If you’ve ever bought or sold a home, you probably became a quick study in all things real estate. What’s a seller’s versus a buyer’s market? What are closing costs? What’s an addendum, a home inspection, and the whole litany of things you never thought about before? One of the more nuanced parts of a sale involves who pays real estate commission.
The “Why” Behind Real Estate Commissions
If you’re using the services of a real estate agent, the sales process includes a commission. While some people negotiate their own buying and selling process, it’s not an easy undertaking. A lot goes into buying and selling, and many homeowners who go it alone can tell you it’s a nightmare. This is where the glorious beauty of real estate agents rolls in on a noble steed (or luxury SUV) to save the day.
The difference between buying or selling a property on your own and partnering with a real estate agent comes down to whether you have the time or sanity to go solo — or would rather skip the hassle. But if a real estate agent is involved, a commission is also on the table. The question is, who pays real estate commission? The buyer or the seller?
How Real Estate Commissions Work
Recently, consumer agencies took a fine-tooth comb to research profitable real estate practices and discovered that consumers were often confused about real estate commissions. The research found that much of the confusion was due to an industry-wide lack of transparency. However, many misunderstandings involved consumers that just weren’t aware of commission structures or that commissions even existed.
Of course, most real estate agents are naturally helpful, and if you ask about commissions, you’ll get a straight answer. Helping to sell and buy property is what an agent does, after all, and they make their living through sales commissions. It sounds simple, but the details are slightly more complicated.
How Much Does a Real Estate Agent Make?
The answer to this question is a bit tricky because it doesn’t have a straightforward answer. It doesn’t exactly help with what some feel is a transparency issue, but it’s not a matter of hiding commission rates. It’s a matter of who is involved with the sale, federal and state guidelines, and whether the real estate agent is working for themselves only or with a team. It also depends on whether the agent is also a broker (more on that in a sec).
Traditionally, real estate commissions range from five to six percent of the final sales price of the property. So, if a property sells for $200,000, a six percent commission means $12,000. However, many factors dig into that cool $12K, and it rarely ends up in one agent’s pocket.
Imagine a typical property sales transaction. There’s a buyer. There’s a seller. Maybe one party is represented by an agent. Maybe both parties bring their own agent to the negotiating table. If that sale goes through and everything is hunky-dory, each sales agent is looking at an equal cut of the commission. That comes out to a theoretical $6,000 for each agent. It sounds pretty cut-and-dry, right? Well, not so fast.
Both Real Estate Agents and Brokers Are Part of the Deal
If you look over a real estate agent’s shoulder, don’t be surprised if you see a brokerage firm standing right behind them. That’s because all real estate agents are required to work under a broker’s supervision in the U.S. The arrangement could be as simple as one real estate agent and one licensed broker working together as a two-person business entity. A brokerage — often called a real estate firm or company — is usually much bigger than that, however.
Unless you’re winging it on your own, a brokerage is involved in the transaction, and the broker gets a cut of the real estate agent’s commission. That’s because they not only supervise real estate agents, they also provide a wide array of services as head of an independent real estate company or a local franchise.
But there’s an exception. Since a broker is also licensed as a real estate agent, he or she can directly facilitate home buying or selling. And in that case, there’s no commission cut that goes to the broker since… Well, you get the picture.
If you’ve ever wondered how a house that’s on the market seems to pop up on a slew of different websites and classified ads, it’s because a brokerage is ultimately responsible for getting the word out.
In most cases, real estate agents are responsible for marketing details, much of which is automated via the brokerage’s website. This is especially true in large real estate agencies and franchises in which the local broker runs the big picture and rarely gets involved in agent transactions. Real estate agents often pay for their own advertising, locally and online, plus coordinate open houses and many other details.
Real estate agents and brokers also research properties that could potentially meet a prospective buyer’s checklist. Real estate agents are also directly involved in details such as negotiations for inspections, researching local zoning laws, investigating property history, and serving as a mediator between the seller’s agent and buyer (or vice versa).
Real estate agents and brokers may also have a hand in fine-tuning contract details and addendums. Real estate agents typically negotiate concessions, agreeable costs, and financing alternatives, and they are also involved in the closing of the final sale.
Brokers and agents cover a lot of different areas, and those services take time and cost money.
So… Who Pays Real Estate Commission?
Common practice is to assume that people selling their homes are responsible for the real estate commission fees. Yet, home buyers are the ones purchasing the property. So aren’t they the party who pays real estate commission or at least half?
Say, for instance, a seller lists a home at $150,000. The asking price draws a healthy pool of potential buyers. A bidding war ensues, and a determined buyer offers $165,000 and the seller accepts. So who pays the real estate commission in this case? That’s $15k more than the seller asked for, right? Doesn’t the buyer pay at least part of it?
Here’s the thing. The commission percentage remains the same and comes out of the selling price, no matter what it is. The same is true if the seller is forced to drop the price. No matter what price the house sells for, commissions come from the seller’s side, not the buyer’s.
Even so, it seems logical to say that the buyer is the party forking over the cash (usually via a loan) to the seller. So isn’t the buyer really the one who pays real estate commission?
The short answer is no.
Even if a commission is not involved (if neither buyer nor seller works with a real estate agent) a buyer pays a certain amount to purchase a house, right? What happens to that money isn’t the buyer’s concern.
It’s only when the money is transferred to the seller’s side that a percentage is released to pay for the commission.
Make sense? The buyer pays for the house. The seller pays real estate commission from the sale price of the house.
We understand the real estate process can be complicated and that’s why LemonBrew was created. We’re here to help you match with a local real estate agent that is an expert in their field, as well as provide mortgage services to find the right home loan for you! With LemonBrew, you have advisors at your disposal from beginning to end to offer tips and be your advocates during one of the largest transactions of your life.