Understanding Real Estate Commissions

Posted on Monday, June 8th, 2015 at 11:49pm.

Prime Edmonton Real Estate - Real estate professionals, including Realtors, are paid for their services. I know, shocking, right? The majority of this income comes from a commission basis. This is what most home sellers are interested to know about during a listing appointment - how much fees they have to pay a real estate agent in the home-buying or selling process. Changes in the MLS™ system over the last few years, including companies such as Comfree (now Purple Bricks) and others being able to list homes for sale on the system, has made it even more confusing for some home sellers regarding commissions. One factor worth considering in any of these processes is to know who pays the real estate agent how much and how they complete the entire transaction. For this, everyone needs to understand that agents represent people, they do not SELL anything.

Here are a few things to remember when it comes to commissions:

  • Commissions Are Paid to Brokers, Not Directly to Agents:

Most real estate agents work for the real estate brokers. They can't work or act independently as they are not paid directly. If the transaction includes both a buyer's agent and a seller's agent, in this case, each will be paid by their respective brokerage.

The commission is set by the broker and they charge for houses that are sold through their brokerage. Traditionally, the commission is 5-7% of the sales price. However, the amount is always negotiable. Brokers keep a portion of that fee. Commission split is the agent's share which could be as low as 30% of the commission for new agents, or for veteran or highly successful agents the commission can be as much as 75%.

  • Seller's Agent's Commission:

Brokerages usually demand the exclusive right to sell a house for a certain number of months. The contract generally states that the seller's broker (a.k.a listing broker) will receive the full commission during that period if a contract for the sale of the house is signed, regardless of the commissions of the sale. This happens because the listing agents and their brokers spend time and money advertising, preparing the house for showing, listing the property and otherwise promoting the sale.

  • Buyer's Agent's Commission:

Buyer's agents work with home seekers. Commonly, the practice is that the seller's broker shares the commission with the buyer's broker. However, it's not always an equal split. For instance, a seller might agree to pay 7% total commission, to be divided as 4% to the listing broker and 3% to the selling broker. Likewise, if the seller may agree to pay 5% total commission, then it will be divided as 3% to the listing broker and 2% to the selling broker. There are no rules on the split. The brokerage receives full commission, if the same brokerage represents both buyer and seller. Hence, the buyer's and the seller's agents will receive a cut according to their agreement with the broker. Buyer's agents typically have a contract with their clients so that they are paid when the buyer completes a purchase, even if the buyers found that particular property on their own.

  • New Non Commission Based Payment Structure

There has also been a section of the real estate market who have adopted a 'flat fee' model for their services. Think of it as a 'a la carte' process, where you pay for each component of the process - listing, signage, placement on MLS™, marketing/advertising, contract negotiation, and legal consultation and conveyancing. Note that with these types of services that you may pay for these services without the home being ever sold. Some also charge additional commissions/fees for a sale.

Whether you're a buyer or a seller, the professional support that your real estate agent provides you representing your interests should be worth every dollar of commission. Real estate commissions are certainly one of the least understood subjects. However, if you decide to recruit the services of a real estate agent, make sure you read the contract carefully and understand the terms regarding the commission that you will pay for the services.

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