If you’re thinking about buying a home, you’re probably asking yourself “Do I need a realtor? What does a real Estate Agent do?” It’s a fair question that can lead to even more questions about this mysterious figure that’s supposed to guide you into your new home. What are they responsible for in the process? How do real estate agents get paid? How much do they cost? It can be a confusing situation if you’ve never worked with a realtor before, but we’ll break it down below and help you figure out if using a real estate agent is right for you.
Real estate agents vs. brokers
There are actually two roles involved in a transaction – a real estate agent and a real estate broker. The roles differ slightly, and have different fees. Sometimes the responsibilities are performed by two different people, but at times they can be performed by the same person. Realtor.com has a good article explaining the differences, but in your case you may never meet your broker. The agent is the person you’ll work with day to day.
Ever wonder what the difference is between a real estate agent and a realtor? Anyone who is licensed to sell real estate is considered an agent. If an agent joins the National Association of Realtors, they can also refer to themselves as a realtor. Functionally there is no difference in their ability to close a transaction.
So for our purposes, we’ll lump everything together and refer to this person you are working with as a “real estate agent” or “realtor.”
What does a realtor cost?
When you are buying a home & you work with a realtor, you don’t actually pay that agent directly. When someone lists their home for sale, they agree to pay a percentage of the sales price as a commission. That commission gets split between the listing agent (hired by the seller) and the buyers agent (hired by you). This commission is usually 4-6% of the home price depending on where the property is, so each realtor walks away with 2-3% of the total purchase price.
Again, you never pay your realtor directly, and if a realtor asks you for any type of payment, especially prior to the transaction closing, you should walk away immediately.
Their commission is taken out of the seller’s profits when the transaction closes, and the actual commission payment is handled by the title or escrow company that performs the transaction. Most sellers, however, will factor this commission into their list price – so while you don’t pay for your realtor cost directly, you do end up paying the fee in a roundabout way.
What does a realtor do?
This will vary from agent to agent and really depends on what the buyer is looking for. In all cases though, they are selling you one thing: expertise.
A good realtor is educated on the process, the market, and has experience doing real estate transactions. You can expect them to help with:
Finding listings – Realtors have access to a database (called the MLS) that shows all of the properties for sale in your area. Sometimes these listings may not show up on the home search sites the general public has access to, so this can be a big benefit.
Understanding the local market – Is it a buyer’s market or a seller’s market? How quickly are homes selling? Is a neighborhood trending up or down? Is home inventory high or low? A good agent will be able to answer these questions.
Coordinating showings – Your agent will set up appointments to view homes or will let you know when open houses are happening. In most cases, they’ll go to the showing with you to get a feel for the property.
Getting “inside info” – Agents speak the same language. A good agent will talk with the listing agent to understand why the buyers are selling, what their timeline is, how motivated they are to sell, and what their expectations are for an offer price.
Crafting your offer – When you’re ready, your agent will work with you to pull “comps” – these are similar homes in the area that recently sold. They will use these comps to help you come up with an offer, making adjustments for market factors & what they learned about the sellers.
Negotiating the deal – Your agent will serve as the middle man between the you and the sellers, negotiating the offer and providing advice along the way.
Closing the deal – After your offer is accepted, there are many steps required to close the deal. Your agent will be there all along the way, helping you recognize what is a small hiccups vs. a deal breaker, and advising you on what you should do along the way.
Being your champion – Your agent works for you, and they should have your best interests covered. If a deal is going south, a good agent will give you good advice, even if it means them losing out on their commission.
There are also a number of things a real estate agent is not responsible for, or can not do because of legal restrictions –
Protected class issues – The Fair Housing Act limits a realtor from discussing certain things with their clients. These topics cover protected classes, which include topics like race, color, religion, national origin, sex, handicap, or familial status. If you are looking for something specific, like a home in a neighborhood that’s predominately young families, your realtor isn’t technically supposed to advise you. You’ll have to do this research yourself.
School districts – They often can’t guarantee a home is in a particular school district. They can advise, but you’re better off doing your own research.
Crime rates – Realtors aren’t supposed to discuss these things. Even if they could, we’d still suggest doing your own research if this is a concern.
Do I need a realtor to buy a house?
Use of a real estate agent is becoming a polarizing topic lately. You are not legally required to have an agent. It’s completely possible to handle a home purchase yourself.In other cases, firms like Redfin or Open Listings aim to replace real estate agents with technology
When determining whether or not an agent is right for you, you should consider how comfortable you are handling the process yourself, whether or not you have family or friends with experience that could advise you, and whether or not you have the time to commit to performing the tasks listed above.
You should also consider how comfortable you are dealing with the legal components of the transaction. In some states, you’re required to hire a lawyer to close the transaction. If you decide not to use a realtor, you may benefit from hiring a lawyer to assist you in the transaction, even if your state does not require it.
