How Real Estate Commissions Work

Image of 6% commissions?

There are many misconceptions about how commissions work in home sales. Most people have heard that the commission is 6%. There is truth in it since this does tend to be the “typical” amount, but as I learned from one of my real estate teachers everything is negotiable.

The “Customary” 6% Commission

The 6% commission is customarily paid by the seller. The listing agent (Sometime mistakenly called the selling agent) has the contract with the seller to be paid 6% from the proceeds of the sale. However, there is further language that determines if and how much of this goes to the selling agent. (Sometimes mistakenly called the buying agent)

Typically the 6% is split evenly in half. The listing agent keeps and gets a 3% commission from it, while the remaining 3% goes to the selling agent.

Commissions are negotiable. In the 2008 crisis it became more common to see 5% with 2.5% per side commissions. There have been rare occasions with lower and even higher rates.

Can You Save Commissions by not using a Realtor?

I have heard people say they are thinking of trying to buy a home without an agent to save on the commission. Yet unless they purchase from a For Sale By Owner any listed property likely already has a contract with the sellers paying 6% either way. Therefore, whether a buyer uses an agent or not the net commission costs remains unchanged.

Now contracts can be renegotiated and if one is creative they could effectively lower net sales price by lowering the commission agreement if only the listing agent is involved. However the listing agent would then likely have to handle both sides of the transaction, and want to get more than the 3% commission since they are now doing more work. So this still may not produce a full 3% savings.

Another consideration about this strategy is that a single agent legally can represent both the buyer and seller, but it generally is not advisable. This is because it is very hard to serve the interests of one client without diminishing the service for the other. This would make more sense for someone that has lots of experience buying and selling real estate.

How Agents Could Help You Save Money Buying A Home

Earlier I mentioned that you generally won’t save any money buying a home without an agent. But what if I told you that you could actually save money purchasing a property using a buyers agent?

Rules actually allow for selling agents to pass on some of their commissions to the buyer they are representing. For example lets consider the typical home listed for sale has a commission agreement with their listing agent for 6% with 3% of that going to the buyers agent. If your buyers agent agrees to give you half of their 3% then you would get 1.5% of the sales price as a cash rebate at close of escrow.

Whey would an agent willing to do this? If you have done a lot of the legwork and found the property you want to buy an agent can save a lot of time by not touring homes with you. They would spend the majority of their times on the actual real estate transaction. Therefore, some agents would be willing to share some of their commission.

Where Can I Find an Agent That Will Accept a Lower Commission?

How can you find an agent that will rebate part of their commission? Start with friends and family. If you know someone in real estate they may be willing to offer you a deal or point you to someone they know that would.

This same approach holds true when you are selling a home and looking for your listing agent. There are agents that will agree to list for under the 6% as well. The more work you do yourself and the less services you need, the more likely an agent would be to accept a lower figure.

In fairness to all agents. I want to be careful as this post is in no way trying to belittle the value of hard working agents. There are many wonderful agents that put in many hours and have the upmost integrity in the business. There are many complaints that agents get paid way too much per hour of work on a home sale. On the surface this is absolutely correct, but what is not factored in is the time that is spent marketing to find clients. There are serious expenses for agents to stay competitive and these are the main reasons agents are reluctant or refuse to accept commissions below the “typical” 6% fee.

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