How Real Estate Commissions Work
- Real estate agents work for a real estate broker.
- All fees paid to a real estate agent pass through the broker.
- Only a real estate broker can pay a real estate commission and sign a listing agreement with a seller.
How Are Real Estate Agents Compensated by the Broker?
Divisions vary. New agents can receive as little as 30% to 40% 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% and pay the broker a desk fee. Everybody else falls somewhere in between.
Listing Agents' 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 is not always fair or equal, just like life. For example, a seller could sign a listing agreement for 7% that stipulates the listing broker will receive 4% and will co-broker 3% 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. There is no set formula.
- 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 most commonly is 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 only 2.5% of the sales price, whereas the brokerage operates at fees of 3%. The difference of .5% could be paid by the buyer if the broker chooses not to waive that amount.
- Buyer Pays the Commission Directly
- The seller is then not obligated, under most listing agreements, to compensate the listing broker for more than the listing side or 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 Really Pays the 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. But those sellers haven't quite figured this out yet which causes potential buyers of those listings to be consistently disappointed.
To help alleviate much of this confusion, don't be astonished if over the next 20 years sellers and buyers each retain their own representation and pay separately for said representation.
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.