As with any career, there are always fees and commissions involved in doing business. The fee is paid to you as the broker (real estate agent) while the commission is typically taken by the seller or buyer. Yours is the job to find a home for your client and negotiate their sale or contract, so most professionals include some sort of percentage off set to pay for the service they offer.
That % comes in the form of a commission. In fact, it’s very common for agents to advertise a “listing agency discount” or an “agency compensation plan” because it implies that being members of their team will result in them paying less than if they worked alone.
But what people don’t tell you is that this lower commission is only applicable to sellers. If you are a professional negotiator who knows how to value real estate, you could easily get yourself into a situation where you ARE negotiating from a position of strength AND still earn a high income. You would just have to go about it differently.
This article will talk more about why real estate agent commissions can be expensive for buyers and why it is important to know before you choose one.
What does it mean?
As mentioned before, the term “commission” refers to the fee that an agent is paid for services they provide. This can include things like staging the house, listing it with a real estate agency, marketing the property, showing it to potential buyers, negotiating the sale, etc.
The commission usually comes in two parts- list price and margin. The list price is the asking price the home owner sets as their initial offering on the market. The margin is what the seller agrees to accept as the final selling price.
So, if your friend wants to sell her house and she gives you $100,000 as the list price and she accepts $110,000 as the final sales price, then her broker earns a 2% (or $2,000) commission because he or she made $10,000 off the deal.
That said, not every agent gets this large of a commission. Some agents are lucky enough to earn 1%-2% commissions due to being more productive than others!
Editor’s note: We wanted to make sure our readers understand that while some Realtors may feel pressured into giving larger discounts, there are ethical ways to go about doing business. It is important to be aware of these unethical practices so you do not get involved in any fraud.
How much is it?
As mentioned before, not every real estate agent is an equally good one. Some are more successful than others in getting results for their sellers or buyers.
There are many different factors that determine how well an agent does their job, but probably the most important thing to know about agents’ fees is what the law requires them to tell you.
Under federal regulations, all full-time residential sales agents must inform potential clients within a 30 day window of their fee (for both seller and buyer representations).
After this legal disclosure period, agents may be able to get away with saying things like “We can find you someone close to here” or something similar without telling you the exact price, but that isn’t legally sound.
Agents who say things like “we pay a commission equal to 6% of the sale price” aren’t telling you everything because the 0% sale price doesn’t include any other costs of the agent.
These additional costs are common for professional level real estate agents such as mortgage brokers, title companies, surveys, etc.
Are there exceptions?
As mentioned before, not every real estate agent is paid an upfront commission. Some agents are hired with a percentage-based compensation system or an agreement that they will be compensated for their services at a later date (this is called deferred compensation).
Agents who use this service typically work with several sellers in the area, and as buyers begin to show interest, the agent adds them to his/her team to represent them.
This way, the agent does not need to find new clients immediately, and he/she gets time to warm up relationships with people so that they get business soon. It also helps those agents who may feel uncomfortable going door-to-door seeking business!
Some agents choose instead to receive a monthly fee per seller they bring into your portfolio, which can add up very quickly.
There are many reasons why some agents decide to go about it this way, but none more important than the one just mentioned: They believe that this will create a better experience for their customers.
This article will talk more about how much these fees vary and what factors affect how much you pay.
How do I get a list of commissions?
As mentioned before, your real estate agent is paid through their commission. This is typically shown as a percent of sales or leases completed by the agent. Agents also receive additional rewards for bringing in more business, keeping them motivated to work hard for you.
Some states have regulations that require agents to disclose all of their fees, but most don’t. It is very common to not know what other costs there are!
There can be another fee attached to the listing service they use, any referrals they earn, and possibly even an annual membership cost at a professional association they are part of. All of these things add up quickly!
Most people never look into it because they think the broker takes care of his/her own expenses. But really, they are being paid to handle others’ money so they include some services to help with that. If you want to keep yourself well-informed about how much your agent makes, we have done the research for you.
Do I need to pay my agent?
As a seller’s agent, you are paid by your client to be their representative in the sale of their home. You will typically receive a 6% commission if the property is sold within the first six months, and 8-12% thereafter.
After that initial period, the faster the house sells, the higher the commission! The longer it takes to sell, the lower the commission. This can sometimes make you feel uncomfortable as an agent, but remember that this is how the system works.
If his or her house doesn’t sell in that time, you don’t get paid. It’s his or her loss, not yours.
There may also be other costs involved in listing and selling a property (like paying for advertising), so it is important to look after your own money too.
What if I don’t want an agent?
Even if you decide you do not need an agent, it is still important to know what your agent’s commission rate is. Because most agents are paid a percentage of sales price, their cost per sale depends on how much the seller will pay for the property and how much they can get for it!
If you choose to represent yourself, you will have to find ways to keep track of all the costs related to the sale of the house including paying off existing loans, finding new renters or buyers for the home, etc.
Also, be aware that while some states require you to belong to a professional real estate association in order to be considered licensed, others do not. In those cases, you may feel more comfortable representing individuals instead of businesses, so check out both options before deciding.
How much will it cost me?
As mentioned before, how expensive or cheap an agent you choose to represent you is dependent upon your budget. Obviously, the more money you have, the higher quality agents you can hire, but even if you are buying or selling a small property, like a house, they are still legal professionals that deserve your respect.
In fact, we recommend reading our article about The Different Types Of Agents before choosing who to go with. While not every real estate agent does things by the book, what kind of agent you want really depends on what you are looking for.
Some people prefer having their own personal representative while others do not. It totally depends on what type of seller you want to reach and what types of properties you want to buy or sell.
What are my options?
Even though you may feel like you’ve been scammed by an agent, it is important to understand that not all agents use deceptive tactics to earn money. Some agents spend time developing relationships with their brokers or other agents so they can make more income in the future.
Some agents will advertise heavily to get new clients but then fail to put in the effort needed to keep them as customers.
Other agents will charge excessive fees for services that are not necessarily more expensive than looking up listings yourself or hiring someone else to do it for them.
There are many reasons why some real estate agents have to be paid more than what you agree to pay for their service. It is very difficult to take advantage of this fact unless you are willing to go into work underpaid and suffer negative word-of-mouth reputations, nor are there any legal regulations forbidding such practices.
