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Real Estate Commissions Explained
Most real estate agents do not get paid a salary. In fact, most real estate agents do not get paid at all, unless a transaction in which he or she is materially involved actually 'closes' - meaning a property is sold, leased, or otherwise changes hands. In these cases, by prior agreement, usually between the seller and the seller's agent (the listing agent), the agents involved in the transaction receive a 'commission.' This commission usually is a pre-agreed upon percentage of the property's selling price, but it doesn't have to be. The commission rate is always negotiable.
For example, if a property sells for $100,000, and the commission rate agreed upon in the listing agreement between the seller and the listing agent is 7%, the commission paid to the agent at closing will be $7,000. However, this is almost never what the agent 'makes.'
There are many expenses associated with the sale of property and these usually are paid as they are incurred by the listing agent out of his or her own pocket. The largest portion of these are usually Marketing Expenses such as: 1) Internet Advertising; 2) Print Advertising; 3) Multiple Listing Service (MLS) and similar services like Loopnet - if appropriate; 4) Printed brochures, postcards, and flyers; 4) Yard signs; and 5) other things such as : Lockbox, gas, paper, etc... These expenses add up quickly, and continue to accumulate for as long it takes to sell the property. The longer it takes, the higher these selling expenses will be.
However, none of these is the biggest expense a listing agent will pay. A listing agent's biggest expense, by far, is the fee they will pay to a cooperating broker, if there is one involved in the deal.
The listing agent rarely brings the buyer into a transaction. In fact, in most deals the buyer is introduced to the property by another agent - one that the 'Buyer' has been working with. The buyer's agent spends his or her time searching for and showing properties to the buyer. And, as it is for the seller's real estate agent, the buyer's agent, for all this work, usually is not paid until a transaction they are materially involved with closes.
Any payment arrangement can be made between the buyer and his or her agent, but most of the time it is not the buyer who pays for their time and services. The buyer's agent is usually paid by the listing agent (the one representing the seller). To sell homes more efficiently, the listing agent usually offers to share a portion of the commissions he receives from the seller. In fact, if the listing agent puts the listing in the MLS, which most do, they have no choice but to share the commission. Sharing actually is mandated by the MLS system, which is the system most residential real estate agents use to promote their listings to other agents. But the amount the listing agent shares is not mandated. In the past, the buyer's agent almost always received 50% of the total commissions - an even split. But the split can be almost anything. Today, some listing agents opt to keep more for themselves, which can be a huge disadvantage for the seller - more on that below.
So, returning to our above example of a $100,000 sale with a 7% total commission paid by the seller at the time of closing... Of the $7,000 the listing agent will collect, if there is a cooperating agent involved in the transaction, and a 50% commission split offered, the cooperating agent will be paid $3,500 at closing. That leaves only $3,500 for the listing agent, and he or she must cover all marketing and other expenses from that.
What's Usually Done
Not very long ago, most real estate companies charged a 7% fee to sell a residential property. Commission rates for vacant land and commercial properties were usually higher, due to higher marketing expenses and longer time periods to sell. Today, many real estate companies charge the seller a commission rate of 6% to sell a home. Some charge more, some less, but as previously mentioned: the commission rate is always negotiable.
The more reputable firms, and most are, will offer a 50% 'commission split' to the buyer's agent (the cooperating agent). But beware, some listing agents will opt to take more for themselves. For instance, the listing agent may keep 3.5% and offer only 2.5% to the cooperating agent (a 42% commission split). Or, if the listing agent has cut their commission rate to... lets say, 5.5% to get the listing, they may keep 3%, and offer 2.5% to the cooperating agent (a 45% commission split).
The commission split is a very important aspect of any listing contract, especially in a market where many competing properties are listed for sale. Here's why: In a market with numerous properties to choose from, many of which may completely satisfy a buyer's needs and desires, common sense says that the buyer's agent will show properties offering the highest commission split first. And, what many sellers do not realize: The buyer's agent knows exactly what that commission split will be, as this information must be included in every MLS listing. So, properties offering higher commission splits will garner greater interest. They will be shown more than those offering less money to cooperating agents.
To illustrate... Which property will a buyer's agent show to a buyer? Will it be a property with an asking price of $100,000 and a commission split of 2.5% (which will net the agent $2,500), or a property with an asking price of $100,000 and a commission split of 3% (netting the agent $3,000)? All other things being equal, the answer to this question is obvious.
The Pretty Dog Way
Pretty Dog Realty does things differently. We employ a special, extensive, full service, marketing program - our Value Building, SellFASTTM System.
More importantly, we always offer a full 3% of selling price to the cooperating agent. And, we don't deduct any fantom 'nickel and dime fees' (ask about this, it's important!) many offices are now charging to cooperating agents, which usually amount to hundreds of dollars. These unnecessary fees can be a major disincentive to show a property when other acceptable properties are available with no such fees attached. Remember, a buying agent does not get paid until there is a sale. Common sense dictates that, given a choice of several similar propeties, an agent will always show the listing with the highest income potential first. Our sellers are never disadvantaged in the marketplace by these sorts of business practices.
When you list your home for sale with Pretty Dog Realty, you get the best deal - Full and Excellent Service, including our Value Building, SellFAST System - a premium marketing program to sell you home - and the advantage of a full 3% going to cooperating agents, those who actually bring the buyer to the transaction.
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