Almost any job or career has tasks and concepts that become ‘normal’ as we become tenured. Sometimes we learn things that are almost mind-blowing in the beginning–“A latte is just steamed milk and espresso?!!… Whaaaa?”–but they become so ‘normal’ that we forget how little someone else may know about it. I wanted to address the subject of Commission within the real estate industry and how that commission gets into your agent’s pocket… or Doesn’t… dun dun duuuuuuuunnnn!
As simple as this may seem to me, an agent, I have ended up in conversations regarding commission that seem to be very intriguing to the other person. After reading, hopefully you’ll have a clear idea of how it works and speak in a somewhat educated manor when it becomes the topic of conversation.
Let’s go through the following:
- What is the standard commission for selling? Buying?
- Who pays the commission?
- Screwing up your agent’s commission
- Short Sales
What’s the standard commission for selling your home?
This is sort of a trick question. I know, a trick question right out of the gate… but common, the question had you curious right? Calm down. Here’s the deal… There isn’t a standard…at all… ever… in anything… at least in real estate there’s not. It’s all negotiable, and in some cases even saying “standard” can get an agent in trouble.
Side note*** For those of you who’ve never talked to an agent about selling your home, if the agent says that the commission they’re charging is “standard” or “everyone is doing it,” usually it’s in an attempt to make you feel comfortable, but it is borderline illegal, and definitely against our code of ethics—I digress.
Although there isn’t a standard, there are definitely numbers that you’ll see more often. A lot of the time it’s 5-6% of the sales price of the home. This is paid by the Seller in Illinois (and a lot of other states). The seller’s pay agree upon a commission number with the agent prior to listing the home. The agent and their brokerage can decide how to play with that number. Sometimes how they use that number is one of the main selling points for certain brokerages/agents. Let’s use 5% for example. In most cases, 2.5% of that commission is offered to the buyer’s agent to incentivize them to bring a buyer to the home; the listing agent gets the other 2.5%. Again, you may find brokerages that play with the split i.e. offer 2% to buyers’ agents and the listing agent keep 3% (in our 5% example that is). There are many variations of the overall number, but it’s all paid by the seller.
What’s the standard commission for buying?
So, kind of another trick question… relax… I just told you the seller pays the commission so you should have seen this coming. As a buyer, you get to shop for houses with an agent, use their services, and avoid paying them a commission. Let me say that again… you don’t have to pay your agent if you’re buying. However, there are those annoying arguments that can be made that suggest the buyers truly pay the commission. The argument implies that the commission is factored into the price of the house, so the buyer indirectly pays it… which is true, right? It’s like the chicken/egg complex, don’t think too hard.
…as a buyer, you get to shop for houses with an agent, use their services, and avoid paying them a commission.
As I mentioned above, sometimes the seller/listing agent decide to offer less than 2.5%… 2% 1.5% etc. This can affect you as a buyer depending on how your agent handles it. As a buyer, your agent CANNOT hide a property from you based on commission. Sometimes, even though illegal, this happens because the seller is not offering the ‘normal’ 2.5%. However, they can approach you about it and explain the situation. Basically, the only other way is to ask you to pay the difference. It’s an awkward convo that usually doesn’t take place. Unfortunately, despite how unethical, there are agents who won’t show you that house because the commission offered is lower than 2.5% and they don’t want to have a conversation with you about it. If you are willing to split the difference, you can always let your agent know ahead of time to be sure they don’t try to convince you out of a home or try and hide it from you—I won’t have this conversation with my clients unless the commission offered is less than 2% even though I usually would expect 2.5%.
Sidenote*** If you and your broker (agent) decide to offer less than 2.5% to the buyers’ brokers (agent) you may be missing out on buyers. 1. Because some agents are unethical and won’t show their clients your home. 2. Because the buyers’ agents may have the above conversation (which I’ve done) and sometimes buyers get offended by the seller doing this to them and their agent; they decide they don’t want to see the property (which HAS happened). This usually comes from clients that are very loyal to their agents and at a time when there are many homes available in the market.
