Since the launch of our homebuying service, the most frequent conversations we have with our buyers is how the traditional real estate agent fee really work. Time and time again, we’re asked by buyers to debunk this real estate transaction myth:

“The previous real estate agent I spoke to said that sellers pay the commission, it’s free for buyers. Is it true?”

Much of the real estate agents will tell buyers that their service is free and that as a buyer, there’s no cost to hire an agent. However in reality, this is more of a technicality about how the commissions are accounted and distributed.

The analogy

David and Sarah decide to go to a fancy Italian restaurant to celebrate their new home purchase, they ordered two refreshing martinis and enjoyed their meal. At the end of their meal, David is asked to pay the balance of their order of $150 as well as a tip of $30 for their server, the $30 tip is split between the server and the bartender. $180 is the total amount David has to pay. Saying buyer doesn’t have to pay agent commission is like saying the restaurant owner paid the $30 tip for David. That sure is not the case.

The Answer

Both agents’ commissions are baked into the balance of the purchase price. Although the commissions are distributed by the seller’s lawyer after closing, which makes it seem like seller is the one paying the commissions, the buyer ultimately pay up the balance of the purchase price. Thus the buyer paid the commissions.

Less than forthcoming agents may argue otherwise, but this isn’t just our opinion, Here is what Stephen Moranis, the former President of the Toronto Real Estate Board and Director of the Canadian Real Estate Association, had to say about who really pays the commission.

“The buyer is really paying the cost of the fees, which are built into your asking price.”

Source: Ottawa Citizen, Real estate commissions: What does it cost and who really pays?

The Balance also made a similar argument in an article:

“It can be argued and, quite rightfully so, that the buyer always pays the commission. Why? Because it’s typically part of the sales price. If the seller did not sign an agreement to pay a commission, the sales price might have been lowered.”

Source: The Balance, Who Pays the Commission to the Real Estate Agent?

Do buyers pay their real estate agent commissions?

What do you pay the commission for?

Before the internet, a buyer’s real estate agent split the commission fee with the seller’s agent because getting a buyer to find a home used to be much more difficult. Agents had to search listings for their clients using their connections and networks, drive the buyer around on home tours, personally calculate each property’s market value based on comps, and handle all of the offer and closing paperwork manually.

Today’s buyers often prefer to house hunt on their own, the countless resources online enabled buyers the access to every single listings on the market, sold prices and comparisons with a click of a button, showings can be booked online, offers can now be signed within a matter of seconds.

The 2.5% commission that buyers pay mostly support their agents’ lifestyle and help support agent marketing costs for prospecting new clients rather than the time they spent helping getting your offer accepted.

Agents are working less to get a deal done, but their fees haven’t changed.

How can Instaoffer afford to give buyers full commission refund and only charge a flat fee?

The answer is simple: because we’ve focused on making the homebuying process more efficient, which means we can pass the savings onto you. Instaoffer is able to streamline the home buying process with our online platform. The integration of technologies enabled us to complete job tasks in seconds which would otherwise take traditional agents hours to do, so our agents can focus on providing our buyers the best possible experience. Flat fee makes sense because no matter what the home price is, the home buying process stays the same: research, showing, offer, negotiation, close. That’s why we are able give our buyers a full commission refund and only charge a flat fee.