What is a real estate broker? What is a real estate agent? What is a Realtor®, or a salesperson?
These titles can get confusing, so let's look at the differences between these terms and the role these professionals can play in a real estate transaction.
- Real estate agents are people who help you buy or sell your property. They hold licenses issued by a state. Agents can only sell real estate under the supervision of a broker and must collect the commission from the sponsoring broker. The broker is legally responsible for the actions of the agent.
- Brokers are licensed by the state to collect fees and oversee negotiations for a purchase. The broker has earned a higher-level license and may or may not have more experience than an agent. Brokers can manage a real estate office, work on their own or work in an office under another broker.
- Realtors are brokers and agents who belong to the National Association of Realtors (NAR), usually via a local board. NAR has trademarked the word, which is why it's capitalized. Members abide by a code of ethics over and above the requirements of state law.
None of these licenses and designations by themselves can guarantee that any particular real estate professional is the right person to do the job for you. Many other factors weigh in: personal chemistry, location and experience, for example.
Who's on your side?
If you want your real estate agent to work for you, then it is important to understand their incentives and conventions, and the rules and laws under which they work. Some of these are universal, but real estate laws vary by state. Additionally, agents are individuals who can maintain various perspectives on their profession. If you want to be clear on the relationship you will have with your agent and the role they will play for you, ask them to clarify their position and which considerations they will take into account during the buying or selling process.
The "Law of Agency" says that the agent or broker's fiduciary responsibility is to the client. In legal terms, the client may be the person who pays the commission, or in states with assumed buyer's agency, the buyer may be the client. That means the agent you think is working for you, the buyer, may have a primary responsibility to the seller.
In that case, the agent must put the interests of the seller above yours, and even above the agent's own self-interest. This can restrict the flow of vital information, such as how eager a seller is to sell, from reaching you.
One way to avoid this is to hire a buyer's broker. In states with assumed buyer's agency, you must consent to this relationship, or the seller may yet become the client. An exclusive buyer's agent may be your best chance at 100 percent loyalty.
In the real world, there are also incentives, and a real estate agent has some competing incentives. In the short term, any sale sooner rather than later means a commission sooner rather than later for the agent. Yet in the long term, referrals are where most agents get their leads. In other words, they want to make sure their clients are happy with the price, house and service, so they recommend the agent and build their reputation in a community. And in any case the agent only makes a commission when the deal closes, so there is incentive to get the two parties to agree.
The buyer has influence over which incentives an agent responds to. Find your agent through referrals and recommendations. Once you have picked your agent, commit to them for a time, be honest about your expectations and give feedback about the search progress. If your agent knows that you will eventually buy a house using them in the process, then your agent will invest attention, time, effort, knowledge and money.
Dual agency exists when one agent represents both the buyer and the seller. It can also exist when the listing and buyer's agents work in the same office. This is tricky because the buyer's agent's allegiance is torn between the buyer and the brokerage.
In the case of one agent representing both parties, the agent can provide information about the property to the buyer, disclose all defects in the property, disclose the financial qualifications of the buyer to the seller, explain costs and procedures, compare financing alternatives and provide comps to both parties.
What the agent cannot disclose to clients under dual agency is more complicated. The agent cannot disclose confidential information about the clients without permission. Nor can the agent recommend to the buyer the price the seller will take other than the listing price. Conversely, the agent cannot recommend to the seller a price to accept or counter.
Some states prohibit dual agency. Many states require a written disclosure in the case of dual agency. The only upside to this setup is that because the agent is earning on "both sides" of the deal it's possible they will take a lower total commission, which could benefit the buyer in terms of the overall price paid. But don't ignore the issue: Pay attention to whose side the agent is representing. It may not be yours.
The buyer's agent
Some agents specialize in representing buyers and are not primarily obligated to the seller. Note the word "specialize." These agents could end up as dual agents; however, if the company they work for listed a home you are interested in buying, a buyer's agent's fiduciary responsibility is to you, not the seller. Unlike traditional ways of doing business, you may or may not sign an exclusive contract, and the agreement may state you are liable to pay a commission to the agent even if you find a home through other channels. Read contracts carefully to see if you have to pay the agent a commission if you find a FSBO (for sale by owner home) or other house by yourself. A buyer's agent can be paid by either the buyer or the seller.
