One of the questions that I’m frequently asked is, “Who pays the real estate commission in Texas for a real estate transaction?” That’s a good question! Here’s the answer. Please not that the sales commission is NEGOTIATED (not always 6%) between the Seller and the Listing Broker BEFORE the house even “hits” the market.
Typically, real estate sales commissions are paid at the closing table. The title company disburses two checks out of the seller’s proceeds from the sale: one to the listing broker (such as a RE/MAX or Coldwell Banker) and one to the Buyer’s broker (in our case, Keller Williams Southwest). Then the Seller’s broker splits their sales commission with the Seller’s agent (also known as, the Listing Agent). And the Buyer’s broker splits their sales commission with the Buyer’s agent (Sheila Cox)–after deducting certain transaction costs, such as “Errors and Omissions Insurance.”
Please note that practically all real estate agents are independent contractors…not employees of the broker. In fact, real estate agents are usually required to pay certain fees to their broker for the privilege to work at that brokerage. Plus all expenses, including gas and mileage for taking you on home tours, refreshments on tours, paper and ink for contracts, phone fees, computer fees, etc. are paid by the individual agent and are not reimbursed.
So how do I earn the sales commission? I have a very detailed “To Do List for Buyer Clients” that has over 100 tasks that I may perform for you…and only one task is “Show properties until one is found.” So even if I show you 30 houses, that only represents one of the line items on my To Do list! Trust me when I say that there is a lot more to my job than “just showing houses.” I’m looking out for you every step of the way and keeping my eye on the Listing Agent, the Seller, the builder (if applicable), the lender, the inspector, the title company…I’m always watching out for you because I’m your agent.
Now you need to understand one more important thing:
___ Did your agent provide all the other necessary disclosures, notices, and the Buyer’s Representation Agreement to you before showing you houses? Be careful! You don’t want to find out after-the-fact that your agent actually represents the Seller.
___ Does your agent provide a detailed 18+ page house report on a home (see my sample), before you make the offer, to ensure that you know what you are buying before you make the purchase? This report should include information on the home’s price history, comparable sales numbers, school ratings, flood plain, tax info, environmental hazards (if any), near-by sex offenders (if any) at a minimum.
___ Can your agent effectively explain the HOA maintenance fees, MUD and LID taxes, compliance certificate requirements, amenities, property tax rates, school performance ratings, and other important information for the neighborhoods you are looking at?
___ Does your agent know how to provide you with an accurate CMA (price analysis) on a home before you make an offer? Is he or she committed to helping you get the right price or does the agent just want you to buy the highest priced home you can afford? (See “How to Price a Home Correctly“)
___ Does your agent point out possible defects of homes when you tour them or does your agent always seem to overlook the obvious problems of a home and try to convince you that they don’t matter? (Check my client satisfaction rating.)
___ Does your agent actually show you homes or does he or she expect you to drive the neighborhood on your own and then contact the listing agent directly to let you see the house? A dedicated agent wants to be with you every step of the way.
___ Has your agent set up a customized automatic home search for you that is pulled directly form the local MLS? Or are you still trying to find homes on your own using the limited online search Websites available in your area? These programs (such as Realtor.com, Zillow, Trulia, and Homes.com) can be outdated very quickly showing contract-pending homes as “active.”
___ Does your agent use an online paperwork system where you can e-sign documents instead of having to fax and scan them (which is sometimes challenging and time-consuming)? What if your spouse is still back home in another state or country? You need to be able to e-sign!
___ Does your agent work to negotiate a residential service contract (aka, home warranty) in the deal or provide one for you to protect you from too many future home repairs?
___ Does your agent have at least a 4.5 star client satisfaction rating with the local board of area Realtors? What’s your agent’s YELP rating, Homes.com endorsements, Angie’s List reviews, and so on?
___ Does your agent have 20 years experience? (Trick question.) IT DOESN’T NECESSARILY MATTER! There are terrible agents with 30+ years of experience who even have a broker’s license. And there are outstanding agents with only a couple of years experience. Time does not equal quality in this business. Time cannot guarantee attitude, dedication, integrity, intelligence, or commitment to customer service. Check their satisfaction rating...this is a free service for all members of the Houston Association of Realtors (HAR). If your agent hasn’t signed up, maybe they have something to hide.
