Commission refers to a percentage of the payment made to employees depending on their sales. Many businesses, including graphic designers, web developers, and commonly the real estate industry, have used this mode of payment.
Getting paid through commission can be challenging, especially when the employer doesn’t understand how the phenomenon goes. Whether you’re an aspiring real estate professional or an existing real estate agent working towards your first sale, you should learn about commissions.
Here is a detailed guide about how real estate commissions work:
What Is a Real Estate Commission?
Payment through commission in real estate involves not one but many players who perform different roles towards making a property sell. The parties include the buyer’s agent, seller’s agent, buyer, and listing broker. Commission in real estate agents usually amounts to 5-6% of the sale price, divided equally amongst all the parties involved.
The buyer’s agent is responsible for representing the buyer’s interests, opinions, and needs throughout the entire process of selling. When a buyer involves an agent in property selling, the latter get their commission when the process is completed.
Similarly, the seller’s agent (also known as the listing agent) performs on the seller’s behalf. The buyer and seller are allowed to choose agents on their own. The last parties in the real estate commission mechanism carry the listing and buyer’s brokers.
Although relatively similar, the two brokers have different responsibilities. The listing broker employs and controls the seller’s agent on behalf of the seller, while the buyer’s broker gets the buyer an agent for various responsibilities. It’s rare for the commission to be divided unequally amongst the players.
How Does Commission Work in Real Estate?
Now that you’ve known the players, you can confidently proceed to understand how the commission game goes. The foremost step in real estate commission is settling on the percentage paid when a sale closes. The sellers and buyer’s agents negotiate on a particular portion, generally between 5 and 6% of the selling price, and work with the agreed rate.
Agreed commissions can only be changed before the sale closes (although in rare cases) through an inclusive debate rather than when the deal is done. Attempts to alter the commission after a sale closes are considered unlawful and can attract the attention of a court of law. Sometimes, it may take a while for commissions to process. Real estate agents can use commission advances to stabilize their income in the meantime.
As highlighted earlier, each player gets an equal share of the agreed commission. For instance, if the agents and seller agreed on a 5% commission, each of the four players would get 1.25% of the entire payment.
In recent years, sellers and buyers have moved away from using all the above representatives to employing a general real estate agent and broker for the entire job. The new normal is a win-win for buyers, sellers, and real estate agents since they get to reserve some finances that would be used to hire the other representatives.
Since real estate agents cannot work independently and receive commission directly from clients, they rely on brokers to form a single unit, realtors. The formed unit enables brokers to receive commissions on behalf of real estate agents while observing a particular code of ethics.
Who Pays Real Estate Commissions?
In most common cases, the seller pays a commission to the agents and retains their share of the selling price after a property closes and the transaction is successfully made. The broker or listing agent receives the payment directly from the seller on behalf of the other agent.
Each agent should get an equal share of the paid commission. Although the percentages are open for negotiation, the difference should be small, such as 60:40 and not 70:30 or otherwise.
How Are Commissions Shared When the Sale Doesn’t Close?
Generally, commissions are active when the selling price has been negotiated, settled, and honoured when a transaction has been made. However, there are cases when a seller should pay a commission even when the sale doesn’t close.
The circumstance includes when a representative presents a buyer who is willing and able to buy the property but:
- The seller suddenly changes their mind and chooses not to sell.
- The seller mutually agrees to cancel the transaction with the potential buyer.
- The seller brings up new terms not listed in the original covenant.
- The seller fails to offer the property’s possession to the potential buyer within a reasonable period.
- The seller has a partner connected to the property who failed to sign or agree with the listing agreement or the title has pending errors.
Is the Real Estate Agent Commission Mandatory?
Real estate commissions can be considered a tradition but not legally mandatory. Sometimes, the seller can find and negotiate with buyers independently without involving any agent, meaning they will have no commission to pay. However, giving up on agents seems to make work easier but doesn’t.
The current market has many real estate scammers waiting to feast on any buyer or seller who doesn’t have the right skills or technique. Hiring a real estate agent will save you from a lot of misfortunes that would arise when working alone. It would help if you focused on making a successful sale or purchase rather than the amount of commission you will have to pay the agents and brokers.