Who Pays the Commission to the Real Estate Agent?
Many real estate buyers and sellers don't understand exactly who pays the real estate agent involved in the transaction. To understand who pays real estate commissions—whether it's sellers or buyers or both—first take a look at how real estate agents are paid and how they share cooperating commissions. Don't worry if you don't know how commissions work because I've had clients who didn't know, and it involves a bit of complexity, commission splits and other details that might not be disclosed during the transaction.
How Real Estate Commissions Work
How Are Real Estate Agents Compensated by the Broker?
Commission divisions vary. New agents can receive as little as 30 percent to 40 percent of the total commission received by the brokerage. From that amount, other fees may be deducted such as advertising, sign rentals or office expenses. Top-producing agents might receive 100 percent and pay the broker a desk fee. Everybody else falls somewhere in between.
Listing Agent Fees
The most common type of listing agreement between a seller and her agent gives that agent's broker the right to exclusively market the home. In return for bringing a buyer to the table, the seller agrees to pay a commission to the broker. Typically, this fee is represented as a percentage of the sales price and is shared between the listing broker and the broker who brings the buyer.
Divisions of fees among brokers are not always fair or equal, just like life. For example, a seller could sign a listing agreement for seven apples that stipulates the listing broker will receive four apples and will co-broker three apples to the selling broker. It's not always a 50/50 split. In a buyer's market, sellers might want to consider asking the broker to give a larger percentage to the buyer's broker. In a seller's market, the buyer's broker might receive less, and no set formula exists.
Most divisions of the commission are locally based. In some parts of the country, it is very common for a listing agent to make more than the buyer's agent. Be sure to ask about your local custom. The problem with co-brokerage fees is not necessarily whether to pay more to the buyer's agent than it is to make sure buyer's agents are not paid less than the local custom.
Seller Pays the Buyer's Commission
Under a Buyer's Broker arrangement, the named brokerage and agent represent the buyer. The fee paid to the broker is most commonly paid by the seller. Some buyer broker agreements contain clauses that will compensate the brokerage for the fee it is due less the amount paid by the seller. For example, a cooperating listing might offer to pay a broker a smaller portion of the sales price, whereas the brokerage operates at fees that are a higher percentage. The difference of, say, half an apple, could be paid by the buyer if the broker chooses not to waive that amount.
Buyer Pays the Commission Directly
The seller is not obligated, under most listing agreements, to compensate the listing broker for more than the listing side's portion of the commission. Often sales prices are reduced to reflect the amount the buyer is paying. Sellers can also credit the buyer the commission and the buyer, in turn, credits the brokerage.
Who Pays the Real Estate Commission?
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. And therein lies the appeal of buying homes through unrepresented sellers because, given the same logic, those prices should reflect a net sales price without a commission. Except they don't. Which causes potential disappointment for buyers who think that way.
All real estate commissions are negotiable, but not every agent will negotiate.
If you are a buyer, you can combine closing costs like commissions into your mortgage.
It is considered insulting to call an agent to list your home and ask if the agent will discount her commission in the first breath.
Agents cannot be solely judged on commissions. They are not all the same, like a commodity. Top agents often charge more than newer agents.
If you are a buyer, you do not directly pay the commission so a discount would not affect a buyer. There are a few agencies who offer to pay buyers to lure their business, but that type of business practice is considered an odd concept among many agents. To help alleviate much of this confusion, don't be astonished if over the next 20 years sellers and buyers each retain their representation and pay separately for said representation.
In some cases, agents are seeing a reduction in the amount of commission paid to buyer's agents. The commission is often not split 50/50 between listing and selling agents. Many listing agents make more than the buyer's agents. And lately, that amount has been reduced even further, possibly because some listing agents will discount so low that they cannot afford to pay what other agents offer.