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Understanding how real estate agents are compensated

If this is the first time that you are selling or buying a property, you have got so much to learn. You might even be confused by all the terms and conditions of the transaction. However, if you have already bought or sold a house, you might be a bit more familiar with the procedure. Since more and more people rely on the services of real estate agents when buying/selling, it is good to know how real estate agents are compensated. You will find out more about the rebating program too.

The statistics

Almost 90 percent of buyers use the services of a real estate agent when purchasing a house. To be more precise, 87% of them bought a property through a real estate agent or a broker just last year. That is an increase of almost 20 percent when compared to the beginning of the century. We are looking at a similar picture with the sellers. Even 92% of them hired real estate agents to help them sell.

How many agents and brokers participate in a purchase?

Typically, there are six people taking part in the process of house buying/selling. Apart from buyer and seller, of course, there are two brokers and two real estate agents. Here they are:

• a buyer's agent - a person who is in direct contact with the seller, working in their best interest. He/she represents the buyer. A buyer's agent cannot work independently. They need to have a broker to work for.

• a buyer's agent's broker - a person that a buyer's agent works for. They are in charge of signing the contract with the seller.

• a seller's agent (also known as a listing agent) - a person who represents the seller. Naturally, he or she works for a broker too.

• a seller's agent's broker - a seller's agent's employer.

Both agents and brokers need to be licensed by the state for what they are doing.

Who else can take part?

Ok, now that we have described what a typical job distribution among the parties looks like, let's move on to some more options. There are some real estate referral companies, such as Park Place Realty Network, that can even rebate you back the part of their total real estate commission at closing.

Here's how it works. You approach them and ask to connect you with the top real estate agent in your market. Their database consists of 1 million real estate agents, so they will surely have at least one that fits you. After the agent helps you buy/sell a property and after the commission is paid to them, the agents will rebate you 15% of it. That is a significant amount that might even cover your relocation expenses and you can be moving to a new state with ease!

Beyond the essential roles of agents and brokers, there are other professionals whose services can prove invaluable in the buying or selling process. Home inspectors, for instance, assess the property for any defects or potential issues that could affect the transaction or future ownership. They're integral in helping buyers make informed decisions about their investments.

Real estate lawyers can help navigate complex legal issues and ensure the contract aligns with local laws and regulations, protecting the buyer's or seller's interests. And let's not forget mortgage brokers who can help buyers secure the best financing options for their purchase.

Each of these professionals plays a critical part in the real estate process, and while they might not directly share in the commission, their fees are another important consideration when budgeting for your property transaction.

Exploring Alternative Compensation Models for Real Estate Agents

While the commission-based compensation model is the most common, it is also worth understanding alternative models as they are becoming increasingly prevalent in the real estate industry. One such method is a flat fee structure, wherein the agent or broker is paid a flat fee for their services, regardless of the property's sale price. This model is often employed by discount brokerages offering a la carte services, allowing clients to select and pay for only the needed services. Another approach is a salary-based model, which is less common but still exists within some real estate firms. In this model, the agent is an employee of the firm and receives a regular salary, often with bonuses based on sales. Discussing the compensation structure with your agent or broker upfront is essential to avoid any surprises later on.

Real Estate Commissions - how real estate agents are compensated

The commission that the brokers are paid after the deal is made and contract signed is already agreed upon before the real estate agents start providing their services. That amount can be a flat fee, but more often, the commission is a set percentage of a listing value. The standard fee is 6% unless agreed upon differently. So, after the property is sold, the brokers are paid their commission. The next step is sharing it.

Sharing the commission

The commission is usually shared among four people - two brokers and their agents. Here are the steps:

• The listing is sold and the commission paid to the seller's agent's broker.

• Then the seller's broker shares it in half with a buyers' agent's broker.

• Brokers split their part with the agents, depending on the ratio already agreed upon between them.

Let's take a look at the listing worth $500,000. The standard commission fee for this purchase would be 6% which is $30,000. So, each of the two brokers gets $15,000. A common commission split gives 60% to the agent and 40% to the broker. That means that the agent gets $9,000 for the job performed, while the broker gets to keep $6,000. Now comes the fun part! If you took our advice and picked an agent from our Agent Contact List, you will get 15% of the total commission. Imagine what you can do with those $2,250!

The changes in how real estate agents are compensated

At the beginning of their career, agents are usually paid less than 60% of the commission. It often starts at 30%. As they get more experienced, their split grows and some of the best buyer's or seller's agents can even earn 100% of the commission if that's the deal they make with their broker.

Once again, even the most experienced broker cannot work independently and they cannot receive the direct payments from the customers for their services. On the other hand, brokers can work on their own - or they can hire agents. That being said, you should always double-check the brokerage before you sign the listing agreement. Buying or selling a house is probably one of the biggest decisions you will make in your lifetime. The choice of professionals who will relocate you to your new home is also a big deal. You will make no mistake if you opt for reliable companies such as

The cases when the commission has to be paid even though the transaction is not closed

The general rule is that the commission is paid only upon the settlement of the transaction. But, there are some cases when the seller is still obliged to pay even though the sale hasn’t been completed. These are some of the cases when the seller:

• changes his/her mind and refuses to sell the property;

• commits a fraud regarding the transaction;

• cannot leave the property in a timely manner;

• insists on something that is not contained in the listing agreement;

• makes a mutual agreement with the buyer to cancel the transaction.

Understanding how real estate agents are compensated is important when intending to sell or buy a property. That will help you plan your budget for the upcoming transactions.

Written by: Agnes Edwards with Mod Movers


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