Double Side Note*** (aren’t you lucky) As a seller it’s up to the agent and their brokerage to decide what is best to offer the buyer’s agent for commission. This split of the commission is not up to you really. It is, however, something that will (should) be presented to you before listing your home with that agent. Stick with me here… if a buyer comes along, without an agent, your listing agent gets all 5%. This is simply because they are charging you 5% and THEY (not you) have decided to offer the buyers’ agents 2.5% (or whatever). So if the buyer’s agent isn’t in the picture, they still get 5%. If it makes you feel better, they’ll be doing all the work that the buyer’s agent would have done along the way; but they’ll have YOUR back, and NOT the buyer’s, throughout the process.
We covered how there isn’t a standard, and we covered who pays the commission. Let’s dive into how you might be able to screw this up, hopefully not intentionally. I had a repeat client who was trying to save me time by calling other agents to show him/her properties… this could have potentially messed me up and I was able to find this out early on and explain what I have above.
Screwing up Your Agent’s Commission
There’s 2 ways this typically happens: Registering for new construction homes, and working with multiple agents. New Construction is the easiest way you can mess up your agent’s commission, and forfeit representation. These builders usually have showrooms or an office of some kind. If you go there without your agent, and register, without telling them you have an agent… you have just cut your agent out of the picture and he/she will not be able to help you. Well… technically they can still help you, but they won’t because it would be an enormous waste of time if they won’t get paid… and they won’t get paid because you registered without them… how could you?! Your agent must be there when you first register with that development/developer. So be nice and honest to your agents so they can represent you and get paid by the seller (again, not you).
Working with multiple agents can get a little messy as well. Sometimes a brokerage can make a case against another brokerage for the commission… even after a transaction has closed. There’s something called ‘Procuring Cause’ which is the determining factor as to who gets the commission. Here’s an example story if you want to see how it can sometimes get a little confusing Commission Story. Basically, there are multiple steps to the buying process before and after seeing a home, and even before making an offer. If 2 or more agents have helped a buyer with these steps, there will be a debate regarding who is owed the commission. So let’s break this down really simple for you…
If you are buying a home. Pick an agent, just one, to show you properties and help you with any and everything that goes along with it. Do not call the listing agent… remember they’re getting paid by the seller and represent the seller (not you). They’re trying to get as much money as they can out of you. Some buyers think they can save on the sale of the house by not using an agent, but this is very far from the truth, as I mentioned above in my Double Side Note. Why wouldn’t you use your own agent? You don’t have to pay them anyway. If you choose an agent, and you want to change to another agent, you can do that… no problem. Simply let the old agent know via email that you are no longer working with them and that you’ve found a new agent. Simple. ***There might be some follow up from the managing broker regarding the change and why, but you can handle it, you’re a grown up.
Now, IF you want to make sure you’re getting some top notch service and sales experience, then interview a couple agents. You can even have them show you properties to get a feel for them. Understand, however, the only way an agent would agree to do this, is if they are entitled to the commission (and all the work associated with the transaction) if you decide you’d like to buy a home they show you. Most agents won’t like this btw, so be gentle.
This is easy. Short sales take longer and can require an agent to go through the contract process several times before actually closing on the sale. There is no standard number or requirement, but it’s not out of the ordinary for agents to charge you more if you’re selling short. As bad as a short sale can be for your credit, the silver lining for the seller is that since you’re already selling for less than what you owe, the bank is responsible for the commission and closing costs. The bank usually had 6% in their contracts automatically. Semi-sweet deal?
Last thing, even simpler. Your agent will need to split the commission they receive with their brokerage. In fact, technically, the brokerage gets the entire commission check, and THEN writes a check to the agent for their amount. This split can range from 40/60 to 95/5 (95 for the agent) to 100/0… It just depends on all the variables between the brokerage and the agent. This should never affect you as a buyer or seller, but I wanted you to be aware that your agent might not be taking home as much as you think.
Thanks for reading!!!! Please leave comments and questions below!