The Agent Showing You Houses May Not Be Your Agent
Many people think that if a real estate agent is showing them houses, that means the agent is their agent and looking out for their best interests. This is not the case in Texas, which is why the Texas Real Estate Commission requires that real estate agents go over the Information About Brokerage Servicesbefore they start showing you houses. That document explains that there is a difference between the various roles that different types of agents perform in the home buying/selling process.
Click to see entire document
This is one way you can know that you are working with a PRO! If an agent is showing you houses and has never discussed the legally requiredInformation About Brokerage Services and buyer’s representation, then you are working with an Amateur…not a Pro! Is that what you want when dealing with one of your largest financial investments? What else will they refrain from telling you?
Many people misunderstand the purpose of the Multiple Listing Service (MLS). They think it is just a home search tool. It’s true that the MLS is the tool real estate agents use to list homes for sale. It is also the tool that buyer’s agents use to find houses to show to buyers. And it is the source of information for home search websites like Har.com, Realtor.com, Zillow, etc. (The MLS gets those listings first, because it’s the source database for those listings. After a home is listed in the MLS, then the data is sent –sooner or later–to other home search websites. This is why you may find a house for sale on Zillow and then your real estate agent tells you it is no longer available. Zillow doesn’t update as frequently as the MLS.)
What most people do not understand is that the purpose of the MLS is for licensed real estate agents to advertise homes for sale and offer to share their sales commission with member agents who help them obtain a buyer for their listing. It’s the way that member real estate agents get other agents to help them sell a house. That’s why you have to be a paid member with a state license in order to use the MLS. (It is illegal in Texas to pay real estate sales commissions to unlicensed people.)
So when a listing agent puts a house for sale on the MLS, the agent is agreeing up-front to pay other agents a set commission…which may vary depending on whether the agent is a “Buyer’s Agent” or “Subagent.” This is all predetermined before a buyer ever sees a listing through the MLS…and before the first offer for the house is written.
Here’s another thing that most consumers do not know, while we’re talking about sales commissions…
Real estate agents are not (usually) paid employees of the brokerage where they work…they are “straight commission.” They do not receive an hourly or salary paycheck from their brokerage for showing houses to people just for fun. Almost all real estate agents are Independent Contractors who only earn a living by receiving sales commissions for selling homes. Plus, they pay all their own expenses. This is why professional agents are careful with their time and only show houses to clients who are ready, willing, and able to purchase a home. If they waste time showing houses to people who just want to look at houses for fun, then they are not earning their living.
Buyer’s Agent vs Subagent
So by default, a real estate agent who is a member of the MLS is always representing the seller as a Subagent, unless they have a signed Buyer’s Representation Agreementwith the buyer to become the Buyer’s Agent.
There are different rules for how a Buyer’s Agent can work with a home buyer vs. how a Subagent can work with a home buyer.
Let me illustrate. In the MLS, there are two versions of a listing’s printout…one that is specifically for buyers:
And one that gives more details to the agent:
In this example, a Subagent would be required to say the listing Days on Market was 228 (which is true for that listing)…but the Buyer’s Agent would be free to say the cumulative days on market for the house was actually 302 days. Plus, the Buyer’s Agent can show their clients the full price history…a Subagent is not allowed to lie, but also cannot volunteer information that damages the seller’s position (because the seller is their client…you will want the same protection when you are a seller).
Notice above that the listing says the Original Price was $499,000, but if you look at the price history, the Buyer’s Agent could show that there was another listing for this house, with another brokerage, which started at $519,000 in April 2018.
Also…look what a Buyer’s Agent could reveal right away regarding “Previous Flooding onto the Property”…
A Subagent does not have to volunteer this information unless specifically asked by the Buyer. So the Buyer could waste time making an offer on the house and then get this information on the Seller’s Disclosure after the fact. But a great Buyer’s Agent should be looking out for you without asking. They have a Fiduciary Duty to look out for your best interests.
Furthermore, a Subagent cannot do a CMA and tell you that the home is overpriced…but as your Buyer’s Agent, I will! I will do everything I can to make sure you know all the pricing details on a home when you decide to make an offer. This is to help prevent you from overpaying for the home.