How to choose a real estate agent
If you decide to work with a real estate agent, there are a few things to consider when you are making your choice:
Experience – Real estate is a cyclical business. The realtors who have been around for decades have survived the booms and busts, they’ve closed many deals, and they generally know what they are doing. They also tend to be good at marketing themselves. You probably know this realtor: Their face is on the bus stop bench, on the cart in the grocery store, and on the flyer that got left under your car’s windshield wiper last week.
Geographic Expertise – Some realtors focus on a particular neighborhood (they call it their “farm”). If you drive around a neighborhood and every listing is by the same agent or firm, they are probably the local expert. They will know the neighborhood well and will know exactly what kind of offers will be accepted or rejected.
Niche Expertise – Other realtors specialize in niches like fixer-uppers or rehabs. They’ll know what fair market price is for a home that needs work, will know how to find fair comps, and may even have a network of architects and contractors you can leverage.
Enthusiasm– This is the agent that is hungry for business. Sometimes they are new agents, or sometimes they just love their jobs. They are working hard trying to find buyers and sellers. They will be attentive, supportive, and will work hard to make sure you have a great experience.
Not all realtors fall into these categories, but most share something in common with each of these archetypes. There are pros and cons to each of these realtor types. The trick is to find a realtor that meets your needs.
If you are new to the home buying process, you may appreciate the additional attention from a newly minted realtor that is excited at the prospect of helping you. Or maybe you’re in a hot market, and you want to work with an expert in the area to try and get access to pocket listings. There is no perfect agent, just one that fits your particular needs.
What to look for in a realtor
A real estate transaction can be stressful and could take months. Having good partners is crucial, especially when it comes to your realtor. It always helps to do your research.
Here are some questions to ask yourself when interviewing potential realtors:
How is the communication? Does the realtor prefer phone calls? Texting? Email? Smoke signals? Do your preferences line up?
How patient do they seem? First-time home buyers in particular could take months before they find the right home. For the realtor, that’s months of sorting through listings, coordinating showings, visiting open houses, pulling comps, and running scenarios. Do they seem like they are willing to stick it out for the long haul? Or will they get frustrated after a month of searching and focus on new customers?
How enthusiastic are they? Searching for homes, especially in a hot market, can be draining. For a while in East Los Angeles, homes would get 15+ offers, with many offering over the asking price. It can get disheartening very quickly. Does this realtor seem like they’re going to be supportive through the entire process?
How experienced are they? Are you the realtor’s first client or their 500th? Everyone has to start somewhere, and new realtors may have more time for you and more patience. But experience helps in a large, complex transaction like buying a home. Another question to ask yourself is how confident are you going into this? Knowing what to ask for when submitting an offer is huge — from establishing contingencies to negotiating closing costs and inspection fees. Having a realtor that will work closely with your loan officer can be a huge benefit as well, and that kind of knowledge only comes with experience.
Do they care more about you or their commission? Freakonomics makes a really interesting point about realtor commissions. We’ve included a short video below that goes into the concept, but the main argument is that agents are incentivized to get you to close the deal as quickly as possible. That incentive could lead them to put unnecessary deal pressure on you to make an offer or complete a transaction. Ask yourself if you think this person has your best interests in mind or just wants a commission? “Both” is an acceptable answer here. Being a realtor is their job after all. But their interests should at least be balanced.
The best way to see if you like a realtor is to start to work with them. Ask the realtor what they think about the neighborhood you are shopping in, what they think the market is doing, and how they generally work with clients.
How do I hire a realtor?
Realtors work under contracts. There are a few types of contracts. Each type defines the agent’s responsibilities to you, the buyer, with the major difference being the level of commitment you are willing to give the realtor. We’ll cover the basics below.
Nonexclusive not-for-compensation contracts
For those of you with a fear of commitment, this is the contract for you. You, the buyer, do not commit to paying the broker a commission, and you do not commit to using that broker. You can continue to shop around, or use multiple agents.
Nonexclusive right-to-represent contracts
This ups the ante a bit for the real estate agent. As a buyer, you are not committing to use the agent exclusively, and can continue to use other agents to shop. If you sign a nonexclusive agreement with an agent, and you buy a property that they find for you, you promise they’ll make a commission on that purchase.
Exclusive right-to-represent contracts
This is the most common type of agreement, but also the one that requires the most commitment. As a buyer, you are agreeing to work only with this agent, and you are committing to pay the agent a commission on any property you purchase. This is true if the agent finds the property, if you find the property on Zillow, or if your mom convinces her next door neighbor to sell you their place.
Each contract usually has a set time period. Nonexclusive contracts are generally one to two months, at which point an agent will probably push for exclusivity. Exclusive contracts can vary in length from a month to years.
Do your research here, and shop around. Don’t let the agent pressure you. It’s reasonable (and common) to want to work with an agent prior to jumping into an exclusive contract. If they push you to sign an exclusive agreement early and often, and you’re not ready to make that commitment, then don’t sign it. They probably aren’t the right fit for you anyway — and they might care more about their commission than finding you the perfect home.
There are plenty of fish in the sea, so like any partnership, don’t rush into anything you’re not ready for.
To learn more about real estate agent & real estate broker contracts, you can read this article.
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