When a person or an organization needs to buy or sell a property, they typically hire a realtor to act on their behalf at all stages of the transaction. A realtor is a knowledgeable real estate professional capable of advising clients on issues such as the correct market price for a particular piece of property and all other details that occur during a real estate transaction.
Knowing what a realtor's commission is will help you understand the fees involved when selling or buying a property. In this article, we will review some commonly asked questions relating to realtor commissions.
What is a realtor's commission?
The realtor's commission is a fee paid to a realtor for the services provided to home buyers and sellers. It is typically paid to the real estate brokerage firm that the realtor works for and then split with the realtor on a pre-determined basis. Realtors usually operate under the legal form of independent contractors and form partnerships with the real estate firm they work with. The realtor also uses a part of their share of the commission to pay additional costs, such as the errors and omissions insurance and the business and occupation taxes.
Most realtors are not paid hourly, weekly or monthly fees. Instead, their income depends on the commission they close a deal. While sometimes this commission is a pre-determined flat fee, most realtors charge a percentage of the property's final sale price. The total exact commission percentage can vary, but it is generally around 5–6% of the property's final price.
This percent is not paid to a single realtor, however. Most real estate transactions involve two realtors—one representing the selling party, called a listing agent and the other representing the buying party, called the buyer's agent. The total commission is usually split into two equal parts, with each realtor involved in the transaction receiving one part. The typical amount is 2.5–3% of the final price.
For example, if a house sells for $150,000, a 5% commission would be $7,500. The listing agent and buyer's agent would both receive $3,750.
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What does a realtor's commission cover?
Although property buyers and sellers can conduct business without the help of a realtor, the transaction is typically much smoother with the service of these professionals. These services include discussing selling terms with the owner and helping them settle on a realistic price for their property, marketing the property through various online and offline media channels, professionally presenting it to interested parties, negotiating the transaction details and ultimately closing the transaction. Since buying or selling a property involves extensive time and research, a relator's commission covers their expertise and negotiation skills.
Who pays the realtor commission?
In most cases, the seller pays the entire realtor's commission. Realtors receive commission after the two parties agree on terms and the buyer and seller sign the contract. Although technically the seller typically pays the entire commission, in many situations the commission is factored in the property's listing price, so the buyer indirectly covers the commission.
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Do realtors receive a commission if the home doesn't sell?
Since realtors typically receive commission once a buyer and seller sign a contract, they won't earn money until that point. Contracts between sellers and realtors typically have a clearly defined time period in which the agent can sell the home. Usually, if a realtor does not sell a home within 90 or 120 days, the seller has no obligation to pay the seller for their services.
This means that realtors often do all the work necessary to sell a property, such as counseling the owner regarding the correct market price for the property, advertising it, organizing open houses and hosting private viewings without receiving any monetary compensation for their services. There are some exceptions, such as:
- If the realtor finds a buyer before the contract expires, they are usually entitled to full commission even if the transaction was finalized after the expiration of the contract.
- If an offer is officially accepted but one of the two involved parties changes their mind, the owner is typically responsible for paying a full commission to both realtors involved in the transaction. If the party that changed their mind is the buyer, the seller may still pay the commission, but could seek compensation for breach of contract.
Is a realtor commission negotiable?
Although the widely agreed commission is 5–6%, there is no local, state or federal law that formally sets commission rates, meaning that any commission is negotiable. This allows the homeowner to offer a lower commission for the realtor's services, with the realtor having the option to refuse the collaboration.
Negotiating the realtor commission typically relates to the selling potential of the property on sale. If the realtor expects that the property has all the qualities to sell quickly, they may consider accepting a lower commission than usual. If the property has certain characteristics that make it difficult to sell, the realtor may ask for a higher commission than usual.
Many realtor commission negotiations involve the reduction of the provided services. This means that the buyer may ask to pay a lower than usual commission for fewer services. This often involves an agreement between the owner and the realtor in which the realtor will offer their services to help the owner set an asking price and help with advertising and contracts, but offer a range of services that are more limited than usual. For example, a realtor could accept a lower commission to help set the buying price and advertising, but may not help with the negotiation process.
Regardless of the agreed realtor's commission, all aspects regarding transaction fees between the property owner and the realtor who assists with the sale should be clearly outlined in a contract, along with the duration of the collaboration and other relevant information.