As agents, we’re in a very competitive industry that rewards people who are good at marketing and sales. This can sometimes result in some unfair practices or unethical strategies from individuals to win more business.
There have been many reports of high commission brokers submitting false information about their earnings to get higher returns while paying lower commissions. These dishonest brokers usually don’t make as much money as they claim so you pay higher for their services!
Another common practice is called chasing production. Chasing production means broker A sends an agent to meet with potential clients, but instead of helping them find a home, broker B takes advantage of the empty house by offering them his/her own property as a “rental”.
This article will talk more in depth about how real estate agents are paid in terms of royalties and fees, but first let us look into what constitutes as a royalty.
What is a Royalty?
A royalty is when someone earns income outside of pure selling. For example, if I owned a cabin next to a beach, then I could also offer my guests use of the beach free of cost as a rental. This would be considered a royalty because I am earning extra revenue off of something else.
Royalties typically take up one third of all agent compensation (also known as a seller’s fee). The other two thirds comes from either a listing contract fee or a transfer tax fee.
The buyer gets a discount on the sale
As mentioned earlier, agents get a percentage of the sales price as their commission. But what is not widely known about that percent is how it’s calculated.
The % agent commission typically includes two components: the seller’s contribution and the buyers’ contribution.
The sellers’ commission is simply one half of the selling price (half being because they paid for the house themselves). The buyers’ commission, however, can be a little more tricky to calculate.
There are different ways to calculate it depending on whether you’re talking high end luxury real estate or lower cost homes.
The seller gets a bigger payout
As mentioned before, along with paying your agent their commission, you will also need to factor in how much the seller receives back for selling their home. This is called the sale price adjustment or “SPAN” as it is often referred to.
The SPAN covers all of the costs that come up when a house sells, such as fees to title companies, surveys, etc. It can easily add several thousand dollars to the overall sales price.
In fact, according to Realtor.com, over one-third of sellers don’t know what items qualify for an SPAN!
That’s not only bad for them, but it could cost them money because some agents may ask for it while others won’t. Luckily, we have tips here for you to make sure this doesn’t happen to you.
The agents get paid regardless of the outcome
As mentioned before, you as a real estate agent are paid for what is called “commissions”. These commissions can be divided into two main categories: transaction-based commission and list-based commission.
A transaction-based commission comes due when there is an actual property sale that your services helped facilitate or close. A listing-based commission comes due when someone finds the house they want to buy and you help them negotiate on the price and/or terms. This typically happens through either a direct introduction or through another source.
The buyer and the seller must pay a percentage of the sale
As mentioned earlier, agents are paid by both the sellers they represent as well as the buyers that agent represents during the transaction!
The seller’s broker pays their agent a commission which is usually between one to two percent of the sales price. This depends on how much the seller wants for their home and what kind of market they want to sell in.
Agents also get paid an additional fee from the buyer’s representative fees which can be anywhere from three to six percent depending on the type of representation they offer. These include having them pick out your house or car, paying for all or part of a closing cost, etc.
There is also another party involved in real estate transactions who gets paid but most people don’t know about – tax attorneys! When you own a home, you have to file taxes every year. If you sold yours though, then you no longer need a tax lawyer so you save money when you do your income taxes.
However, if you still needed one, your tax attorney would get a share commision just like any other realtor. It’s not very large, but it’s not nothing either.
The agent gets paid regardless of the outcome
As mentioned earlier, the seller’s agent is usually paid by the listing agency or broker depending on whether they earn more than two thousand dollars per month. If they do not, then the buying agent is still paid!
The agents working with you to sell your home are typically paid either a six percent commission if the house sells within one year, or eight percent if it takes longer. This eight percent covers their expenses such as photography, inspections, etc.
There is no discount for the seller
As mentioned earlier, there is always an agent that you choose to represent you as a buyer or a seller. If the other person does not pay their proportion of the commission, then you do not get paid either! This is why it is important to find a good real estate agent that can win your business, not just someone who has the same number next to his or her name on the website.
Real estate agents are not made equal by sales commissions. Some agencies have higher commission rates than others, which makes a difference in how much money you make.
There is some variation between states, but most states average around 1% per $1 million sold for the seller’s commission, and 3-5% per $100K-$500k sold for the buyers’ commission. The percent varies depending on whether the sale is a pre-sale contract, at open house, through listing, etc.
The seller must pay a percentage of the sale
As mentioned earlier, there is always one person who does not have to pay any commission. This individual is referred to as the “seller” or the “property owner.”
The seller pays a percent of the sales price that goes directly to your agency-the real estate agent working with you!
This is typically called the listing fee or selling commission. It can range from 1% – 6%, depending on whether it is a quick close sale or if it takes longer.
Some sellers choose to take care of this themselves by paying online brokers or other agents to help them market their home.
This way they do not need to hire an agent in addition to another broker.
The agent gets paid regardless of the outcome
As mentioned before, the seller’s agent is there to help their client sell his or her home as efficiently as possible, which usually means paying attention to the price they are asking for it.
The agents fees are also dependent on what happens next- if you close a deal and the person who owns the house now makes an offer that beats the one you recommended, your fee is still paid!
This can be very frustrating because sometimes sellers feel like they don’t get enough money even though you did all you could.
As professionals in this field, we want to make sure everyone receives a fair market value for their homes but unfortunately, that isn’t always the case.
Sellers may feel let down by their agent when they find out how much they got for their home. It can hurt their feelings and really take away from the relationship they have with them.