How Does Real Estate Commission Work: Frequently Asked Questions
If you’re looking to buy or sell a home, real estate fees are likely to be a matter of substantial concern. The problem is that although people are quick to inquire how much these fees are, few people actually understand how real estate commissions work. Knowing who has to pay what once the transaction is complete can provide some peace of mind and help you navigate the world of real estate more comfortably.
In order to understand how does real estate commission work, here are six of the most frequently asked questions:
1. How is the real estate commission amount determined?
One thing to be aware of from the get-go is the fact that real estate fees are almost always negotiable, and therefore the amount will vary from situation to situation. Although the standard tends to hover around 5 or 6 percent, it depends on factors like location, the agent’s reputation, and the current state of the market.
Of course, the stated percentage is a percentage of the sale price of the home and thus the exact amount will not be known until an offer has been accepted and the house is sold. The commission rate will always be decided in advance and should be clearly stated in a contract between the agent and the buyer or seller.
2. Who pays the real estate commission?
This is actually where things get a little more confusing about how real estate commissions work. In the event that both the buyer and seller have an agent, you could argue that the seller pays it or that the buyer pays it. How the real estate commission works is that the fee gets split evenly between the two agents.
Depending on how you look at the situation, you could say that the buyer is paying the fee because the cost is absorbed by the price of the home, or that the sell is paying it as it comes out of the home’s equity.
Regardless, the important thing to note here is that the fee comes out of the price of the home and is not added to the sale price.
3. How is the money distributed once it has been paid?
Contracts that have been signed in advance, by both the buyer’s and seller’s agent, will determine how much should be paid in fees. The percentage rate is often split evenly between the two, although sometimes a contract can stipulate that one agent will receive more of the commission than the other.
It is then up to the lawyers overseeing the transaction to ensure that the commission is distributed appropriately according to the contract. It’s important to note though, licensed real agents must work for a broker and this is who will initially receive the money.
Most brokers also take a small cut of the fee in order to cover the cost of things such as advertising, signage rental and office space.
4. Are real estate commissions often disputed?
One of the biggest contentions within the world of real estate is the fact that many people feel the fees are too high. Some argue that the service provided doesn’t always warrant the steep price tag and that agents end up being overcompensated for a relatively small amount of work.
As in any field or work, some people are better at their job than others and it’s difficult to reach a conclusive point either way. In some cases, a home will simply sell more easily due to external factors and although the agent may not have put in a tremendous amount of work, they can’t really be blamed for the situation.
In other cases, a home can also take weeks, months or even years to sell. This means that the seller’s agent will have clocked many hours marketing, holding open houses, and communicating with potential buyers.
5. Are there alternative ways of handling commissions?
Aside from agents working on commission, there are listing agents who work for a flat fee. Depending on the situation, this can definitely save the seller some money, but it also means that the agent is likely to offer limited representation. You can think of percentage-based real estate fees act as a type of insurance, that works to protect both the real estate agents and the buyers and sellers they represent.
Due to the fact that both parties go into the agreement without knowing what the outcome will be, a predetermined rate helps ensure that the buyer or seller doesn’t pay too much and that the real estate agent is fairly compensated.
6. What’s the most important advice about real estate commissions?
Always read the contract carefully. Depending on your situation, different conditions might be more appropriate than others. Once you’ve signed something though, you’ve agreed to those terms and conditions, so it is important you understand what they are. Don’t be shy about asking questions or requesting further clarification if you feel unsure.
