CLEARING UP THE REAL ESTATE COMMISSION MYSTERY
Confused about real estate commissions? You're not alone. Here are some answers to a few of your most common questions.
There’s no question a good real estate agent can be a valuable resource when it comes to buying or selling a home. But how much is that help going to cost?
First of all, if you’re the one buying the home, it isn’t going to cost you anything. The agent’s commission comes out of the selling price. That means it’s deducted from the amount the seller receives, not added onto the amount the buyer pays. Of course, it can be argued that as a buyer you are indirectly paying the commission by virtue of the fact that it’s included in the price. But following that logic, all homes for sale by owner should cost less than those being sold through an agent, and that certainly isn’t always the case.
Second, if you’re the seller, you don’t have to pay an agent anything up front to market your home. A real estate agent generally doesn’t receive any commission until closing, at which time they will receive the amount stipulated in their contract -- typically somewhere between five and eight percent. But chances are (unless you’re in a particularly hot market) your agent is going to have to work hard to earn that commission by investing a lot of time, effort and money into marketing your home. And they’re going to have to give a cut of that commission to both their brokerage and the buyer’s agent (unless they represent both the buyer and the seller).
To help take the mystery out of real estate commissions, I have provided the following answers to a few of your most common questions.
Q.What is the average commission on a home purchase?
A. The average commission is between 5% and 6%.
Q.Who pays the commission?
A. Usually paid by the seller. It is paid out of funds received from the sale of the home. However, there can be agreements where the buyer agrees to pay a commission. The commission is never paid by both.
Q.Does the commission go entirely to the seller’s real estate agent?
A.No. The broker whose firm lists the house sets the commission. The listing broker then offers part of the commission -- often 50 percent -- to the broker whose firm represents the buyer. Both brokers then share their portion of commission with the agents who work with the seller and buyer. The agents’ share may be as little as 50 percent, depending on their arrangement with the broker. If either brokerage is part of a franchise, it may also pay part of the commission as a franchise fee.
Q.Is it possible to negotiate the real estate commission?
A. Yes. An agent may be willing to negotiate his or her commission in order to get your business. This is especially true if the agent is independent and doesn’t have large operating costs but the downside of low commissions is lower level of service. In some cases, both agents might agree to cut their commissions in order to bring down the price of the home if the buyer’s offer doesn’t quite meet the asking price. Sometimes a buyer’s agent may request concessions such as paid closing costs, a repair allowance or a rebate in order to help close a deal.
Q. Will I pay less if I buy a house without using a real estate agent?
A. The short answer is "maybe". But not all homes for sale without an agent are priced right - as a matter of fact, many are priced above or below market because homeowners do not have access to or may not be willing to accept community comparables or the techniques used to try to determine the true value of the home. Often the sellers' or buyers' perceived saving may actually turn out to be a loss because he/she over or under estimated the true value of the home. The fact is A HOME IS WORTH WHAT A BUYER IS WILLING AND ABLE TO PAY FOR IT.
This year and for prior decades, the National Association of Realtors® (NAR) survey of sellers has found that homeowners who did not use a professional real estate agent sold their home for an average of 20% less than homes represented by a Realtor.
Another possibility is that the listing broker may agree to a reduced commission and pass the savings on to you. This may also be possible if you use the same agent as the seller -- for example, if you toured an open house and retained the listing agent. This is called dual agency, and is legal in most states, although it may be subject to special laws and regulations.
Q.Is a real estate agent likely to push me to buy a more expensive home so he can make a higher commission?
A. No. The agent is usually more interested in helping you make a purchase rather than encouraging you to buy a more expensive house. There isn’t a big incentive for an agent to push you to buy a more expensive home because of the way commissions are divided. Your agent may be entitled to 65 percent of his broker’s share of the commission -- perhaps 3 percent of the sale price. Under that scenario, if you were to buy a home for $260,000, rather than $250,000, your agent would earn only an additional $195.
Q.Can I get a lower fee by using a discount broker?
A. Yes. However selling a home involves more than just putting a sign on the lawn and placing photos on the Internet. A discount broker may offer you lower fees, or a deal in which you pay only for the services you receive. However, discount brokers offer very limited services with no screening or guidance through the process so they may be more suitable for those with a working knowledge of real estate and the process of buying and selling property. Remember,you get what you pay for so the difference between a 2% commission and a 3% commission could end up costing you time, anxiety and a lot more money than the 1% difference.
