Real estate commissions: What you need to know
Confused about real estate commissions? You're not alone. Here are some answers to a few of your most common questions.
There’s no question a good real estate agent can be a valuable resource when it comes to buying or selling a Property. But how much is that help going to cost?
First of all, if you’re the one buying the Property, it isn’t going to cost you more than 1%. The agent’s commission mostly comes out of the selling price. That means it’s deducted from the amount the seller receives, not added onto the amount the buyer pays. Of course, it can be argued that as a buyer you are indirectly paying the commission by virtue of the fact that it’s included in the price. But following that logic, all homes for sale by owner should cost less than those being sold through an agent, and that certainly isn’t always the case.
Second, if you’re the seller, you don’t have to pay an agent anything up-front to market your home. A real estate agent generally doesn’t receive any commission until closing, at which time they will receive the amount stipulated in their contract -- typically somewhere between five and eight percent. But chances are (unless you’re in a particularly hot market) your agent is going to have to work hard to earn that commission by investing a lot of time and effort into marketing your home. And they’re going to have to give a cut of that commission to both their brokerage and the buyer’s agent (unless they represent both the buyer and the seller).
To help take the mystery out of real estate commissions, we provide the following answers to a few of your most common questions.
Q. What is the average commission on a home purchase?
A. The average commission is about 5 percent, although 6 percent commissions are still common.
Q. Who pays the commission?
A. The seller. It is paid out of funds received from the sale of the home.
Q. Does the commission go entirely to the seller’s real estate agent?
A. No. The broker whose firm lists the house sets the commission. The listing broker then offers part of the commission -- often 50 percent -- to the broker whose firm represents the buyer. Both brokers then share their portion of commission with the agents who work with the seller and buyer. The agents’ share may be as little as 50 percent or as much as 100 percent, depending on their arrangement with the broker. If either brokerage is part of a franchise, it may also pay part of the commission as a franchise fee.
Q. Is it possible to negotiate the real estate commission?
A. Yes. An agent may be willing to negotiate his or her commission in order to get your business. This is especially true if the agent is independent and doesn’t have large operating costs. In some cases, both agents might agree to cut their commissions in order to bring down the price of the home if the buyer’s offer doesn’t quite meet the asking price. Sometimes a buyer’s agent may offer concessions such as paid closing costs, a repair allowance or a rebate in order to help close a deal. Buyer rebates are legal in most states.
Q. Will I pay less if I buy a house without using a real estate agent?
A. You might be able to negotiate a reduced price. Since the listing broker won't have to share the commission with another agent and broker, he may agree to a reduced commission and pass the savings on to you. This may also be possible if you use the same agent as the seller -- for example, if you toured an open house and retained the listing agent. This is called dual agency, and is legal in most states, although it may be subject to special laws and regulations.
Q. Is a real estate agent likely to push me to buy a more expensive home so he can make a higher commission?
A. There isn’t a big incentive for an agent to push you to buy a more expensive home because of the way commissions are divided. Your agent may be entitled to 65 percent of his broker’s share of the commission -- perhaps 3 percent of the sale price. Under that scenario, if you were to buy a home for $260,000, rather than $250,000, your agent would earn only an additional $195. However, there could be an incentive for the agent to steer you toward a house on which his broker has been offered a larger share of the commission. This practice is not prevalent, but it does occur.
Q. Are there other commissions that buyers don’t see?
A. In some cases, a seller, listing agent or builder might offer the buyer’s agent a cash bonus or other incentive to help sell the house. The buyer’s agent should disclose these fees if you ask.
Q. Can I get a lower fee by using a discount broker?
A. A discount broker may offer you lower fees, or a deal in which you pay only for the services you receive. However, discount brokers may be more suitable for those with a good knowledge of real estate, since they may not offer a full range of services.
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