Understanding Real Estate Commission

Understanding Real Estate Commissions

Selling, buying, or renting a home can be a daunting task to anyone who is doing it for the first time. Whether you’re selling, buying, or renting a home, clarity, and transparency in Real Estate commissions is not that easy to understand. The guide below will help you navigate through some popular commission structures available by different brokerages and help you identify which one is the best fit for you.

But first, a couple points to remember:

Every Real Estate Broker operates differently. The Policies and commissions described below may vary from broker to broker.

Sherman AntiTrust Act

The Sherman AntiTrust Act was passed in 1890 to prevent companies from forming monopolies and encouraging competition. Applied in the Real Estate field, this means that there is no set or “standard” commission to be paid out when buying, selling, or renting a real estate property.

This means that when shopping around with different Real Estate Brokers, their commission fees to buy, sell, or rent a home will vary. No such thing as a “standard commission rate” exists. With that being said, most commission structures generally are now set as a percentage (%) of a sales price whether buying, selling, or renting.

Selling a Home?

If you’re a homeowner looking to sell a property, this is what your commission structure may look like. The seller and listing broker would agree upon a total commission rate to be paid out to the listing agent and a commission rate that would be paid out to the buyer’s agent. In Virginia, the commission for the Listing Agent and Buyers Agent are almost always paid exclusively by the seller. These commission rates are generally disclosed in the Listing Agreement between the Listing Broker and the seller. The listing agent would then publish the Buyers Agent commission on the MLS (Click here to learn more about the MLS).

Example:

You (seller) negotiate a Listing Agent commission of 2.50% and Buyers Agent commission of 2.50% of the sales price.

Your Home Sells for: $850,000

Buyers Agent Commission: $850,000 x 2.50% = $21,250

Listing Agent Commission: $850,000 x 2.50% = $21,250

Total Commission Paid out by Seller: $42,500

Note:

– The Commission negotiated for the Listing Agent and Buyer’s Agent can be different.

– The Commission to be paid out is generally based on the sales price of the home, not the listing price.

– The Commission is generally paid out at closing/settlement from the proceeds of the selling of the home.

Commission Structures can also be set as a fixed amount and not a percentage.

Example

You (Seller) negotiate a Listing agent commission of $7,500, and a Buyers Agent Commission of 2.50% of the Sales Price.

Your Home Sells for: $850,000

Buyers Agent Commission: $7,500

Listing Agent Commission: $850,000 x 2.50% = $21,250

Total Commission Paid out by Seller: $28,750

It is important to note that although these commission structures may be common, there is no set “standard commission rate”.

Buying a Home?

Purchasing a home can be a fun, long, and stressful experience all mixed together in today’s market! Knowing what you can afford by being pre-approved (click here to learn more about pre-approval vs pre-qualified ) and fees to be paid ahead of time can help ease the stress and make the purchasing experience a more pleasant one. Generally when purchasing a home, all commissions to be paid out to the buyer’s agent are paid by the seller. (See above seller example).

Although generally, commission fees are paid out by the seller, some Buyer Agents may require a retainer fee that may or may not be due upon signing a Buyer representation agreement, and that fee may or not be deducted by the seller provided commission. All of these fees are generally outlined in your Buyer Representation Agreement.

Renting out a Home?

Where do we start with rental properties? Arguably the least represented and talked about real estate transaction! Condo’s, apartments, single family homes, tenants, landlords, where to start! Honestly, rentals don’t have to be as complicated and confusing as they’re set out to be. A rental transaction usually involves a landlord (owner) and a tenant (occupant). Condo’s Townhouse, Single Family Home, Apartments are all just forms of ownership of the building’s entity. A condo, townhouse, single family home, townhouse, duplex, etc., are generally all owned by a single owner who owns the individual unit. When renting an “Apartment” this usually means that you are renting a unit from the landlord, who usually owns the building. When renting a condo, this usually means that your landlord only owns the particular unit you are renting (but not limited to) and the unit is part of a Governing Condo Association.

What does this all mean regarding commissions?

Landlord:

When enlisting the services of a Real Estate professional to rent your home, generally means the landlord will pay the agent either a percentage or portion of the rent as their commission. One of the most common structures is paying one month’s rent in commission.

Unlike the selling of a home where the Seller pays out separate commissions, the Landlord usually will pay out a Listing fee to the Listing Broker that will share a portion of that commission with the broker/agent that represents the tenant renting out the home. This Commission is disclosed in the MLS by the Listing agent/broker for Tenant Agents to have access to. As a Landlord, you want to make sure your listings are marketed on the MLS to receive maximum exposure, click here to learn more about MLS Benefits.

Tenants:

A tenant seeking to rent out a Condo, Single Family Home or Townhouse will benefit greatly by utilizing the services of a Real Estate Agent. Unlike Apartments where you usually walk into the complex and request a tour on Demand. Tours of Condo’s/Townhomes/Single Family Homes usually have to be scheduled in advance with the Listing Agent if you are not represented by a tenant agent. The benefits of enlisting the services of an agent to represent you as a tenant are numerous!

Benefits of using a Real Estate Agent with Your next rental home as a tenant:

1. Your Real Estate Agent will have up to date access to the MLS where you will be able to filter new Rental Listings and Coming Soon Listings before going live/public.

2. Although some Listing Agents, Property Management Companies, and Landlords are utilizing the latest technology to provide self guided in-person tours without the need of a Real Estate Agent, the majority of Listing’s still require a Real Estate Agent to be present with you to tour the home. Hiring a Real Estate agent will provide you with access to these homes.

3. Rental Market knowledge. It is important to have someone by your side throughout your rental process to negotiate and represent your best interest. A Real Estate professional should be able to assist you throughout your rental search, application process, lease drafting and review, and walk-through/move-in inspection.

3. Most, if not all of the of the Agent’s Commission is also paid out by the Landlord.