Real estate agent commissions can get a little tricky. Typically, the seller pays the commissions because buyer and seller agent fees are included in the purchase price of the property.
Suppose, for instance, that a buyer and seller (each with a realtor) agreed on the price of the home at $500,000. In this scenario, the buyer and seller agent commission is set at 5%: 2.5% for each agent. The total commission will be $25,000 with $12,500 going to each agent.
Those commissions are deducted from the price of the home, not added to the sale price So, while the buyer would pay $500,000, the seller would only receive $475,000 from the sale before closing costs.
Who sets the commission and why is it important to set the right commission?
Unfortunately, it’s often the case that real estate agents (who are supposed to be working in their clients’ best interest) have an incentive to push buyers into purchasing the property with the highest commission. This is a problem for the seller, because the seller chooses the commission percentage for both the seller and buyer agents which can have a tremendous impact on how many prospective buyers are encouraged to tour the home.
Here’s why: A typical commission offered a buyer’s agent is 2.5% or 3%. If a seller were to offer a commission under 2.5%, some (not all) agents would steer their clients towards other homes offering a higher commission. The National Association of Realtors says sellers offering a commission under 2.5% get 14% fewer showings than sellers offering 2.5% or more.
On the other hand, if a seller offers a higher commission, it is reasonable to conclude buyer agents will nudge their buyers to see the house — even if it is not their first choice, simply because of the higher commission incentive.
Are inflated real estate agent commissions worth it?
Perhaps the greatest dispute about real estate commissions is that they are excessively high, or that the service provided doesn’t justify the high cost of the fees.
A listing agent’s fee may be justified by the amount of work that goes into representing the seller. This includes listing documentation, marketing, photos, home staging, open houses, negotiations, legal disclosures, agent inquiries, contract disputes, and handling all the details of selling and closing a transaction.
While there are a lot of homes that sell within a few days, there are just as many listings that take weeks (and even months) before being sold. Having a house on the market for an extended period of time translates into additional advertising costs, signage and marketing.
Conversely, the buyer’s agent works exclusively for the home buyer. The commission paid to the buyer’s agent covers the cost that goes into helping the buyer find a home that meets the buyer’s needs, and representing the buyer’s interest throughout the entire transaction.
The seller typically pays the buyer’s agent commission, based on an agreed percentage in the listing contract. But change is on the horizon to make buyer agent commissions more transparent, and offer buyers and sellers more options for compensating buyer agents.
We are already seeing more options for home sellers. Instead of the typical commission-based agents, there are now agencies that offer a flat fee for their services, while others provide a menu of services options based on how involved the seller wants to be in the sales process.
These services come with varying levels of representation such as MLS entry only, full service, and hybrids that allow sellers to do the parts of the transaction they can (and should) do, while experienced agents handle the more critical elements of a transaction, which should be completed by a licensed professional.
For those who choose to sell as a For Sale By Owner (FSBO), the most profitable choice may be to have a flat fee agent to do the legal paperwork, and manage negotiations, transaction details and contract disputes for a low set fee.
Everhome’s Listed With Owner program offers full legal representation to FSBO sellers for a low set fee. To learn more, call (805) 379-3300 for a free consultation.