Most buyers often wonder how the real estate agent who helps them find their dream home or property will eventually be paid. Real estate agents are, in most cases, not salaried but receive commissions for every successful sale.
Real estate commissions are the payments real estate agents receive upon a successful sale of a property. It sounds like a pretty straightforward affair; the buyer pays, the agent gets a percentage of the amount.
While that may be the case, there are many players involved in the process, and this further complicates the whole exercise. Here are the major players in any transaction:
- The seller – The seller is the person intending to sell a property.
- Seller’s agent – Also referred to as a listing agent. It is the person hired by the seller to sell the house on their behalf. The seller’s agent is a licensed salesperson.
- Buyer – The person buying the property.
- Buyer’s agent – The person appointed by the buyer to identify and negotiate the purchase of a property on their behalf.
- Listing broker – This is the office or company the listing agent works for. In some cases, the listing agent can be the listing broker as well. The listing broker is certified and can work independently or hire agents
- Buyer’s agent’s broker – This is the company the buyer’s agent works under.
How Are Commissions Divided?
Typical real estate commissions are divided between the agents and their brokers. Sometimes, the commission will be a percentage of the purchase amount of the property that will be paid by the seller. There could also be a flat-rate fee commission, which is a standard payment the agent charges irrespective of the cost of the house.
The flat-fee can be for specific services such as listing the house for sale and not doing the extra work of negotiating with buyers or it could be a fee they charge for any services they offer whether the house sells or not.
Who Pays Real Estate Agent Commissions?
In most cases, the buyer or seller covers for these costs, which are usually included in the total price of the property, or may be paid as separate fees. It is, therefore, critical that you read through your contract before signing any purchase agreement.
The buyer and seller may, however, agree to divide the cost of the commission. If you find an agent with a good track record, you can pay the full commission in advance. But if their history is sketchy, you can opt to release it when the sale is consummated.
All the commissions are paid to the brokers who will then split the commissions with their agents accordingly. Once the brokers have received the commission, the agent will be paid between 60 percent to 90 percent. This may be lower, depending on the contract.
Ideally, according to the National Association of Realtors (NAR), an agent should receive a 6-percent commission on the total purchase price. This is, however, not a standard charge and has reportedly declined over the years.
An agent and a broker can split commissions using a number of split models that include:
- The fixed real estate commission split, which is where real estate agents and brokers have a fixed percentage, typically a 60-40 split.
- The graduated real estate commission split is where the agent graduates, for instance, from 50-50 to 60-40, and sometimes to 80-20. This is designed to reward highly productive agents.
- The 100-percent commission model is where the agent receives 100 percent of the commission, but this could involve a lot of administrative fees.
According to Investopedia, 87 percent of sellers used agents to sell their properties in 2017. As a result, more agents are joining the business as more sellers are seeking their services. Much as this process seems like a tangled web, it is important that you are fully aware of the entire process to save as a seller or buyer.
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