Oct 23 2016

Understanding Real Estate Commissions: Who Pays? #kaplan #real #estate

#real estate commission

Understanding Real Estate Commissions: Who Pays?

When you set out to buy or sell a house, one factor worth considering is a real estate agent’s fees. Unfortunately, most people are only interested in how much these fees are, and have no idea how they work or who even pays them once a transaction is complete. Here we take a look at some of the more universal principles of real estate fees.

How Much?

The commissions paid to real estate agents are negotiable and therefore they vary. Although many people believe that commission is always 6%, a 2004 report by REAL Trends Data showed the average commission rate in the U.S. to be 5.1%. That percentage is a percentage of the sale price of the home, so the exact amount this will entail will not be known until an offer has been accepted and the house is sold. Any commission to a real estate agent must be negotiated as part of the contract between the agent and the buyer or seller before the deal is completed. (For related reading, see 5 Ways To Save On Real Estate Fees .)

Who Pays?

Precisely who pays a real estate agent’s commission is where things get a little tricky. Assuming that both the buyer and seller have an agent, you could argue that the seller pays it or that the buyer pays it. This is because the fee comes from the proceeds of the sale and is often – although not always – split evenly between the two agents.

For example, suppose that a buyer and seller (each with a real estate agent) agree to a deal on a home. The home is sold to the buyer for $250,000. Assuming the real estate commission is 6%, this means that the commission due on this sale is $15,000. You could either argue that the buyer is paying this fee (because he or she is paying the cost of the house), or that the seller is paying it (because it is coming out of the home’s equity). Either way, it is important to note that this fee comes out of the cost of the home – it is not tacked on in addition to the sale price. So, if the seller owns the house outright, he or she will emerge from the sale with $235,000 ($250,000 – $15,000).

How Is the Money Distributed?

The contracts the buyer and seller have with their agents determine the fee each agent will receive ahead of time. The percentage rate is often split evenly between the buyer’s and the seller’s agent, although sometimes a contract can stipulate that one agent will receive more of the commission than the other. Then, it is generally up to the lawyers in the transaction to extract the commission and distribute it according to the agents’ contracts. However, the fee doesn’t go straight to the real estate agents – it goes to their brokers. Licensed real estate agents must work for a broker, many of which take a cut of the real estate fees to cover the cost of things such as advertising, signage rental and office space.

Contentions About Real Estate Fees

In cases where the real estate agent must work many months to complete a deal, the percentage fee ensures he or she can expect a reasonable sum for the work completed and expenses incurred to get the job done. However, this also means that a real estate agent will sometimes get paid just as much for much less work. Because both parties enter into the transaction without any knowledge of the outcome, the rate is seen as a fair way to ensure that the buyer or seller doesn’t pay too much, and that the real estate agent is fairly paid for the amount of work the deal may entail. A percentage is also a way to level the playing field in terms of making real estate agents available to buyers and sellers whether they are millionaires or are looking to buy or sell a $90,000 condo. (Do you have a good real estate agent? Read Top 5 Signs Of A Bad Real Estate Agent for some clues.)

The Bottom Line

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