Paying a percentage of the sale price of your home in commission is the standard way of doing business in the real estate industry. But how much will you really have to pay, and what else should you know about commission before you buy or sell a home?
We will explore the commission for Realtors so you have a much better handle of your expenses.
How Much Are Commissions for Realtors?
When a home is sold, there is typically a Realtor commission of around 5-6% of the sale price to pay. This is generally split equally between the buyer's agent and the seller's agent. Though this doesn't mean they will earn all of the 2.5-3% commission, as it also has to be split with their brokers.
The commission fee schedule will be shown in the exclusive right to sell listing agreement that is signed between the seller and listing agent.
Who is Responsible for Paying Real Estate Agent Commission?
When you buy a property, it isn’t normally your responsibility to pay the Realtors commission. Even when you have a Realtor looking out for your interests in the transaction, the seller will have to pay the commission. As a buyer, you will have other fees to deal with though, like the closing costs.
However, it is possible that if you're interested in a for sale by owner home, you may need to pay your real estate agent a commission if they've found the property for you. If you have signed a buyer's agent agreement this will typically be spelled out.
Can You Cut Realtor Commission Costs?
Since there isn’t a set amount that has to be paid in commissions for Realtors, it is open to negotiation. Perhaps you feel you can do without the full range of services provided by a real estate agent if they will agree to reduce the commission.
If the Realtor agrees to lower their commission, it might reduce their marketing budget as well. This could leave your home on the market for longer, something that could cost you more in the long run. While agreeing a lower commission percentage appears to save you money, it might mean your home sells for less as well.
If the agent is representing both the buyer and the seller in the transaction, they will be more open to reducing the commission. This is a dual agency arrangement and isn’t legal in every state, however. Full disclosure has to be provided to both sides of the transaction when it is legal in the state to ensure transparency.
What Does a Real Estate Agent’s Commission Cover?
The commission will cover the obvious things a Realtor does, as well as the things they need to do behind the scenes to sell your home. This can include setting the best price to list the home for and using different methods to market the property to buyers.
With potential buyers interested in the property, they will show the home, answering any questions they might have. When an offer's made, they will negotiate the terms of the contract, and be present when inspections and appraisals take place. They also deal with some of the paperwork to ensure the sale closes smoothly.
How is Real Estate Commission Split?
The commission due when the sale closes is normally split evenly between the buyer’s and seller’s agents.
However, the agents themselves don’t receive all of that commission. Their brokers get part of the commission, and the exact amount the agent receives will depend on their agreement with their brokerage. The agent might only earn 1% to 1.5% of the 5% commission paid by the seller.
Understanding how a real estate agent gets compensated is always essential for sellers and buyers to understand.
How Do Realtor Commissions Affect Buyers?
Though the seller will take responsibility for the commission due to the buyer’s and seller’s agents, it can make a difference to the buyer. Sometimes the seller will increase the sale price to include the commission, so the buyer is really covering the cost.
Are Real Estate Agent Commissions Included in Closing Costs?
Since the closing costs are paid by the buyer, they aren’t going to include agent’s commissions. Closing costs normally include loan origination fees, property taxes, title insurance, home inspection fees, and more. While this can amount to 5% of the purchase price, commissions don’t contribute to these costs.
Will You Owe Commission if the Home Doesn’t Sell?
Most of the time, if the agent doesn’t find a buyer, you won’t have to pay the commission. The contract with the Realtor will usually have a time limit, and if the home doesn’t sell before this date, the contract will no longer be valid.
Sometimes homes go pending or contingent and the sale falls through. Agents do not get paid in these unfortunate circumstances. Occasionally, the contract will state that you have to pay commission if the buyer was a prospect before it ended.
If you decide you don’t want to sell your home after a buyer has been found and their offer accepted, you might still owe the commission to the brokerage.
Even if it is the buyer that backs out of the purchase contract, the seller could still be required to pay the commission to the Realtors. If some circumstances, the seller can choose to sue the buyer due to their contract breach. However, in many locations the seller's damages are limited to the earnest money deposit.
There are a lot of contracts to sign during a real estate transaction, but you need to be clear on what you are signing and your responsibilities.
Final Thoughts on Realtor's Commission
Whenever you are hiring anyone from a service industry it is essential to know what you're getting for the money. Real Estate is no different. It is vital to know exactly what the Realtor you hire is going to be doing to earn their keep. In the interview process, you'll want to have a deep understanding of what they agent will be doing. Where and how is the money being spent?
You commission questions should always be answered before moving forward.
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