How does the Commission Work in Real Estate?
by Terry Hall, Real Estate Professional
So, you're thinking about selling your home and looking at the costs involved, noticing that the most expensive cost is the commission and wondering what you can do about it. What can you do about it? Is it negotiable? Should I try to sell it by myself? What am I getting for paying so much money? Is it worth it? Let's see if we can figure this out.
The commission is the amount of money you pay your real estate agent when the house you are trying to sell is sold. It is paid at the time of closing and is based upon a flat fee or a percentage of the sale price. Once the commission has been agreed upon it is then broken into its component parts for payout. The agency that you hired keeps a certain percentage of it and that amount is split between the agent and the agency on a percentage basis, and the same thing happens with the person who represents the buyer. If the agent works for him/herself and represents both sides in the transaction s/he would keep the whole commission. This does not happen often. The commission is the only cost to the seller by the realtor unless the seller agrees to others, which in my opinion, you should not.
Commissions range in cost from flat fees starting at about $600 to as much as 7% of the sales price for residential homes, higher for rural property. Normally the service you get is reflected in the amount you pay. Today our focus is going to be full-service. Full-service means that the agency takes you from start to finish in the transaction for a certain amount of money. Some things to make sure you address before signing the listing agreement:
1. Make sure all the fees are disclosed. ASK THIS QUESTION: Other than the commission are you required to pay for any of the advertising costs or a transaction fee or any other incidentals?
2. The amount you pay in commission should reflect the amount of marketing that you receive. No-one ever bought a home because of the name on the sign in the yard. People buy a home because of price, location, condition and marketing. If all other terms are equal, you should not pay one company more than you pay another for selling your home.
3. Demand that the marketing plan be a part of the listing agreement so that if it is not followed you have the right to cancel the listing. This is the only way for you to control the marketing of your home.
4. If you are selling and buying and you allow the same agent to represent you in both transactions that should be worth a reduction in price for the cost of selling your home.
5. A listing agreement should not exceed 90 days. You can always renew. Most salespeople always work better under a little pressure.
6. If a house is in a neighborhood that sells quickly that is something that should be addressed when negotiating the commission.
7. The payout to the other agent who brings the buyer to the transaction should never be less than 2.7% of the sales price. Anything less except on very high priced properties will cause a reduction in the amount of agents who will show the home.
8. Don't sign with an agent just because they quoted you the highest price that they think your home will sell for. That's a cheap trick and you should be smarter than that. The price that you set on your home should be justified by recent sales of similar properties in your neighborhood.
9. As a rule if the agent agrees to a commission below 5.5% the marketing and service you will receive is going to suffer no matter what they may say.
10. All commissions are negotiable.
11. Transaction fees are not a required part of a commission, are usually excessive and are negotiable.
This article was taken directly from St. Charles Missouri's The West County Journals Classified--Wednesday, November 17, 2004. Terry Hall writes a weekly syndicated column that is featured in 30 newspapers nationwide. Check back with our site for updated articles.