How Real Estate Agents get Paid

Whether working with the buyer or the seller, real estate brokers are generally paid on a commission basis. That is, rather than working for a fixed fee or for an hourly fee, they are paid a percentage of the home's sale price once the sale is concluded.

Many first time buyers have two misconceptions regarding real estate commissions. First, many assume that if they "hire" a real estate agent to help them buy a home, they will have to pay that agent directly. Second, many are convinced that if they go directly to the listing agent, or directly to the seller of a listed property, they may be able to negotiate a lower price because since the seller won't have to pay commissions to both the listing broker or the buyer's broker.

The Listing Agreement

Details regarding real estate commissions are heavily influenced by local traditions and practices, but the specifics are established on a case by case basis through a negotiated contractual agreement between the seller and the broker they hire to market or "list" their property (commonly referred to as the "listing agent" or "listing broker").

In our market, the listing contract will almost always contain four key elements:

1. Exclusivity. It will typically contain an agreement that the broker, or more precisely the company she works for, will have the exclusive right to market the property for a specific period of time. A two to four month listing period is probably typical. This means that the broker will be paid if the house sells during this period, or if it sells later to a buyer who became aware of the home during the listing period, whether the listing agent was the actual cause of the sale -- or is even involved in the ultimate sale -- or not.
2. The Fee or Commission.. It will specify the fee that the broker will receive if the home sells within the time frame specified in the contract. This fee is negotiated between the seller and the listing broker, but it is generally calculated as a percentage of the property's sale price. In our market, listing commissions typically range from 5% to 7% of the sales price, though I've seen commissions as low as 3% and as high as 10%.
3. Sharing the Commission. The contract will specify that the listing company will share the commission with agents from other companies who are working with the buyer who buys the property. While the amount of the commission shared with the broker working with the buyer is established in the listing contract, it is generally either 2.8% or 3.0% of the sale price in our market.
4. The contract must establish the agency relationship between the listing broker and the seller (See Agency Law in Real Estate).

Implications of the Listing Agreement for the Buyer

While the buyer is not bound by the terms of the listing agreement, the seller is. As a result, the terms of this agreement can have important consequences for the buyer who is interested in buying the listed. Specifically:

• The listing broker will have a legal right to the stipulated commission whether you approach the seller directly, through the listing broker, or through a broker who is working for you. In principle, you can wait to see the home until the listing agreement expires and then approach the seller directly, but any home that stays on the market that long generally isn't worth buying in the first place.
• With respect to cost and commissions, it won't matter to you or to the seller if you work directly through the listing broker or through a broker who is helping you find a home. The seller has agreed to pay the listing broker the full commission whether another broker shares the commission or not. Certainly, the listing broker will make more money if you work directly through her rather than having a broker of your own, but neither you nor the seller will save any money.
• Finally, the listing contract will generally specify that the listing broker will represent the interests of the seller rather than the buyer. At any point that your interests and the seller's do not coincide --with respect to the purchase price for example -- the listing broker's job is to undercut your interests. Unless the broker is working with the seller as a "transaction broker" (See Agency Law in Real Estate), the broker is not a neutral facilitator of the transaction. They are an agent for the seller. They are legally and morally obligated to undercut your interests at any point where they are in conflict with those of the seller. In some situations, this may have little impact on you. In others, it can lead to disaster.

New Home Developments and Real Estate Commissions

If you considering buying a home in a new home development, you need to understand how real estate agents and commissions operate in this context.

• Almost universally, the "on site" broker who shows you through the model homes at a new development, and then helps write up the contract if you decide to buy, is working as an agent of the builder/seller. Like the listing agent with a resale home, these agents are required by law to disclose known defects in the homes they are selling and to honestly disclose other critical facts to you. But they are not neutral brokers. They represent the interests of the builder/seller and have no responsibility to protect your interests as a buyer.
• In the Boulder County and Denver Metro area real estate market, almost all home builders pay commissions to real estate brokers who are working with buyers. They understand that if they pay commissions, brokers working with buyers will show the homes they are building. This helps them get their homes sold quicker, reducing their marketing costs.
• While builders will pay an agent who is working with a buyer, it is best if you visit the new development in the company of your agent on your first visit. In fact, some builders require that your broker accompany you to the subdivision on your first visit as a condition of paying your agent a commission. If you visit a new home subdivision on your own, and then decide that you want the help of a knowledgeable broker to help you through the purchase process, the builder may be unwilling to pay the broker's commission.

Cause of Sale

This general principle can apply with listed resale homes as well. The rules that govern the payment of real estate commissions are based on the underlying assumption that real estate is a "sales" business. The general rule is that the commission is paid to the agent who was the "cause of the sale." As a consequence, if you see a home you are interested in and call the listing agent directly, you may not be able to retain the services of a separate broker to help you through the transaction -- unless you are willing to pay the broker for their services out of your own pocket. If you are considering using an agent to help you through the process, it is best to start working with them from the outset so that you don't inadvertently create an issue with commissions.