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Agent Commissions – How Do They Work?
I find that many people are confused about an agent’s commission and how it works. So let me take you through how it works for the seller and how it works for the buyer.
For A Seller
If you are a seller, and you agree to have an agent list your property exclusively, you and the agent will negotiate the commission you will pay. When you agree to pay commission, you are agreeing to pay the commission to the agent who represents you on the sale of your home, and commission to the agent who brings a buyer to your home. What is paid each agent doesn’t have to be the same.
For example, if you agree to pay 6% commission, in most cases, the commission is evenly split between the buyer’s agent and your listing agent. So each agent gets 3% upon close of escrow. In some cases though, the listing agent may feel that the commission should not be split evenly. An example might be that you and your listing agent want to give a nice carrot to a buyer’s agent to entice them to bring in an offer. The listing agent may take 2.5% of the 6% and suggest 3.5% to the buyer’s agent. (This can also go in the other direction if the sale of your home is going to be difficult and require more marketing and time to sell.)
So remember, the total commission is negotiable and the split to each agent is negotiable (between you and the agent taking the listing).
After the commission is split between agents, then it is generally split again between the agents and their offices. Let’s say the listing agent gets 3%. That 3% first goes to the agent’s office/broker and a cut is taken from the office. So, let’s say your home is sold for $350,000, the total commission you pay out is $21,000, and the cut on the listing side is $10,500. The listing office may take 30% of the commission or $3150. That leaves the agent with $7350. If the agent has a transaction coordinator, then that number might be reduced further to $6950. If taxes are 25%, then another $1737 is cut, so the number is down to $5213. Because an agent has overhead, part of that money then covers costs for marketing your property and paying for their costs. So in the end, out of the $21,000 you pay towards commissions, your listing agent is probably netting somewhere less than $5000.
For a Buyer
It’s pretty simple if you are a buyer – you don’t pay your agent anything to work for you in helping you find your home. It’s really a great deal to get free help. Your agent will help you in finding the ideal home, and help you to negotiate the best deal. Years ago this wasn’t the case. The buyer did not have representation and that is where the phrase “buyer-beware” came from.
Well, it’s not the case today. Your agent, though paid by the seller, has the responsibility to act in your interest only. Laws have changed.
With the seller, the agent enters into a contract with the seller, so the agent is protected once they begin work on selling the home. They know they will be compensated for their work and they aren’t at risk of losing money unless they can’t get the home sold.
At this time it’s not required for a buyer to enter into a contract with an agent to find their home. However, times are changing and good buyer agents are beginning to require a contract before they start work finding a home for a buyer. Why? In return for their work on your behalf, they need assurance that you will stick with them so they can put their full energy into working for you. If you don’t give an agent that assurance, they won’t be able to give you their full effort. If not under any contract with your buyer agent, another agent can slip in and seize the opportunity to write an offer for you (a good example would be if you went to an open house without your agent and another agent tried to sell you on the home), thereby reaping the rewards of work done by the other agent. It’s unfortunate and the buyers are not usually aware of what they are doing and how it affects an agent’s livelihood.
So, if you want to use a professional buyer agent, free of charge, minimally you should be respectful of their time and loyal to them. And ideally you will want to sign an agreement with them to work on your behalf so you know they will put their full effort into working for you.
If you are asked to sign a contract with an agent, here are some tips:
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Make sure there is a date when the contract expires.
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Make sure there is a reasonable exit clause if you don’t like your agent.
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If you only want to use the agent to search for you in a specific area, be sure to identify the geographical limits of your agreement.
Note: The only time I think you should consider using more than one agent, is if you are looking simultaneously in two areas not close to each other. Talk this over with the first agent you contact, and they will generally help you find a second agent and make sure they are coordinating your search for you.
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