8 Important Facts About Real Estate Commission

If you are buying or selling a home you might be wondering who pays the real estate commission. After all, this tends to be a big expense, so it’s important for both buyers and sellers to understand who pays it, what it includes, and determine if it’s really necessary.

Let’s look at the important facts you should understand about real estate commissions when buying or selling a home. So if you are one of the many wondering how does Realtor commission work here is a helpful guide.

What is Real Estate Commission?

Real estate commission is a fee paid to a real estate brokerage for their services. This fee will vary from area to area but is usually a percentage of the sales price.

Who Pays the Real Estate Commission?

It is customary for home sellers to pay real estate commission. Occasionally, the buyer’s agent will be paid a commission by the buyer themselves. This can happen if the home is being sold as a “for sale by owner” (FSBO) property, and the seller is not willing to pay commission to a real estate agent.

However, a buyer will only have to pay their agent a commission if they have a written agreement in place, such as an exclusive buyer brokerage agreement. This agreement will stipulate how much, when, and if a buyer has to pay their agent a real estate commission.

A big misconception about real estate commission is the listing agent receives the full commission or bulk of it but that is not the case. In fact, the commission is usually split four ways between the listing brokerage, selling brokerage, listing agent, and selling agent.

Generally, the total commission is split 50/50 between the two brokerages. Then each brokerage will take a percentage or flat fee from their portion of the commission and the listing agent and selling agent will receive the balance. Commission splits vary from brokerage to brokerage but some are 50/50.

This could easily result in the listing agent receiving 25% of the total commission a seller pays. So if the total commission is $10,000 the listing agent could receive $2,500 after the splits. On top of splitting the commission with their broker and the cooperating brokerage, the listing agent will also be responsible for paying taxes, E&O insurance, membership fees, MLS fees, marketing, professional photographer, gas, compliance/ admin fees among other expenses.

Is Real Estate Commission Negotiable? 

While real estate agents are independent contractors and should be able to do what they want, like negotiate real estate commission, that is usually not the case. Agents have their license hung with a real estate brokerage, a brokerage that will certainly have standards, regulations, and restrictions in place. Some of these restrictions might include real estate commission, the minimum amount an agent is able to charge a seller, and the minimum amount they must offer a cooperating broker.

If and how negotiable real estate commission is can depend on several factors, such as the price point of the property, the current market conditions, and the agent’s experience. Oftentimes when it’s a strong seller’s market or a seller is buying and selling a home with the same agent the commission may be more negotiable.

A seller may also be able to get a reduction in commission if the agent and/or brokerage is also working on behalf of the buyer. This dual agency arrangement could lead to potential problems and isn’t allowed in some states. Since the real estate agent will be working for both parties, there could be a conflict of interest that may not go in a seller’s favor.

Another possible alternative to paying less when selling a home is using a flat fee agency. This could offer a cut in the commission, however, there will be many things they don’t do. For example, a flat fee service might only include listing a home in the MLS, leaving the seller to do everything else and having to tackle the same problems a “for sale by owner” has.

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Is Choosing For Sale by Owner a Good Option?

It can be tempting for sellers to think they will save money by eliminating agents altogether and choosing to sell their home for sale by owner (FSBO). When a seller decides to go FSBO they also decide to take the entire process on from start to finish and little mistakes along the way can be financially devastating.

Selling a home is time-consuming, more than most sellers imagine. Aside from time, there is the “know-how.” Does a seller really know how to sell a home for top dollar? Will they be able to find a buyer? Will they have to pay a real estate commission to a buyer’s agent? Do they understand and know what contracts and disclosures are needed? Will they be forced to hire a real estate attorney to draw up the contract and handle the closing? Do they understand their legal obligations and the risks involved?

Just to get started a seller will need to:

• Select the right price
• Deal with inquiries
• Market their home
• Show their home
• Qualify potential buyers
• Communicate and negotiate with buyers and/or their agents
• Understand and complete real estate contracts and disclosures

And that’s just the tip of the iceberg, oftentimes, finding a buyer is the easy part. Getting an executed contract to the closing table is the difficult part and when a real estate agent’s knowledge and expertise becomes invaluable. They know how to navigate and resolve issues that are sure to pop up along the way. Whether it’s expired permits, liens, inspection issues, appraisal issues, mortgage issues, or title issues. The list of obstacles that can derail a home sale goes on and on and with an inexperienced seller handling the transaction it can easily fall apart.

The biggest question of them all, if a seller decides to take all of this work on will they get the best price for their home? Maybe, but the statistics seem to be against it. Data from 2020 shows that FSBOs accounted for 8% of sales. The average FSBO home sold for $217,900, while homes that had help from a real estate agent sold for on average $295,000. This is an average difference of $77,100, which is a lot more than a seller would have paid in commissions. Using the services of a real estate agent should actually pay for itself.

On top of this, it is probably going to take longer to sell a home FSBO, if for no other reason than they don’t know what they need to do and when. The longer a home is waiting for a buyer, the more it will likely cost a seller, and the more disruption it will cause in their life.

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What Does a Realtor Actually Do?

It can be very easy to assume that real estate agents don’t do a lot for their commissions, however, the truth may surprise you. A top listing agent will have the experience to sell a home for the most amount of money in the quickest possible time. They will create a pricing strategy and marketing plan to ensure a buyer is found quickly.

They will also provide staging advice or bring in a professional and hire a real estate photographer to make sure the listing photos grab prospective buyers’ attention. They will screen potential buyers, deal with inquiries, show the property, and when a buyer is found negotiate the best terms. Once under contract they will follow up with all parties to make sure everything stays on track and if any issues arise determine the best solution. As previously mentioned, oftentimes, the hard part isn’t finding a buyer it’s keeping everything on track and moving forward.

8 Important Facts About Real Estate Commission

• Real estate commission will be determined prior to a home being put on the market.
• Real estate commission will be stated in the listing agreement, which the sellers, listing agent, and broker will sign.
• Real estate commission is paid directly to the real estate brokerages involved in the sale, not the listing or selling agent.
• Real estate commission is split between the listing brokerage, listing agent, selling brokerage, and selling agent.
• Real estate commission typically includes agent services, advertising, and marketing expenses for the home.
• Real estate commission percentage may be negotiable.
• Real estate commission is usually a percentage of the sales price.
• Real estate commission is paid at closing.

Final Thoughts

While a seller might not like paying real estate commission to sell their home, getting a higher price, selling their home faster, and reducing their stress, is surely worth the cost.

Cutting costs means cutting corners, and a lot of extra work for a seller. Selling a home is one of the most stressful things a person can do, so does a seller really want to take this on? As shown, average sale prices are considerably higher when using the professional services of a Realtor, so much so, that this should more than pay for itself.

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About the Author

Top Wellington Realtor, Michelle Gibson, wrote: “8 Important Facts About Real Estate Commission”

Michelle has been specializing in residential real estate since 2001 throughout Wellington Florida and the surrounding area. Whether you’re looking to buy, sell, or rent she will guide you through the entire real estate transaction. If you’re ready to put Michelle’s knowledge and expertise to work for you call or e-mail her today.

Areas of service include Wellington, Lake Worth, Royal Palm Beach, Boynton Beach, West Palm Beach, Loxahatchee, Greenacres, and more.

8 Important Facts About Real Estate Commission