Please know that Texas is a non-disclose state and only members of the MLS have actual sales data. Tax appraised values are not accurate for market value in Texas! And even Zillow only gives themselves 1-star on their Zestimate’s accuracy (see here). There is a method for doing a proper Comparative Market Analysis for a home that is similar to how a lender’s appraiser is going to determine a home’s value. Hire an experienced agent who knows what they are doing!
As you can see, if you want all the pertinent information available to make the best buying decisions, then it is important that you obtain your own representation with a Buyer’s Agent. Having a Buyer’s Representation Agreement benefits you by:
Protecting your confidentiality
Allowing me to provide you with all the information at my disposal, including advice on the price
Allowing me to negotiate based on your best interests
Giving you a partner who is loyal to you
And the Seller stills pays the real estate commission, even when you have a dedicated real estate agent. They agree to do that when they agree to let their home be listed on the MLS (see graphic above). So it does not cost you extra to have your own buyer’s representation.
Sheila’s Release Clause
The Buyer’s Representation Agreement is for your protection; it is not meant to “tie” you to me…it’s meant to “tie” me to you. To prove this, and because I’m confident that you will enjoy working with me as your real estate agent, I put a release clause in Para. 17 stating that you can cancel the agreement at any time for any reason. I do not want you to worry about being “stuck” with me! I’m a Five-Star award-winning real estate agent, but if you are not happy with me, then you are free to cancel our agreement.
I only work with Buyers with whom I have a Buyer’s Representation Agreement. This just simplifies things because then I don’t have to worry about whether I’m giving you too much information (or properly representing the Seller). As my client, I can give you my full professional opinion at all times and answer any and all questions that you have.
Once you have a Buyer’s Representation Agreement in place, you should always state that up front to other real estate agents (at open houses) and builder’s sales reps (if touring new home models) because, by law, they need to know that you have representation.
Your Agent Helps Protect You
Remember: My job is not “just” helping you find a house to buy…I’m helping you buy a house. There are over 100 tasks that I perform for you during the purchasing process! I’m looking out for you every step of the way and keeping my eye on the listing agent, the seller or the builder (if applicable), the lender, the inspector, the title company, and so on. I’m on your side because I’m your agent. I consider myself more of a real estate consultant and project manager…not a salesperson. Not only do I help you find a house, I help with price analysis and negotiation, legal paperwork, inspections, repair negotiations, home warranties, compliance inspections, hazard insurance, surveys, appraisals, title commitment, and so on. Buying a home has serious legal consequences! And it is a complicated process that needs an experienced project manager (like me) managing it for you.
Take a look at a sample House Report that I do for my clients. No other agent in the world does this!
Check out p. 27 for the Flood Map info I provide. I’ve got your back!
But I’m Buying From a Home Builder – So I Don’t Need An Agent
A home builder is a seller…so you still need your own representation! Believe me when I tell you, that sales rep sitting at the builder’s model home may be a super-nice guy or gal, but he/she is paid to look out for the builder’s best interest, not yours.
The builder’s sales agent is not going to tell you that there is a landfill or prison a half-mile away from the neighborhood or that the specific schools zoned to the neighborhood are low-performing (notice how they talk about the school district?), or that the neighborhood is struggling to sell homes (and home values are falling). The builder’s agent will not tell you that the last three buyers who bought the same floorplan that you want, paid $30,000 less than the price he or she is showing you now…but I will! What’s more, the sales agent will show you that the house originally listed for $100K more than current list price to make it sound like a great deal. That’s a builder’s “trick.”
Did you know that most home builders require their sales agents to “hang up” their real estate license (go Inactive) to work for the builder? This is so the sales agent doesn’t have to abide by the same rules and ethics that a licensed REALTOR® has to abide by.
And please know that you are not going to save money by not having your own agent. Just like regular home sellers, builders pay the buyer’s agent’s sales commission and they build that cost into their sales price. If you don’t have your own agent, that just means the builder makes more money…it doesn’t mean you get a better price.
And always remember that you still need a home inspector when you buy a new-construction home. The builder’s inspection process is not for your protection…it is just part of their system. In my experience, new homes typically have longer inspection reports (more stuff to fix) than good-condition resale homes because the “kinks” haven’t been worked out yet…by the first owner.
