Saturday, February 10, 2007

All about real estate commissions

Every buyer and seller wants to save on commissions paid to a real estate broker. We've had discussions before about when to ask for discounts and negotiating the commission amount. So far we haven't talked about what the commission really is and how it works. That's what we're going to do today. {FYI: for the purpose of this discussion, BROKER and AGENT are used interchangeably}

First off, the usual and customary real estate commission is at or around 6%. Business and investment property can be in the upper 10% area. ALL REAL ESTATE COMMISSIONS ARE NEGOTIABLE BETWEEN THE CLIENT AND BROKER.

Usually the seller pays the commission through sale proceeds at the close of escrow. The great majority of real estate sale transactions involve more than one broker (or agent). The seller's agent takes the listing, lets say at 6%. This agent begins a marketing program and lists the property in the local MLS (multiple listing service).

Another agent (most likely) may bring a client over to see the house and write an offer to purchase. If the seller accepts the offer, the other agent will be paid 3% of the 6% commission when escrow closes. This is called the 'Split'.

As an example, lets assume a sale price of $100,000. At the close of escrow the commission settlement may look something like this:

Sale Price: 100,000 x .06 = 6,000 /2 (split 50/50) = 3,000 to each broker.

This example doesn't account for fees and costs each agent incurs in the course of doing business which easily can eat up 1/3 of the commission paid on each transaction. So the take-home pay for agents in our example might only be $2000 and since they are usually self-employed; at least 30% of that will get set aside for taxes. Leaving 1,400 to pay the rent and keep the lights on.

So that is what the commission is. It's a fee for a service and that fee gets split between the service providers. Again, the commission is always negotiable and your transaction may have higher or lower amounts than our example. Every transaction is different and the workload for each transaction is different also.

For tips on negotiating the commission on your purchase or sale, e-mail or Call (562) 449-8421. I'd be happy to help.