How Real Estate Commissions Work
Real Estate Commissions Basics
The standard and customary real estate commission to sell a property is 6%. Some properties can be handled for more based on the situation. And other properties can be listed for less. All real estate commissions are negotiable, but not every agent will negotiate.
The first point to understand about real estate commission is the listing real estate agent (the agent who is going to put property for sale) receives only part of the commission. Depending on the property situation, it is generally 50/50 split. That means half to the agent listing the property and half to the agent that finds the buyer for the property. But the split can be 60/40 or 40/60 or any other division of the whole.
The next point is who pays the commission? There are two schools of thought on this issue. The first one says the buyer brings the money to the table, therefore they paid the commission. It is also argued that the commission is typically part of the sale’s price, consequently it paid by the buyer.
The other side says the seller pays the commission. The commission comes out of the total payment for the property. It is also clear that the commission generally comes on the seller’s side of the Uniform Settlement Statement at escrow. The listing agent is concerned with setting the commission for the sale of the property.
The buyer looks at the total cost of purchasing the property. Where the seller looks at the net from selling the property and the commission is a big part of the cost of selling.
Real Estate Commissions Advanced
Why pay a real estate agent a commission to sell a property?
First reason is the biggest. Find a buyer who is able to pay for the property.
Depending on the quality and marketability of the property being sold, the agent might spend roughly the half of that amount of the commission on marketing the property and completing other tasks associated with the sale.
If you do the numbers, than half the listing commission goes to the listing agent. And of that half commission, half is reasonably spent by the agent to find buyers for the property. This leaves a quarter of the commission to cover the agent’s normal business, taxes and living expenses.
Some marketing and sales tasks expenses are email marketing, direct mail marketing (including postage), web marketing, printing flyers, home books, comment cards and marketing packages, purchasing and installing signs & directional signs, listing the property on the MLS, installing lockboxes and enlisting entry card services, conducting and marketing open houses, and creating virtual video tours and much more specific types of marketing.
Understanding the big risk of the real estate agent is key to the commission issue. The real estate agent only gets paid if the property sells. If the property does not sell, all the marketing cost is paid by the agent, not the property owner.
The next big reason to pay a real estate agent a commission is to take care of the paper work. The legal aspect to selling a property is vast. Preparing the contracts and legal disclosures is a big job. And the consequences of not doing it right can be enormous and time consuming.
Another huge reason to pay a real estate agent a commission is to see the deal through to the end. A real estate agent is worth his or her weight in gold when they look ahead to see when the contingencies are due and solve any problems before they hit. The standard real estate contract has many conditions, disclosures and contingencies that must be managed. It is worth hiring a full time person to see the deal to the end.
Another major problem a real estate agent solves is the go between the buyer and seller. There can be personality conflicts, communication difficulty, property issues, complicated legal issues, financial issues, time delay issues and the list goes on and on that a quality real estate agent handles. Again, this is worth a good deal of commission.
Real estate agents take on all these tasks and more for the chance of a commission. Generally, a real estate agent only receives payment if the property sells. It is an all or nothing proposition. The property owner is getting a great deal on professional work done, but only pays for it the property sells.