Once you have a Buyer’s Representation Agreement in place, you should always state that up front to builder’s sales agents (if touring new home models) because, by law, they need to know that you have representation.
But I Want To Save Money Working Directly With a Listing Agent
Some inexperienced buyers think they will save money if they skip their own representation and just work directly with the listing agent. Congratulations! You just let the seller pay the listing agent double for NOT representing you.
Before a listing agent can put a home for sale on the MLS, he or she must have a signed listing agreement where the seller has already agreed to pay a set sales commission. As I showed at the beginning of this article, when the listing agent puts the home on MLS, they already agree to pay buyer’s agent’s sales commission. This is the purpose of the MLS!
If you buy without your own agent, then the listing agent gets to keep the entire sales commission…it’s already in the “contract” (listing agreement) between them and the seller. Sales commissions are NOT negotiated when an offer is made on the house…they are agreed to in advance. So don’t make this amateur mistake.
Does My Real Estate Agent Represent Me or the Seller?
When I bought my first house in the mid 1990s, Texas was kind of a “Buyer Beware” state. In fact, a home Buyer could spend weeks looking for a home with a real estate agent, telling her secret information (like how much you were willing to pay for a house), not knowing that everything you told that real estate agent would be told to the Seller because the real estate agent was actually representing the Seller–not you (the Buyer)!
Here’s what you need to know…
Unless you have a written agreement with a real estate agent, all Texas agents are always representing the Seller–typically known as the “subagent.” That is how agency works in Texas. This can be confusing for home Buyers, so the Texas Real Estate Commission wants you to know about brokerage services, who represents whom, and intermediary agency, BEFORE you start working with an agent...not only is it the law, it’s also for your protection! (Read TREC’s Information About Brokerage Services.)
NOTE Finding out “your agent” is actually representing the Seller after you’ve found the house you want to buy is NOT a good thing! If an agent doesn’t give you the Information About Brokerage Services form UP FRONT (before showing you houses), then you are dealing with someone who is unprofessional and not following the law.
Another fact that you need to know is that Texas is a dual-agency state…meaning that a real estate broker (such as Keller Williams Southwest) can represent both the Buyer (you) and the Seller (them) in a the same transaction. This is called “intermediary agency.” These visual aids will help you to understand…
In this case, you are represented by Keller Williams Southwest (KWSW) while buying a house listed by another broker, such as a RE/MAX or a Coldwell Banker. This is not an intermediary agency since KWSW is only representing you.
In this case, KWSW is representing both you and the Seller…because the house that you are buying is listed with KWSW but with a different agent. However, you have an appointed agent (Sheila Cox) and the Seller has an appointed agent (Unknown) and both agents have to maintain their duty of confidentiality. So I am not allowed to share your private information with the other agent. This situation may occur frequently with large brokerages who have lots of listings, such as KWSW.
This situation may only occur if both the Seller and the Buyer agree to it in writing. In this situation, you are buying a house that I have listed for one of my other clients. I would be representing both you and the Seller, so my fiduciary responsibilities would be limited. Frankly, I don’t work these types of deals. If you wanted to buy one of my listings, then I would step back and find another real estate agent to be your appointed agent…so you would still have full representation.
Now you need to understand two more important things:
“That’s what I used to think! In fact, before I became a licensed real estate agent, I did several FSBO (For Sale By Owner) sales and THOUGHT I knew what I was doing. But if I had known then what I know now…I never would have risked it. Here’s what I’ve learned…” –Sheila Cox
Yes…You Need a Partner During the Home Buying Process!
Your home is probably your largest single financial investment. Most homes in my area (Katy and Sugar Land TX) cost over $200,000. If you had a $200K legal problem would you try to handle it yourself or would you high a quality attorney to help you?
Of course, not all attorneys are equal in skills, knowledge, integrity, experience–and neither are all real estate agents. In fact, most people have had at least one bad experience with a low-quality real estate agent. I know I have! As in any industry, please consider that it is possible the 80-20 rule applies to real estate agents…maybe 20 percent are not very highly qualified, but that would leave another 80 percent who are! (Just like in your line of work…do all your peers provide the same quality of expertise?) Always keep in mind that having a bad experience with one agent, doesn’t mean that all real estate agents are bad. The trick is finding and hiring the right, high-quality agent. Here are some things to consider…
Real Estate Laws Vary From State to State
Not all states have the same real estate laws. In fact, Texas real estate laws and practices are highly unique in comparison to other states. Just because you have bought or sold a home in another state, does not necessarily make you qualified to do so in Texas. (I know, I know…we Texans think everything is bigger and better here!) But the fact is, Texas real estate is so complicated, that agents are required to have many more hours of education to get a license here than any other state…about three times more hours of education than average across other states!
