Real estate agents are compensated through commissions earned from the sale or purchase of real property. The commission is typically a percentage of the property's sale price (or occasionally stated as a flat fee) and has historically been paid by the seller in most cases. However, it's important to note that everything related to real estate commissions is negotiable and can vary depending on the agreement between the agent and the client.
Here's an explanation of how real estate agents are compensated and the negotiable aspects involved:
1. Commission Structure:
In a real estate transaction, the seller's agent and the buyer's agent would each likely earn a commission. The total commission is usually a percentage of the final sale price of the property (or a flat fee). This fee can vary based on negotiations with the agent and/or the real estate firm's internal company policy. In the past, most sellers have offered to allow the brokerage/agent to share the total commission with a cooperating buyer's brokerage/agent. Recently, some class action lawsuits have gained national attention by calling into question the way agents are compensated, and how thoroughly that compensation model is disclosed to the client. Although the lawsuits are ongoing, the overall premise remains that commissions must be negotiable between the agent/firm and the client, and that agents must refrain from claiming that they represent a buyer for "free" (unless the agent is truly working without compensation as a "pro bono" buyer representative).
2. Listing Agent's Role:
The seller's agent, also known as the listing agent, represents the seller in the transaction. In a nutshell, the listing agent markets the property, negotiates offers, and facilitates the sale. The seller typically agrees to pay the listing agent's commission as a percentage of the sale price (or a flat fee), which, as we have said, can vary and is negotiable. Historically, sellers and listing agents/firms have agreed to share a portion of the commissions with a cooperating buyer's agent/brokerage because it appeals to a large majority of buyers. Buyers already often need cash on hand to pay for a down payment, closing costs, inspection and appraisal fees, etc. during a transaction. In situations where a buyer is short on cash, having the commission paid by the seller is a way for buyers to essentially include the commission to pay the buyer's agent in the purchase price of the property. The buyer is still "paying" the buyer's agent (hence, the reason a buyer's agent cannot claim that the services are free), but the funds are technically paid from the seller's proceeds once the buyer closes on the property. Many buyers would avoid considering a property where the seller is not offering compensation (or too little compensation) for the buyer's agent because it would add to the amount of cash the buyer needs to bring to closing.
3. Buyer's Agent's Role:
The buyer's agent helps the buyer find and purchase a property, provides guidance during negotiations, and assists throughout the buying process. The buyer's agent's commission is also usually a percentage of the sale price (or a flat fee), and this percentage is also negotiable. In some cases, buyers may agree to pay their agent directly if the compensation offered by the listing brokerage/seller is less than what the buyer's agent has negotiated as sufficient payment from the buyer client. As previously mentioned, it is important for buyers to understand that the fee paid to an agent as a buyer's representative is negotiable, even if that fee is being offered by the seller and/or listing brokerage. The amount the buyer's agent is paid is agreed upon in writing in a buyer agency agreement, and this agreement commemorates the amount the buyer's agent will expect to collect for representing the buyer in the transaction.
4. Dual Agency:
In some situations, a real estate agent (or brokerage) may represent both the seller and the buyer in a transaction, which is known as dual agency. In these cases, the commission structure may differ, and it's essential to clearly understand how commissions are negotiated and allocated. If there is a variable commission structure for dual agency, it must be disclosed to cooperating agents in order to facilitate a fair and open marketplace. For example, if a listing agreement states that the seller would pay a reduced fee if the brokerage/agent represents both parties in the transaction, that must be disclosed to all cooperating agents outside of the firm so that they may take it into account when making an offer on their buyers' behalf because the reduced fee could affect the seller's net proceeds.
5. Commission Split:
Real estate agents typically work for a brokerage, and the commission they earn is split between the agent and the brokerage. The specific split can vary based on the agent's agreement with the brokerage. Some agents receive a higher percentage of the commission based on their experience, production, or other factors.
6. Negotiation of Commission:
One crucial aspect of real estate commissions is that they are negotiable. Sellers and buyers have the ability to negotiate the commission rate with their respective agents. Negotiating the commission is a way to find a rate that is fair for both the client and the agent; however, real estate brokerages are allowed to set a minimum commission rate policy for their company's affiliated agents. An agent may have the ability to negotiate their commission rate with the client as long as it does not fall below a company-required minimum. If clients are unsuccessful in negotiating their desired fees with their agents/brokerages, the clients are allowed to seek representation from other agents/brokerages until they find agreeable terms. A brokerage/agent may not create an agreement with another brokerage/agent outside of their own to charge a certain amount - this would then be a violation of antitrust laws and be construed as price fixing.
In summary, both sellers and buyers should discuss commission arrangements with their respective agents and negotiate terms that work for the brokerage, the agent, and the client.
