Where does a Commission Go?

Hello again, from the throes of the spring real estate market! I am taking a breather to write you a little blog post in my hopes of making the world a better, smarter place. This time of year is a whirlwind of Sellers putting their homes on the market after spring cleaning, and buyers looking to buy before the next school year.

One piece of the real estate sales process that I’ve found to be commonly misunderstood is how Real Estate Agents get paid! Unfortunately, what services Real Estate Agents get paid for providing, and who specifically is paying the Agent, are not tidbits of general knowledge that most people learn about as they begin to dive more into real estate transactions. In this week’s blog post, I’m going to discuss and elaborate on the breakdown of a commission, and why you are paying your agent either as a Seller or as a Buyer!

Let’s start at the beginning. What do Real Estate agents get paid for? Many people thing that they get paid for “selling” their client’s property or “selling” a property to their buyers. And while that is true in generic, layman’s terms, there is much more that goes in to the services a Realtor provides to his or her clients. First and foremost, Real Estate Agents get paid for bringing a Seller and a willing, able, and ready Buyer together to purchase a property. Secondly, Real Estate Agents get paid to negotiate the terms of that purchase for their clients. So, the subtasks that go into these two primary functions are:

  1. Marketing and promoting Sellers’ properties Effectively and Ethically.
  2. Advising Sellers on the improvements, repairs, and staging they need to do to have the home show its best, and therefore sell for the highest amount of money.
  3. Educating Buyers and Sellers on the home buying/selling process.
  4. Setting realistic expectations for all parties during the sales process.
  5. Showing homes and properties in an honest manner and disclosing material information.
  6. Guiding, counseling, and negotiating for clients through the Due Diligence Period.

One common theme you may have noticed is the fact that Agents are often guiding, counseling, negotiating, advising, etc. This brings me to my final point on what a commission “buys” you: It buys you experience. Many people buy a handful of homes over their lifetimes. A good real estate agent can sell that many homes in a month. An experienced agent’s wisdom is hard-fought, and can only can be learned by guiding clients through dozens, hundreds, thousands of real estate transactions, and consistently navigating through many obstacles and problems to help their clients achieve positive real estate outcomes! This cannot be understated. When you hire an agent, you are not getting a dude or dudette to put a card into a lockbox, walk you through a home, and comment on the “nice countertops.” You’re not hiring someone who can fill out some paperwork, put your home online, and stick a sign in the yard. You are hiring someone who actually knows what they are doing when it comes to buying or selling a property, and has consistently proven they can help their clients through those “Oh Shit” moments!

Now, here is how a commission is typically broken down. The most common commission we see in the Chippewa Valley is a 6% listing commission. This is paid by the Seller to the listing brokerage at closing. There are typically no up-front costs at all for the seller or buyer. The 6% is based off the sale price, so if the home sells for $100,000, the commission to be paid will be $6,000. Of this 6%, 40% of it is typically paid to the buyer’s agent. So, the listing agent will keep 60% of the $6,000, or $3,600, and the buyer’s agent will be paid $2,400. Often times, Buyers will sign a Buyer Agency Contract with their agent and that contract will have a stated commission that the buyer’s agent is working for. Let’s say the Buyer agency contract states the buyer’s agent will get paid 2.4% of the sale price – if the listing agent is paying out 2.4% to the buyer’s agent, the buyers will not have to pay their agent anything. However, if the listing agent is only paying out 2%, either they buyers will have to pay their agent the .4% difference at closing as part of their closing costs, or they can ask the sellers to pay for the .4% difference.

Now, how do sellers and their agents arrive at the commission that they agree upon? Well, it should be tied to the level of services provided. I personally don’t believe that the commission should be “a flat 6%, and that’s just the way it is”. Now more than ever before, Sellers are able to choose their commission rate based off the services they are requesting their listing agent to provide. Listing agents like myself will offer different packages at different commission rates that include things like professional photography, drone photography, professional cleaning, pre-listing inspections, open houses, virtual tours, direct mail campaigns, 3D tours, and more. The greater the level of service you would like your agent to provide, the higher the commission and the more qualified buyers you will likely get for the home, resulting in the likelihood of stronger offers for you to choose from as a seller! Additionally, it goes without saying that the higher commission you pay your listing agent, the higher percentage they can pay to the buyer’s agent. The higher commission you are paying out, the more attractive your home is for other agents to show! This is often understated and underrated!

Once again, thank you for reading this week’s post. I hope you learned a little more about what a commission pays for, and whom it gets paid to after the home closes. To sum it up: Hiring a real estate agent costs you nothing up front, they only get paid when you close, and you are hiring years worth of hard-won experience and customer service/negotiation skills that will get put to work for you! Until next time..

~Tim Nelson, RE/MAX Affiliates, 715-529-0239

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