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  • Writer's pictureJoseph Gunerman

How Do Commissions Work?

How agents get paid and how much we make feels like a growing topic of discussion surrounding the increasingly expensive real estate market. Sometimes it even feels like a big elephant in the room throughout a transaction and at the closing table. Do agents make too much? How much is the agent actually taking home out of the “Commissions Paid” section of the closing statement? Whether you think we make too much or too little, I’m going to break down how our commissions work, what we take home, and why.

The commissions, generally a percentage of the final sale price, are determined as part of the listing agreement between the listing agent and the seller. The seller must decide how much they believe they need to pay to Net the highest amount from their home sale. The more commission they pay, that’s money off of their top line… but if they pay less commission will they get the marketing that brings them the highest and best offer out there? Will they get a smooth and easy experience? How fast will their home sell? When the final percentage is decided, one component of it is how much will be shared with the agent who brings the buyer. Sellers and their agents don’t just want amazing photography, a strong marketing presence, and boots on the ground until the house is sold… but they also want to attract high quality agents with high quality buyers to their listings. So deciding what commission to share with the buyer’s agent is also a part of the marketing strategy. YES, as I write this today, commissions for buyer’s agent and listing agent generally are paid by the seller.

What are agents on both sides doing? Properly cleaning, staging, and marketing a home so that the most qualified buyers and their agents will see it and become interested is an extremely important and time consuming part of the listing process. You’ll want high quality photos, video tours, a property website, and heavy digital advertising when you sell your house. These items cost money and time, and are just some of the expenses that come out of the listing agent’s commission. On our team, we doorknock in the neighborhood and invite neighbors to a private wine and cheese open house to see if they have friends who are looking to buy. Getting to choose your neighbors is a rare opportunity and you’d be surprised how often people jump at that opportunity. The first weekend on the market is the most critical for your home, and we put you up in a luxury hotel for the entire weekend so that you don’t have to worry about plans while we’re holding huge open houses and driving traffic through your home. These are only a few more of the expenses that come out of the listing agent’s commission before it’s even been paid. When we secure multiple offers, we put them into a spreadsheet to show the seller how much each offer will Net them, what contingencies are in each offer, what the close date’s are, and what the likelihood is of the offers closing. We do due diligence with every buyer’s lender, and help the seller select the best offer for their timeline and goals.

On the buyer side, you’re probably wondering why the buyer’s agent is getting paid by the seller. The buyer’s agent is helping prospective buyers get properly pre approved with a local and reliable lender. They’re also oftentimes selecting your property from the MLS, sending it to their clients, and suggesting a tour. After touring, the buyer’s agent is communicating with the listing agent, putting together an offer that’s appealing to the seller, and writing up the final contract. If you’re a seller, having a properly qualified buyer with a clean and well written offer walk through your door is your best chance for a smooth process that closes on time, and you’re most interested in attracting agents with those buyers. After contract acceptance, the buyer’s agent is coordinating the home inspection, monitoring the contingency periods, and communicating directly with the lender and title company to ensure that the buyer has wired funds and completed all necessary paperwork for closing. The agents on both sides of the real estate transaction are so important to ensure that the deal doesn’t fall through.

But after all of this, what does your agent even keep? Is it the full 2.5-3% that you typically see on the closing statement? In the DMV, buyer side commission is usually 2.5% of the total sale price. In the case of agents who are on a team, roughly 10% of that goes back to the brokerage that holds the team’s licenses. Then the remaining commission is split with the team leaders, which for most new agents is a 50/50 split. At this point 60% of the commission amount you see isn’t even going to your agent. Once the remaining money arrives in the agent’s account, 25-30% of it is deposited into a tax account. The agent profit is the remainder. The listing side works the same way, with the listing agent splitting the commission with their brokerage and team, AND spending X dollars on marketing along the way. It’s no cheap task to properly market a home, so when the listing agent asks for more commission it’s generally not money that finds its way directly into their pocket.

Whether you think agents are overpaid or not is completely up to you, but I hope this sheds some light on how the system functions today. If you’re a buyer or a seller, make sure you talk to your agent about it and choose to work with an agent who really earns their commission!

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