he still must pay his agent a fee.
Finally, where a buyer’s agent and a seller’s agent are involved in a transaction, it’s always possible for the buyer and the seller each to pay their own agents. Just remember, your fiduciary responsibilities go to your principal, which is the person who hires you, even if you receive your fee from someone else.
When a real estate agent should be paid
A question in the real world, and on state exams, is this: When, during the process. do real estate agents earn their fees? The answer is when the broker produces a ready, willing, and able buyer. A ready, willing, and able buyer is someone who agrees with the seller to all the terms of the deal and is prepared to do whatever it takes to buy the property.
For example, if the buyer doesn’t have the full price in cash, he gets a mortgage. The broker in this case is considered the procuring cause, a fancy term for the person who brought the deal together.
An interesting factor that you notice about this answer is that it talks about the transaction from the seller agent’s point of view, because most agents still represent sellers. Although buyer’s agency is growing, buyer agents’ fees still are paid primarily by the seller. So don’t grow worried about a question that deals with when the agent’s fee is earned. The ready, willing, and able buyer answer should be fine.
Another factor with when a fee is earned is that it says nothing about actually transferring ownership of the real estate from one person to another. A fee is earned when the minds of the seller and buyer meet in an agreement — a meeting of the minds — which is another way of saying that the buyer and the seller have agreed to terms and are prepared to complete the transaction.
If a seller agent produces a ready, willing, and able buyer who’s ready to buy the property at the seller’s price and has the money to do so, and for some reason, the seller changes his mind and refuses to sell the property, the broker still is entitled to a fee.