Realtors are professionals who help consumers buy and sell houses. Also known as real estate agents, most work as independent contractors underneath a real estate brokerage. Some realtors are also brokers themselves. As contractors, brokers and agents alike are paid on commission.
Agent compensation is an interesting thing, that’s for sure. The general rule of thumb is that both the listing and buying agent split commission down the middle. A total 6% is the industry standard, with 3% going to each agent. Then the agents pay a portion of their commission to their brokerages.
The question is this: who actually pays the realtors’ commissions when a house sells? You could make the case that it is the seller. You could also make the case it’s the buyer. From a legal standpoint, the seller pays it out of the proceeds of the sale.
Lawyers Handle the Details
Many home buyers do not understand the commission principle because lawyers handle all the details in the background. When you bought your house, your bank didn’t hand you cash for you to turn over to the seller at closing. They sent a check to your attorney. Your attorney deposited it, then wrote separate checks to cover the costs of the transaction.
In the dispersal of funds, your attorney paid the two real estate agents. They turned around and paid their brokerages through whatever agreements they had among themselves.
This arrangement explains why sellers pay realtor commission from a legal standpoint. On paper, they pay the commission out of the sale proceeds. But you could make the case that the buyer ultimately pays in the end. How so? Smart sellers and real estate agents build commission into the listing price.
What You Want to Walk Away With
It is ultimately up to sellers to decide the price at which to list their homes, explains Salt Lake City-based CityHome Collective. But it is not unusual for sellers and their listing agents to start by figuring out how much the seller wants to walk away with. Maybe you have a home that’s valued at $200,000 according to current market conditions.
With the amount due on your mortgage and your current equity, you decide you want to walk away with no less than $190,000. A 6% commission on that amount would be $11,400. Then you have to build in some room to negotiate – because negotiation is part of the game – so maybe you want to add another $10,000 or so. You end up listing the home for $221,000.
Commission Rates Are Negotiable
If 6% seems a bit high to you, consider this: realtors and real estate brokers have to cover their own costs out of their commission payments. For example, everything a listing agent spends to market a property has to be recovered, and then some. It’s not like the total amount each agent receives is pure profit. It is not.
The good thing about commissions is that they are negotiable. There is no law requiring agents charge 3% each. And in many cases, brand-new agents make less than 3%. They have to work their way up to the full amount by gaining experience and closing deals.
Whether you are looking to buy or sell a house, your realtor will be paid a commission based on the total sales price. Keep that in mind during your negotiations with the other party. Listing agents ultimately want a higher price because it means more commission. Buyers’ agents are caught in that middle ground of wanting a higher commission but having to act in the best interests of the buyer.