Buying a home is something you don’t do often, yet many high-income professionals assume they should understand the whole process. If you made it through Evidence or Molecular Biology, how complicated can it be to buy a house?
On the other hand, real estate agents don’t exactly have the best reputation. With modern technology, you’re probably going to find your own home through an online search, so it may not be clear to you what a real estate agent brings to the table.
You might be like a lot of people who spend more time deciding on a place to eat than they do searching for a good real estate agent, but we’re going to convince you that a good real estate agent can help smooth out your home purchase and make the difference between a pleasant and unpleasant experience.
There are over 3 million active real estate agents in the United States and 86% of buyers and sellers report using a real estate agent. Whether you are buying or selling a home, a good agent will have a significant impact on the value and quality of service you get from a real estate transaction.
Pick a real estate agent with relevant experience like you would a lawyer or doctor. You wouldn’t trust a pediatrician to perform brain surgery. Ideally, your real estate agent specializes in your financing and property type and is:
- Familiar with your local market
- A strong negotiator
Your real estate agent should also understand what it’s like to be a busy professional and they should help offload tasks so that you can focus on what you do best.
How real estate agents make money
Real estate agents are required by law to work with a real estate brokerage and receive payment in the form of commissions. Agents must be paid by their brokerage and cannot receive commissions directly from clients. Brokerages supervise the activities of the agents they employ and collect and distribute commissions between agents on either side of a transaction.
The commission structure is set by the seller who pays the commission for their listing agent as well as the buyer’s agent.
Let’s say a home is sold for $100,000 and the seller agreed to a typical 6% commission to be paid to their brokerage and evenly split between each agent. The buyer’s agent would collect a commission of 3%, or $3,000, at the closing of the deal and the seller’s agent would collect the same.
Many first time homebuyers don’t understand that it’s actually the seller that sets the commission, and that the buyer isn’t typically expected to pay any of the commission (although the commissions likely increase the housing price the seller is hoping to get for the property).
The median price of homes sold in the United States is $396,800. Approximately 6.1 million homes were sold last year, meaning the total value of home sales was around $2.4 trillion and the commission pool agents competed for was approximately $145 billion.
The median annual income for a real estate agent is $48,340, but agent incomes vary significantly depending on volume and the number of transactions an agent participates in.
Commissions may be negotiated and vary market to market, but ultimately a real estate agent is only paid if a deal closes.
There’s been a lot of criticism in the industry about how fees are based on the price of the house, which means that a seller might be paying 10 times more to sell a house in California as they would to sell a house in Kentucky. Does anyone really think the level of service is 10 times different between the locations?
Are buyer real estate agents really free?
Buyers will never be charged by their agents and commissions are technically paid by the seller, but these fees are baked into the purchase price. The seller and the seller’s agent agree on the commission rate while taking into consideration the commission to be paid to the buyer’s agent.
After a deal is completed, commission fees are removed from the purchase price of the home and distributed by a brokerage between the seller’s agent and the buyer’s agent. Although the seller pays the total commission fee from the purchase price of the home, the buyers and sellers collectively pay agent commission fees.
Sometimes you may be able to get a discount on the purchase price by not using an agent but you’d be in the minority of people who decide to do that and we can’t recommend it as a good idea since you may end up making a mistake that could cost you thousands.
Particularly as a first time homebuyer, the fact that ultimately the seller is paying the commission gives you a chance to learn about the process of purchasing a home without the pressure of paying out of pocket.
How to pick a real estate agent
The first step is to create a list of potential agents. Trusted referrals from friends, family, and work colleagues are a great place to start, but keep in mind their recommendations are likely based on a single transaction. Once you’ve collected names, you can narrow the list down through some background research.
Check their online presence for quality photos and social media posts.
Search your state’s real estate commission website to confirm agents are properly licensed. Arello is another good tool although it doesn’t include all 50 states.
Investigate any violations or disciplinary actions. Your state’s real estate commission or department websites are good resources to check and the Better Business Bureau may reveal poor reviews from past clients.
Once you’ve got a manageable list of agents you can begin the vetting process. You should vet at least three real estate agents to establish relationships and learn more about their personality, past transactions, and potential strategies. Good questions to ask include:
- How many deals have you done in my market and price range?
- Do you have experience with my property type and financing?
- Do you have a list of references I can speak with?
- What would a competitive offer in my market look like?
Ultimately, you should pick an agent you trust and feel comfortable with to get the most value out of your real estate transaction.
The financial stakes are huge and unlike a lawyer or physician, a real estate agent can obtain a license to practice real estate in as little as two months in some states.
It isn’t obvious which agents are good and which agents are bad, so don’t be afraid to spend some time picking out the right agent for you.
The importance of your real estate agent understanding professional mortgages
The real estate marketplace is extremely competitive and a good real estate agent will be able to answer a seller’s questions about financing and highlight your offer to beat out buyers with larger down payments.
At first glance, an uninformed seller may not know the difference between a regular mortgage and a professional mortgage. An agent who understands professional mortgages can act as an educator and effectively communicate the strength of your candidacy with lenders and banks who have waived your large down payment requirement.
Lastly, a good agent knows you’re busy and will accommodate your schedule and communication preferences. From a buyer’s perspective, it’s helpful to have someone who knows the process and can coach you from start to finish.
What does a real estate agent do?
Like a bouncer that gets you into exclusive clubs, real estate agents can provide you with resources you can’t get anywhere else.
Agents have access to the MLS membership database where buyers can search for homes and sellers can display properties for sale. Agents are also able to leverage their private networks to follow community trends, and inform clients of private and off market listings.
Once you’ve vetted and selected an agent, they will walk you through the process from start to finish. Your agent will view prospective properties with you and submit offers and negotiate on your behalf. In presenting an offer, an agent can research and provide comparable property sales in the area to give you a sense of what a fair price or strong offer looks like.
There are a lot of professionals involved in a real estate transaction and the agent will organize appraisals, inspections, and showings, as well as coordinate documents between all the parties involved.
Your agent will be your biggest advocate and take care of any issues that arise throughout the process.
When should you start working with a real estate agent?
You should connect with an agent early on so they can prepare you before you’re ready to pull the trigger on a home.
Connecting with an agent early provides an opportunity to learn about current market conditions, pricing, and timeline expectations. With this information you can be ready whenever the time comes to make the best decision moving forward.
How do you find a real estate agent?
Most people skip the vetting process and rely on reviews from companies like Zillow to find their real estate agent. However, these reviews are limited and inflated. 49% of real estate agent websites provide only a single customer review.
Stephen Brobeck, a senior fellow and former executive director of the Consumer Federation of America, believes companies like Zillow generally only solicit good reviews for their agents.
Stephen found that The National Association of Realtors (NAR) reported 25% of buyers and 52% of sellers were not happy with their recent sale, yet 92% of Zillow reviews assigned an agent rating of 4.8 or higher.
When searching for an agent you want accurate and reliable information. Instead of relying on agent websites, gather recommendations yourself from trusted friends and colleagues and take the time to interview and vet at least three real estate agents.
Joshua Holt is a licensed real estate agent (License #784484) and founder of Biglaw Investor, a website that serves high-income professionals. His real estate expertise lies in the areas of helping connect people with high caliber real estate agents, including those that routinely work with lawyers, doctors and other high-income professionals. Prior to Biglaw Investor, Josh practiced private equity mergers & acquisition law for one of the largest law firms in the country.