A survey released in January 2020 suggests that the number of real estate agents associated with the National Association for Realtors (NAR) amounted to 1.4 million, a number that has been increasing steadily since 2012. This means they’re more inclined towards ethical brokerage in terms of their services, including real estate agent commission and selling practices. Commissions for your friendly home seller can get confusing for many, even real estate agents themselves at times. It is natural to wonder about how real estate agent commissions get paid, who pays them, and when. Before we get into how real estate agents get paid, let us answer a more common question.
What is my Real Estate Agent’s Commission?
Real estate agent commissions vary around the world with the highest average commission rate amounting to the US $8,458 (7600 Euros) in Austria. In the United States, average broker commissions have varied over the years, amounting to an average of 6.04% in 1992 and 5.08% in 2018. Most real estate agencies are bound to try to charge more, but as with anything, it is negotiable. Where newer home sellers might charge you as little as 3-4% of the sales price, top and established realtors might give you higher figures from anywhere between 6-10%. 6% is usually a good percentage to settle on, however, depending on your haggling skills, you can try to go lower!
Be careful of low commission rates, to begin with, though, as it might be a red flag regarding the trustworthiness of a real estate agent.
When do Real Estate Agents get paid their Commission?
A straightforward answer to this is when the deal has been finalized and the buyer releases the funds. However, there are some intricacies involved in the timing and who ends up paying the real estate agent commission.
Real estate agents earn their keep by charging for services rendered when it comes to the sale or purchase of a property, i.e., finding interested parties for a buyer’s place, completing the necessary paperwork, and most importantly, negotiating the selling and buying prices.
Once a deal has been finalized and both parties have mutual consent in the form of a contract, the buyer releases funds to the real estate agency – not the agent or the buyer directly. The real estate agent commission is usually added to the selling price of the house. For example, if a property has a selling price of US $ 500,000, buyers will be told a selling price of US $530,000 (based on a 6% commission rate).
Once the agency receives the said amount, it will deduct the agreed-upon commission and release the rest to the seller. So, in a way, the buyer bears the brunt of associated costs unless explicitly agreed upon by the buyer and seller to share it. Taking the above-mentioned example into consideration, the agency doesn’t get to keep the whole $30,000 for itself. If there is more than one real estate agent associated with the transaction, the amount gets distributed between the listing and buying real estate agents.
This split isn’t always 50/50. Real estate agencies negotiate the split percentage.
The real estate agency has a contract with its agents. If agents are salary-based, they don’t see the commission directly; perhaps in the form of a bonus if the sale is exceptional. If they are on commission-basis, as is more common, a percentage is set out when joining the agency.
Let’s take the example above into consideration. $30,000 was paid as real estate agents commission, which is split, let’s say 60/40, between the listing and buying brokerages, leaving $18,000 for the listing brokerage. An agent associated with this brokerage has a contract of getting 45% of that, amounting to $8,100 before tax.
How much a realtor gets from their agency is dependent on the signing contract. Usually, this can be from anywhere from 15% to 50%, however, big shots can dictate this percentage, at times keeping the whole commission for themselves and paying the agency a monthly desk-rent.
Following is the general process of how a normal real estate exchange takes place and an exchange-of-money structure;
- You and the agent finalize a commission rate
- The listing and buying agents settle on a split percentage
- Once the deal between buyer and seller gets finalized, all the necessary documentations are done and funds are released by the buyer to their agent
- The buying agency splits the amount received into two parts – seller’s amount and commission amount
- The seller’s amount gets transferred to their account while the commission amount gets split further
- The brokerage sends the listing agency their share
- Both agencies keep their share and transfer the real estate agents commission to them, effectively completing the transaction.
How Many Parties are Involved in a Real Estate Transaction?
Sharing the real estate commission isn’t as simple as dividing the commission amount by two since there can be more than two parties involved. A normal real estate transaction’s commission might have to be split between;
- The listing agent
- The buying agent
- The listing agency
- The buying agency
In some cases, the same agent or agency can be representing both parties (buyers and sellers) in a transaction. This is known as “Dual Agency” (or “transaction brokers”) and is a much-debated topic for many. Some states in the US such as Kansas and Colorado have made dual agency illegal.
The 2016 Colorado Statute Article 61, Part 8 dictates that dual agency may not be established with any seller, landlord, buyer, or tenant. Other states require that dual agency be disclosed to both parties since this means that there is no need to split the real estate agent commission. This can lead to tempting an agent to misrepresent some material facts about a property.
It is always a good idea to know the ins and outs of how real estate transactions take place so that you can get the best possible deal for yourself. If you are looking for reliable real estate agents or more information on how the real estate agent commission system works, you can contact Fastexpert, Inc.