Selling a house or other property can be a confusing process, rife with marketing challenges, long contracts, legal requirements, and serious financial ramifications. These obstacles are why real estate agents exist—their job is to help you navigate the process from start to finish.
However, some sellers shy away from agents because of one big question: How is this person going to get paid? The tradition is to pay an agent a commission based on the property's selling price, but how exactly does this work? And will the agent really do enough to earn that commission?
A real estate agent does not receive payment until and unless a property transaction closes (unless the parties involved make some other arrangement). Both the seller’s and the buyer’s agent will be offered a percentage of the sales price of the property sold. The total commissions usually amount to between 5% and 6% of the sales price.
Both the agent representing the seller and the agent representing the buyer will be paid out of the funds that the buyer gives to the seller at closing. In other words, you as the seller are responsible for seeing that the agents involved receive their commissions. These commissions are wrapped up into the selling price of the property, to be paid out at closing.
For example, let’s say Maria plans to sell her house for $400,000. She hires an agent, and they agree upon how much Maria’s agent as well as the buyer’s agent will be paid. (It’s traditional to post this latter amount on the local listing service, which is accessible by agents.) They decide that Maria’s agent will be paid 3.0% of the sales price, and the buyer’s agent will be paid 2.8%. That means that, if the house sells for the exact list price of $400,000, Maria’s agent will receive $12,000, and the buyer’s agent will receive $11,200. This $23,200 total will be deducted from the total money Maria receives from the buyer.
No agent fees are ever set in stone until agreed upon in writing by the parties. How much agents receive in commissions is always open to negotiation.
In fact, it is illegal pretty much everywhere in the U.S. for agents to collude to set a fixed rate. Agents are free to ask for flat rate payments (which are, in fact, becoming more common), and are also free to enter into arrangements where they are paid before closing.
As a seller, there's no need to simply assume that a percentage of sales price is the only way that your agent is willing to be paid—it can’t hurt to discuss other options and see whether your agent is open to being paid in a “less traditional” manner than a percentage of sales price, such as on an hourly basis or a flat rate.
If the house sells for more or less than it was originally listed at, the agent’s commission will change accordingly. So, continuing with the example above, if Maria has trouble selling and finally accepts an offer for $380,000, the agents will receive 3% and 2.8% of that amount, respectively. And if a number of buyers love her house and she accepts a bid for $480,000, the agents will earn the agreed-upon percentages of that price.
While the property is under contract, the buyer and the seller may negotiate various monetary adjustments due to inspection items or other issues that come up. For example, if the buyer discovers that there is an encroachment on Maria’s property that no party was aware of, the parties may start to discuss what the negative monetary effect is of the encroachment.
Whether an adjustment is made as a reduction in the selling price or a credit at closing depends on the lender’s policies and what the buyer and seller can negotiate. If the adjustment comes in the form of a price reduction, the agents’ commissions will be reduced proportionally to the change in the sales price.
However, if the adjustment is made in the form of a credit to the buyer at closing and the sales price remains the same, the agents’ commission amounts will also remain the same, even though the seller is not making as much money due to the credit. Therefore, once the parties start talking about monetary remedies for problems, it is important for the seller to consider how this will affect commissions and, subsequently, his or her bottom line.
Popular media is replete with images of the big-bucks agent driving the fancy car and chatting on the phone all day, seemingly raking in the bucks with little work involved.
Although commissions may seem large, agents incur many different costs of which the seller is not necessarily aware.
Agents invest substantial time in preparing to put a house on the multiple listing service, such as taking and editing photographs, researching the property (things like square footage, building type/material, inclusions with the property), writing property descriptions, and making sure all necessary documentation is completed.
Nearly everything comes with a fee, too, which the agent absorbs before a sale is made: listing the property, setting up a showing service, creating a website, and printing flyers.
Not to mention that an agent must pay to maintain his or her license, for brokerage fees, and for continuing education seminars. All of these things (not to mention taxes!) take considerable chunks out of the agent’s ultimate take-home pay. The commission also helps mitigate the risk that the agent takes by incurring all those costs without any guarantee that the property will ever sell.
A common complaint about the typical percentage-based commission structure is that an agent working in a high-property-value area such as San Francisco will put in just as much work selling a property as an agent selling in a low-value area such as Detroit, while the agent in Detroit will make far less money than the San Francisco agent due to the lower sales prices. Agents in areas such as San Francisco will defend the difference by noting that they live in the same area as their sellers, and it’s just a fact of life that the cost of living is high . . . an agent living in Detroit does not have to earn as much to be able to sustain a livelihood.
If you believe this disparity is unfair, you are not alone. Commission fee structures are changing due to rising sophistication of sellers and buyers, as well as the advent of Internet-based real estate marketing in the form of sites such as Zillow and Redfin. More and more agents are experimenting with offering flat rates or hourly rates. The fact of the matter is, though, that there is little incentive among agents to change the traditional commission structure, and if there is to be a significant change it will require the efforts of sellers and agents alike.