Exclusive buyer's agents
Exclusive buyer's agents work for real estate companies that never represent sellers or list properties for sale. By utilizing the services of an exclusive buyer's agent, you can avoid conflicts of interest that may arise if a buyer client becomes interested in a property that is also listed for sale by a traditional buyer's agent.
Saving on commissions
With more and more data about housing now available on the Internet, and with many consumers trying out new ways of transacting real estate, there are many more focused and prepared clients on both the buying and selling side of real estate transactions. Instead of touring with an agent, buyers do the legwork themselves — online. For the agents, this means working with clients who are probably more prepared to fast-track the home buying and selling process.
What had been a fairly standard 5- to 7-percent commission has been pushed down. In 2011, real estate tracking data showed that the average commission was just under 5.5 percent. This downward trend has been brought about by tougher economies in which buyers and sellers have pushed to save as much money as possible during what is often one of the largest financial transactions in their lives.
Additionally, new discount real estate firms have bucked the system and set up cheaper alternatives. These brokers say they offer sellers some of the same services as a full-service agent, but at greatly reduced commissions; traditional brokers say you get what you pay for.
Real estate firms that charge a minimum monthly fee and a few hundred dollars per transaction to the agents open the door to reduced commissions. Agents working with this system sometimes pay more out-of-pocket expenses, but they are not paying a big chunk of their earnings to the sponsoring broker.
Typically, a seller is the party who pays the brokerage fee. Buyers typically do not, as the listing broker pays a portion of his/her commission to the agent representing the buyer. However, the cost to pay the commission could be built into the price of the home. So, while buyers are not directly paying for commission, they are indirectly.
Fee-for-service brokers have a smorgasbord of services to pick and choose from. Just pay for the services you want to use. (This can get confusing at times because services seem to overlap when you aren't familiar with how real estate transactions work.)
House auctions are popular in some areas. Properties are posted on auction sites, and agents can bid, then negotiate commissions or fees in the event the bid is accepted.
All of these services can save you money, if you live in the right state. In some states, these kinds of services are curtailed or banned entirely.
A quick guide to agents and brokers
Real estate broker: Licensed by each state to act as an agent for principals in real estate transactions. A broker can be an individual or a large company or franchise.
Associate broker: Individual who has a broker's license but works under another broker.
Real estate agent: Licensed by the state to act as an agent for buyers or sellers but must work under broker supervision.
Dual agent: Represents both the buyer and the seller in the same transaction. Dual agency must be disclosed upfront to both parties in order to be legal. It is not allowed in some states.
Buyer's agent or buyer's broker: Represents the buyer in a transaction. A buyer's agent, under an agreement with the buyer, acts solely on behalf of the buyer. Buyer's agents will disclose to the buyer known information about the seller that may be used to benefit the buyer. Buyer's agents have duties of loyalty, confidentiality and obedience to their buyer clients. By law, buyer's agents must represent, advise, negotiate and advocate on behalf of their buyer clients.
Exclusive buyer's agent: Represents only the buyer in all transactions and works for a company that never represents sellers or lists property for sale.
Seller's agent or listing agent: Represents the seller in a transaction. A seller's agent, under a listing agreement with the seller, acts solely on behalf of the seller. A seller can authorize a seller's agent to work with subagents and/or buyer's agents. Seller's agents will disclose to the seller known information about the buyer that may be used to the benefit of the seller. Seller's agents have duties of loyalty, confidentiality and obedience to their seller clients. By law, seller's agents must represent, advise, negotiate and advocate on behalf of their seller clients.
Subagent: An agent who writes an offer for the buyer but who is not the buyer's agent. The subagent owes allegiance to the seller.
Transaction broker: A mediator who has no allegiance to either party and is hired to help the buyer and seller reach an agreement.
Single agent: Represents either the buyer or the seller in a transaction, but never both.
Realtor®: A member of the National Association of Realtors (NAR), the national trade association of Realtors that sets standards and ethics. A real estate agent does not have to be a Realtor.
Realtor–Associate: Some boards of Realtors™ use this term for salespersons or agents affiliated with member brokers.
GRI, CRS, CRB: Advanced designations earned by agents who have met certain continuing education and performance requirements. The acronyms stand for Graduate REALTOR Institute, Council of Residential Specialists, and Council of Real Estate Brokerage, respectively. There are many, many designations agents can earn; these are just a few.