Most people have questions about commissions. If you are paid a salary or hourly wage at your job, commissions may be foreign to your knowledge base. If you are in a position where you receive commissions for pay, you still may have questions about how real estate commissions work since real estate transactions are different than personal property transactions . So, here we go!
Commission:
The commission is paid at Closing whether or not the Buyer chooses to be represented. The commission is set by the Seller and their Agent as part of their Listing Contract before the property is listed for sale. The percentage offered to Co-Operating Agents representing Buyers is in the agent portion of the MLS.
My brokerage charges $210 Broker Administration Charge (BAC) and a percentage commission determined by the Seller and their Agent. The $210 is paid by the Buyer and/or Seller at Closing. The percentage commission, unless otherwise agreed upon, is paid by the Seller at Closing. One exception to this would be Auctions. At most Auctions, the Buyer pays the commission. *The $210 BAC is paid per side per transaction on all transactions conducted by agents in my company. Other companies may charge more for BAC. Some may have no BAC but may charge other fees.
How Percentage Commission Is Decided:
The percentage commission is determined by the Seller and their Agent as part of the Listing Agreement. Part of the commission will be offered to the agent representing the buyer. Strategies to increase the number of showings may include offering a higher percentage commission to the co-operating buyer's agent than most nearby listed homes are offering. Offering a bonus paid if certain conditions are met is another strategy. The entire agreed upon commission between seller and listing agent is not advertised on MLS; we only see what percentage of the commission is offered to the buyer's side. Note that the buyer does not take part in these discussions.
Banks and discount brokers may offer a lower commission percentage than nearby listed homes have advertised in the MLS. Banks and discount brokers depend on turning over a higher volume of properties in order to make up for the lower commissions. Banks do not concern themselves with buyer's rights. In fact, banks have been known to tack on other fees and charges to buyers. There are also third parties used by banks and discount brokers that may charge buyers and their agents additional fees for services not ordinarily needed in a home purchase.
Homes listed for sale for less than $100,000 will often offer a fixed commission because a percentage commission would not cover the time and expenses incurred by a buyer's agent for showing, negotiating, and transacting the purchase.
Where does commission go? 
The circle graph (pie chart) on the right shows a basic 50% split. The split does not have to be 50-50.
All expenses shown for the Seller's Agent also exist for the Buyer's side. This is not indicative of where all the commission money goes for every agent as costs will vary.
Each agent has an agreement in place with their broker specifying how much the broker gets and how much the agent gets.
This graph shows the seller's broker getting 13% of the selling side. Some brokers may keep more; some may keep less. That's between each agent and broker.
Brokers with a lot of training programs in place often keep 50% of new agent's earnings. You can bet that any brokerage taking zero, or less than 5%, of an agent's commission will have other charges in place.
Income taxes may be higher than the 11% shown but perhaps offset by tax deductible expenses.
Advertising & Marketing expenses are up to each individual agent. Mine are higher than the graph shows but my automobile expenses are lower because I drive old cars.
When is commission paid?
Commission is paid after Closing. In Kansas and Missouri, Closings are conducted by Title Companies. The HUD-1 Final Settlement Statement shows all charges to be paid at Closing. The commission is on the Seller's side of the HUD-1. The Closer at the Title Company will verify all charges and disburse funds to all parties as soon as the check for the purchase clears. Cashier's checks are often required so that funds can be verified and disbursed immediately. Wiring money is another way to move funds around the world almost instantaneously.
Both agents check the HUD-1 prior to Closing to make sure all entries are correct. Any errors or omissions need to be corrected before Closing. We carry Errors & Omissions Insurance in the unlikely event it is needed. E&O Insurance also covers errors made on the Real Estate Conract. Charges on the HUD-1 may include tax prorations, HOA fees, contractor charges for repairs made after inspections, lender fees, etc.
Both buyers and sellers sign a document agreeing to cooperate in correcting any error found after Closing. This could be something like a name mispelled, middle initial left out, or an erroneous charge.
The commission is paid out to the seller's broker and the buyer's broker. The broker then processes that money through an escrow account set aside for that purpose. Whatever agreed upon percent and fee per transaction is kept by the broker and a check for the remaining amount is sent to the agent. It may take 24 hours to a week for the agent to receive their part of the commission.
Dollar Amount Example: There is no set commission as that would be a violation of the Serman Antitrust act. The following is for example purposes only.
Suppose the Seller and their Listing (Seller's) Agent agree to list the property for sale at $360,000 for 6 months at an 8% commission. They agree to offer 4% of the commission amount to the cooperating agent working with the buyer. An offer is made and negotiated, finally settling at $352,800. (98% of List Price). The Seller has $95,042 left on their mortgage, owes $28,434 in commission, $210 broker administrative charge, $759 for titile insurance and closing fees, has already paid taxes for the year so will receive $1,250 credit back from buyer for tax prorations, agrees to pay $450 for a Home Warranty for the buyer, and has the contractor who fixed the downstairs toilet bill to closing $150.
$352,800 goes into the Title Company's escrow account. The Title Company pays out a total of $124,076 and then wires the remaining $228,724 into the Seller's personal checking account.
The Buyer pays $352,800 for the house, pays $1,250 in property taxes, nothing for lender fees or prepaids because she's paying cash, $475 for the whole house home inspection billed to closing, $99 for the Wood Boring Insect Inspection, $85 for the Radon Inspection, nothing for Home Owner's Insurance because she paid it in advance of Closing, $210 broker administrative charge, and $459 for title insurance. The buyer receives a credit of $3,500 for the Earnest Money Deposit already held in escrow so she brings a Cashier's Check in the amount of $351,878 to Closing.
The Title Company diburses funds to all parties according to the HUD-1, notarizes all necessary documents, keeps a record of the transaction, and records the change in ownership at the County Recorder's Office. The real estate agent gives the buyer the keys to their new home and everyone lives happily everafter.
More Answers to Frequently Asked Questions (FAQ's)
(Photo of pie chart graph is used with permission of Better Homes & Gardens Real Estate.)
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