Why Are Real Estate Commissions So High?
Who gets all that commission money when you sell your home? Most real estate agents bill sellers approximately six percent of the sales price, which can be a really nice payday. Sometimes the agent can make more out of the deal than you do. So why does it cost so much?
Nearly nine out of 10 real estate agents work on commission, and are paid only when the transaction closes. Except for the legal profession, real estate agents are the only fiduciaries and agents who work this way.
Commissions are paid according to the terms of two contracts – the listing agreement and the sales contract.
To simplify how commissions are routed, the real estate industry customarily allows all sales commissions to be paid out of the seller’s proceeds, according to the terms of the listing agreement. The five, six or seven percent commission that is negotiated is given to the listing agent, or listing broker.
According to licensing law, only licensed brokers can serve as fiduciaries. They have “agents” or licensed salespeople who work for them, but they have the legal responsibilities of operating the brokerage.
The salesperson license allows salespeople to serve as agents of the broker. They can negotiate contracts, but the seller is actually negotiating with the broker, by proxy. It’s the broker’s company name and signature on the listing contract.
Once the home is listed in the multiple listing service, (MLS) the listing broker discloses the terms of the commissions to other competing brokers, so they will bring their buyers to the listing.
That means a commission can be split as many as four ways:
- Listing broker or agent
- Listing salesperson
- Buyer’s broker or agent
- Buyer’s salesperson
At closing, the listing agent is paid by the escrow agent out of the seller’s proceeds, or a day or two later when the buyer’s loan is funded by the lender. The listing agent, in turn, pays the buyer’s agent his or her share of the sales commission.
All commissions are negotiable, but sellers should keep in mind that commissions are incentives.