Real Estate Commissions

Nearly nine out of 10 real estate agents work on commission, and are paid only when the transaction closes. Except for the legal profession, real estate agents are the only fiduciaries and agents who work this way.

Commissions are paid according to the terms of two contracts – the listing agreement, and the purchase agreement. The listing agreement states the total compensation allocated to the listing broker and the amount of that total which is, in turn, promised to the buyer’s agent who 1) writes the offer and, 2) communicates acceptance to their principal.

To simplify how commissions are routed, the real estate industry customarily allows all sales commissions to be paid out of the seller’s proceeds, according to the terms of the listing agreement.

Brokers

According to licensing law, only licensed brokers can serve as fiduciaries. They have “agents” or licensed salespeople who work for them, but they have the legal responsibilities of operating the brokerage. The salesperson license allows salespeople to serve as agents of the broker. They can negotiate contracts, but the seller is actually negotiating with the broker, by proxy. It’s the broker’s company name and signature on the listing contract.

But be careful; a licensed agent may not be a REALTOR® and, as such, is not compelled to follow any laws, conventions, or ethical framework.

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Distribution

Once the home is listed in the Multiple Listing Service (MLS), the listing broker discloses the terms of the commissions to other cooperating brokers, so they will bring their buyers to the listing. When the buyer’s broker presents a contract to the seller, it will include a provision to collect their share of the sales commission, as offered by the listing agent in the MLS. That means a commission can be split as many as four ways:

  • Listing broker or agent
  • Listing salesperson
  • Buyer’s broker or agent
  • Buyer’s salesperson

At closing, the listing agent is paid by the escrow agent out of the seller’s proceeds, or a day or two later when the buyer’s loan is funded by the lender. The listing agent, in turn, pays the buyer’s agent his or her share of the sales commission.

All commissions are negotiable, but sellers should keep in mind that commissions are incentives.  Skimping on commissions can reduce the exposure of your listing.

Simple Math

In California, it is commonly stated that “sellers pay commission” because the funds are distributed from the purchase price like the sellers’ loan balance.  Frequently, though, the math is overlooked which proves that the buyer pays half of the commission (and/or based on the agent/buyer agreement).

This math is simple because commissions, costs, loan fees, and seller profits all come from the purchase amount, NOT above and beyond the purchase amount.  That means the buyer is providing the money which includes commissions, costs, loan fees, and sellers’ Net.  Then it gets distributed at close-of-escrow.  The analogy is:  A seller provides “an empty bucket” which is filled with the buyers’ money.  The costs are taken off the top of that bucket and the seller gets the remainder.

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So, when a seller asks for a discount on commissions, if agreed, the seller is giving the buyer a discount too.

P.S., You may hire a discount broker but “you get what you pay for”.  And I’m not a discount broker – my business would not succeed otherwise.  In fact, I am frequently under-compensated for the level of risk and negotiation management that I provide my principals.

P.S.S., In your line of work, do you allow the possibility of no success and no payment?

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