Your Legal Exposure in a Real Estate Transaction Can Be Very High
A very common type of real estate lawsuit involves Deceptive Trade Practices in which a home buyer accuses the home seller for not properly disclosing the actual condition of the property. In these cases,treble damages (three times the actual cost) can be awarded. This can really add up! And the cost for hiring a real estate attorney to defend yourself can cost well over $10,000! It doesn’t always matter that you did nothing wrong. Without a licensed real estate agent there to watch out for your interests and to make sure that you comply with all of the Texas real estate code and statutes, you can end up with a real nightmare on your hands.
Likewise, home owners can sue home buyers for non-performance or can keep large amounts of earnest money if a contract doesn’t Close. This is when you want a professional agent looking out for your best interest to (hopefully) prevent you from breaching a contract and losing your earnest money. And if a lawsuit is not prevented, isn’t it best to have a large, reputable real estate brokerage (and their legal team) behind you when you need it?
Real Estate Data Is Not a Matter of Public Record In Texas
Texas is one of 14 non-disclose or partially-disclose states in the U.S. That means that real estate sales prices are not a matter of public record in Texas. So Internet-based companies like Zillow and Trulia do not have the real data to accurately “Zestimate” what a house is worth in our state. Property tax records are what these companies use in order to estimate a home’s value. But everyone in Texas knows that tax appraisal values do not usually reflect the actual value of a home…they are typically lower than actual value. (Which helps to keep the costs of our already too-high property taxes down.)
The only people in Texas who have accurate sales records are members of the Multiple Listing Service (MLS) including real estate agents and home appraisers. So if you want an accurate sales price analysis on a home (so that you don’t pay too much for it) you will need to hire one of these professionals.
CAUTION: Not all real estate agents are equally good at sales price analysis. Hire an agent who knows how to put together a valid comparative market analysis (CMA).
Do You Really Want (or Have the Time) To Learn Everything You Need To Know About Real Estate?
Yes, you can read up on real estate and I encourage you to do so. But no amount of book-learning is going to make up for the actual real-world experience a high-quality real estate agent offers. Real estate laws change yearly and vary from state-to-state. So most books are out-of-date by the time they go to print or are too generic to meet your specific state’s requirements.
And please don’t believe all the real estate advice that you can read on the Internet. I recently read an Internet article about how to sell a home without a real estate agent and most of the advice offered was not accurate according to Texas real estate laws…which could get you into some costly legal trouble. Even the advice from real estate agents on one of my favorite online resources, ActiveRain, is not always accurate for Texas.
Besides all this…aren’t you busy enough with just deciding on a home, getting your lender all the necessary paperwork, planning the move, changing utilities, registering at new schools, packing, training for the new job, and so forth?
It’s Complicated! Are You Qualified to Manage the Entire Transaction?
A high-quality real estate agent wears many hats: local area expert, state real estate rules expert, amateur remodeler, price analyzer and mathematician, home decorator/stager, professional photographer and videographer, marketing expert, chauffer and tour guide, psychologist, marriage counselor, sales negotiator, amateur home inspector, administrative assistant, project/transaction manager, communications expert, and tech writer. Very few professions require skills in so many different areas! I don’t think the average person realizes how much they expect their real estate agent to handle.
(Read a great article by non-agent: “How many hats does a Realtor wear?”)
And then there are the home buyers who think real estate agents just help them find a home to buy and once the contract is accepted, their job is over; but that’s just the “end of the beginning” for an agent! Likewise, a great listing agent doesn’t just take a few photos, put a sign in the yard, and wait for the offers. A great real estate agent is looking out for you every step of the way and keeping their eye on the other agent, the other party (buyer, seller, builder), the lender, the inspector, and the title company.
