How Commission Works in a Real Estate Transaction

August 18, 2011

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As a real estate professional, a question you get asked on a daily basis is “What is your commission rate?” Although this is a very important question to ask any agent, the question nobody ever asks/should ask  is “How is commission split and who gets what?” A solid understanding of how commission is disbursed provides a home seller with a better understanding of how their real estate fees are “going to work” for them, without an explanation however, commission percentage is just another number (and most people aren’t “numbers people”).

In three simple steps, here is how commission is typically disbursed in a residential real estate transaction:

1) Once someone desiring to sell their home has selected a real estate agent to market their home, negotiate on their behalf, etc., the parties (agent and homeowner(s) mutually enter into a formal written contract called a “Listing Agreement”. The listing agreement among other things such as the length of the agreement, price of the house, etc., will spell out a total amount of commission payable which has no standard rate, but in today’s market ranges from $1 to 7% of the eventual sale price of the property in most cases.

2) From the total commission payable, the agent known as the “listing agent” (the one who signed the contract with the hopeful seller) first decides what his/her marketing budget will be, and determines what percentage of the total commission payable they will pay themselves upon the successful sale of the home.

3) Whatever is left from the balance of the total commission payable less the listing agents portion (EX. 5% total, listing agent needs 2.5% to effectively market the property leaving 2.5%) is what is paid to the real estate agent known as the “co-operating agent” . To put it simply, the co-operating brokerage (often referred to as the “selling agent”) is the real estate agent who was out shopping for houses with clients that decided that “this is the house and we want to buy it”. It is important to note that this process is often completely reversed, here’s an example for illustration purposes only: The total commission payable is only 4% in this case, but the listing agent wants to offer 3% to the co-operating brokerage as an incentive to sell the property, and will only keep 1% remaining).

From there, both the Listing Agent and Selling Agent have a commission split with their brokerage which can range anywhere from a small per transaction fee to as much as a percentage of their total commission.

One of the biggest misconceptions with respect to commission (especially with first time home buyers) is the belief that when you have been working with an agent to find a home, that the point will come where they have to pay him/her for their services. This however is not the case with most conventional MLS ® listings, as your buyer’s agent will be paid by the listing agent (home sellers agent) for bringing you to their client’s home. THAT”S RIGHT, a sigh of relief isn’t it? Most of the time, it’s almost too good to be true that get your agent’s expertise, a ride around in his/her vehicle, the odd free coffee, and the home of your dreams, at no direct cost to you!

I sincerely hope this will provide a better understanding of the conventional commission structure in residential real estate from the perspective of both buyers and sellers.

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About Brendan

Brendan Clemmens of Royal LePage First Contact Realty is a residential real estate agent in Barrie that provides value added service to all of his clients. Brendan can help you with all of your real estate needs but has a specific focus on helpin g young families and investors.

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