Buyers, sellers, investors, welcome back to another installment of Real Estate Jargon, aka, simple explanations of real estate terms not normally found in nature.
Compensation to real estate brokers is typically a commission paid by the seller upon completion of a real estate transaction. However, the standard California Association of REALTORS® residential listing form (CAR Form RLA) states in Section 4: "real estate commissions include all compensation and fees to Broker." So, what all could be included in compensation?
Commissions are paid to both the broker who represents the seller (Listing Broker) and to the broker who represents the buyer (Selling Broker). Since both are paid by the seller, Section 4.A of the listing agreement specifies the amount to be paid to the seller's broker and Section 4.D specifies the amount that will be offered to the buyer's broker. Commissions can be stated as a fixed amount or as a percentage of the sale price, or a combination of the two.
As further explained in the listing agreement: "The amount or rate of real estate commissions is not set by law."
Several years ago, many "fixed fee" and "discount" brokerages flourished throughout the U.S., offering everything from listing-only services to traditional full buyer and seller services at a discount price. While some of these brokerages have survived the market downturn, many were unable to sustain profitability as traditional, full service marketing programs became necessary to close a sale.
Traditional brokerages have also felt the squeeze on commissions, as sellers have seen their paper equity greatly reduced, along with the net proceeds of their sale. From 2005 to 2008, many traditional brokerage offices reduced their commission rates to maintain market share against the discount brokers, but since 2008 most have stuck to their historical commission rates and focused on providing the high level of service needed to sell properties in a soft market.
Given that commissions are easy to understand and calculate, what other fees could be added to broker compensation? Section 4.C of the listing agreement states: "In addition, Seller agrees to pay Broker: _______________." Until recently, some brokers were adding miscellaneous offices fees, such as "closing fees", "administration fees", or "handling fees." These fees were made illegal in many states unless they could be tied to a specific cost for which the broker could produce a receipt. A common example of a valid fee is a "transaction fee" paid to a Transaction Coordinator, typically an outside contractor paid a fixed, per-transaction fee.
Another fee sometimes found in Section 4.D is a maintenance fee, usually included when the property is vacant and the seller is located out-of-town. An addendum to the listing agreement (incorporated by reference in 4.D), authorizes the listing broker to make minor repairs, up to a certain $$$ limit, for which the broker might be compensated immediately or at close of escrow by submitting an invoice with receipts.
Although now included in most luxury home marketing programs, sellers in years past have sometimes paid additional marketing fees for marketing activities not included in the listing broker's standard marketing package. These could include specially catered open house events, staging, or premium print ads in out-of-town publications (example: ads for a $20M oceanfront home in Forbes or The Robb Report).
Sellers should consider all fees and commissions before signing a listing agreement. Ask the listing broker for a "Seller's Net Sheet" that lists all anticipated costs. In the end, sellers, it's all your money.
If you have questions about real estate jargon or buy/sell/investment strategies, drop me a line! john@jsrealproperty.com
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