Here are more examples of what a real estate agent does for you:
Helping you maneuver the Option Period, including getting the right inspections and, if necessary, repair estimates. Do you know how to “exercise your option” properly if needed? Do you know how to minimize the impact of the OP when marketing a home as a seller? How do you deal with lender-required repairs?
Negotiating necessary repairs with the Seller so you don’t get stuck with them after Closing. Can you get repair estimates in a timely manner? Do you know how to effectively overcome common repair objections? Do you have the knowledge needed to accurately estimate a remodeling project?
Helping you meet your contractual obligations (such as appraisals, surveys, deed restrictions, HOA compliance certificates, legally required disclosures, title commitments, hazard insurance, and more) in a timely manner so you don’t find yourself in breach of contract. How many days do you have to get the survey? If there is an existing survey, what other legal document is required? What do you do if encumbrances are found in the title search? What do you do if your financing falls through after the deadline in your contract?
Dealing with home inspectors, appraisers, lenders, and title companies to get them to do their jobs in a timely manner so you can move when you plan to. There are many moving parts in a real estate transaction! What do you do if the lender doesn’t get the paperwork to the title company on time? How do you know if the fees on the HUD1 are accurate? Did you remember to get hazard insurance and order the residential service contract? Did you negotiate a temporary lease so you can move out after Closing? What do you do if the Closing falls through?
Do You Know the Area As Well As You Need To?
If you are moving to a new area, there is no substitute for getting the opinions and advice of a local real estate expert. Even if you know someone who lives in the area that you are moving to…they only see that area from their individual, and probably limited, perspective. You really need a professional who has the BIG picture and the “inside information” that only a local real estate expert can provide. Someone who will listen to your specific needs and find the right neighborhood and right home for you.
And watch out for online companies offering you price reports and other types of statistics based on ZIP Codes. Sugar Land consists of multiple ZIP Codes and let me assure you that a price analysis for a home in Sweetwater in 77479 is not going to accurately reflect the price of a home located in Woodstream which is in the same ZIP Code.
Home prices vary not only from neighborhood to neighborhood, but even within the same neighborhood. For example, a home in New Territory that has a water view is going to be valued higher than a home right down the street that does not have a water view. And a 2000-2600sf home probably has a different average sales price/sf than a 3500-4100sf home…even on the same street. AND those same values can change from month to month (depending on the actual figures for recently closed home sales). Do you have the real sales data and price analysis expertise to ensure that you don’t pay too much for a home or list it at an unrealistic price?
Sometimes You Need An Objective Partner When Choosing the Right Home
Let’s face it…even the most level-headed, objective, analytical engineer-type can get emotional (and become unobjective) about a home. Trust me on this observation! Everyone gets emotional on some level about the house they are going to live-in for the next several years. And if you have raised four kids, two dogs, and three cats in a home for the past 23 years…forget about it. You may not see the worn-out carpet and outdated wallpaper for the good memories.
Sometimes it is just like “love at first sight” when buying a home. And that emotional response to a home may cause you to do something you will regret later. You need an unattached, neutral, third-party (such as a dedicated real estate agent) to help keep you focused on the facts and the big picture. I’m not saying all agents do this. I agree that some agents are just out to close the deal no matter what, and don’t really care if you are going to end up with a poor investment that you will regret when resale time comes along.
But I once talked a client out of a $650,000 home because, when I was researching the home and looked at the bird’s eye view, I found a hidden dump where you could see railroad cars deteriorating and rusting into the local water supply! You never would have seen this driving around the neighborhood because it was hidden behind fences and shrubbery. But when I showed my clients what they would be living next to, even though they were disappointed because they loved the house, they were thankful that I found the problem and objectively pointed it out to them before they purchased that potentially costly mistake. I ended up selling them a $525K home they loved and we are very good friends to this date because they know I am trustworthy and not just looking out for the highest sales commission I can get.
So let’s recap. Since…
…real estate laws vary from state to state and change every year,
…your legal exposure in a real estate transaction can be very high,
…real estate data is not a matter of public record in Texas, so you don’t really know what a specific house is really worth,
…you probably don’t have the time to learn everything you need to know about real estate
…it’s complicated and you may not be qualified to manage the entire transaction,
…you may not know the area as well as you need to know it, and
…you probably want an objective partner to help you choose the right home…
You should definitely hire a real estate agent to help you with your next real estate transaction!