Buying a house is a scary process. You're dealing with a loan of an enormous amount of money that takes most people decades to repay, if ever. If you're relocating, you might be ill-prepared for how far your money will go and what type of house you can afford, given the huge disparities in real estate prices from one city or region to another. Adding to your stress, you may not even know much about the neighborhoods in your new hometown, much less have a strong idea of where you want to live. The amount of time it takes to figure out everything you need to know is beyond what many homebuyers can spare.
Because of these challenges, most prospective homebuyers have a real estate agent help them with their searches. Yet because buyers often neglect to make sure that the agent they choose is working solely in their best interest, their relationship with their agent ends up being somewhat ambiguous. To help in this regard, you can retain a buyers' agent to work on your behalf to find the property that best meets your needs.
Agents, buyers, and sellers
The relationship that exists among real estate agents, the sellers of a property, and the prospective buyers of that property is sometimes a bit difficult to understand. From a legal standpoint, there is an explicit contractual agreement between the sellers and the agent with whom they choose to list their property. In general, that contract requires the agent to work toward finding buyers for the sellers' property, with the goal of protecting the sellers' interests and obtaining the specified listing price. In almost all cases, the sellers are responsible for paying only the commissions that the listing agent charges.
For buyers, however, things are often not as clear. When you choose a real estate agent to help you find a house, you won't have to sign anything. The agent will probably show you some houses that his or her brokerage has for sale but could also show you some properties listed through other agents and brokerages. If you end up being interested in a house for which the agent is also the listing agent for the sellers, then you may be in an awkward situation. In such cases, the agent will not be able legally to represent both you and the sellers in the same transaction, unless both you and the sellers agree. This situation often arises when you drive by a house that piques your interest and call the phone number on the for-sale sign. When you're connected to the sellers' agent, you may decide that you want that agent to help you regardless of which property you finally buy.
As a practical matter, it may not cause major problems if a real estate agent doesn't legally represent you. While agents have a financial incentive to steer buyers toward their own listings, most are ethical enough to recognize the potential conflict of interest and will avoid putting on pressure. Yet the situation can still be difficult both for buyers and the agents themselves. An agent will naturally want to help a buyer, but the relationship between the agent and the sellers sometimes means the agent can't give the buyer the level of attention that either party may prefer.
Dedicated buyers' agents
A relatively recent development in real estate is the emergence of agents who represent only buyers. To help avoid conflicts of interest and other ethical problems, these agents do not accept listings from prospective sellers but instead focus solely on helping buyers find the right property. Because of the way agents are compensated when a purchase closes, buyers' agents usually receive a portion of the total commission that the sellers pay. As a result, most buyers don't have to pay for their agent's services. Even if you buy a new home from a homebuilder such as DR Horton
Because they represent only you, buyers' agents can sometimes be more effective advocates on your behalf than other real estate agents can. Their experience not only with properties in the area but also with the agents representing various sellers can provide valuable insight into how to structure an offer in the most favorable way for you. Most of the time, buyers' agents have the same access to information that any other agent has, and they may give you more candid advice about the properties you see.
Last but not least, you may find that some buyers' agents in your area -- though certainly not all -- are willing to pay you part of the commission they earn from a sale. For instance, if the typical arrangement in your area is a 6% commission with 3% going to the sellers' agent and 3% going to the buyers' agent, then your buyer may be willing to give you 1% of the purchase price, which can amount to thousands of dollars.
Buying a house is stressful enough without having to worry about whether you can trust the real estate agent you're working with. By using a dedicated buyers' agent, you can make sure your agent is working for you.
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Fool contributor Dan Caplinger has managed to muddle through his homebuying experience without a buyers' agent, but he'd do it differently if he had it to do over again. He doesn't own any of the companies mentioned in this article. The Fool's disclosure policy keeps your interests in the forefront.