Saturday, November 7, 2015

How Realtors Get Paid (a true commission story)

     Buying or selling a home is, for most people, the single most expensive transaction of their lives.  At the center of most real estate deals is the real estate salesperson, hired by sellers to list their property for sale, market and advertise the home, and then assist in the contract and sale; and used (yes, used, see below) by buyers to find and show buyers possible homes based on the buyers’ personal criteria, and then to assist in the contract and purchase of the home.  For these functions, a real estate salesperson is paid a commission based upon the sales price of the home.

     Traditionally, there were two types of realtors involved in a real estate transaction.  The “listing agent” was the person who was hired by the seller, placed the property on the multiple listing service (the MLS), and acted as the agent of the seller.  The “selling agent” was the person hired by the buyer, who helped the buyer find a property and acted as agent for the buyer.   In Florida, most realtors today act as transactional agents instead of as listing or selling agents. A transactional agent does not have a fiduciary relationship with the buyer or seller, nor does the transactional agent act as the single agent representative of the buyer or seller. However, a transactional agent does have a duty to deal honestly and fairly with both the buyer and seller, to disclose all known facts, and to use skilled care and diligence in the transaction. Despite the change to transactional agent status, payments are still traditionally made by the seller, and shared by the realtors involved in the transaction.

     Both the listing agent and the selling agent are traditionally paid from the seller’s proceeds. Pursuant to the listing agreement, the seller of the property has contractually agreed to pay the listing agent a commission upon finding a buyer ready, willing and able to purchase the property. Included in that agreement is the right of the listing agent to share a portion of his or her commission with a selling agent. So even though the selling agent is being technically paid from the listing agent’s commission at most closings, it appears on the closing statement that the seller is paying both the selling agent and listing agent separately. In rare circumstances, a buyer would hire a “buyer’s agent,” who generally acts in the same manner as the selling agent, but is instead paid directly by the buyer at the closing, with the listing agent receiving the full real estate commission from the seller without making any payment to the buyer’s agent.

     Traditionally, the amount of the real estate commission has been 6%. With both a listing agent and selling agent involved, each agent would receive one half of the commission, or 3%. Each realtor would then share a portion of that 3% commission with the broker (realtors in Florida cannot earn a commission, only licensed brokers). Generally, the split between realtor and broker is determined by the realtor’s independent contract with the broker, and varies from a 60/40% split for newer realtors, to a 90/10% split in favor of very experienced, successful realtors.  If the listing agent is also acting as the selling agent, the realtor will keep all 6% of the commission.

     The amount of the commission is determined at the time the seller enters into the listing agreement with the realtor. Some realtors are willing to negotiate the commission, but many will not, especially those who are very successful. One common reduced commission scheme is known as the 5/2/1 commission. With that type of listing, should the property be sold by the listing agent with the involvement of a selling agent, the total commission paid would be 5%, with the listing agent receiving 2% and the selling agent receiving 3%.  If the listing agent sells the house without a selling agent, the listing agent receives 2%, and if the seller sells the home to a buyer without involving the realtor, than the listing agent receives only 1%.  Keep in mind that the commission is what motivates the realtor to sell your property, and the best agents generally earn their 3- to 6% commission.

     Many people believe they can buy or sell a home without a realtor. As someone who has been in this business for over thirty years, it is my experience that in most cases you will still get the highest price only if you work with the realtor, and will find more homes as a buyer only when you work with a realtor. Working with a realtor who is familiar with your area (known as a realtor who farms an area) can get you inside information about communities, homes that have not been listed but may be for sale, and affiliates who can provide title, surveys, inspections, loans and other tools necessary when buying and selling homes. That is why, even though I could easily buy and sell property myself, I still work with a realtor when I sell and purchase.  If you do your homework and find the right realtor, you should have success whether you are selling or purchasing a home.

Michael J Posner, Esq., is a partner in Ward, Damon, Posner, Pheterson & Bleau a mid-sized real estate and business oriented law firm serving all of South Florida, with offices in Palm Beach County.  They specialize in real estate law and business law, and can assist buyers and sellers in loans and purchases/sales.  They can be reached at 561.594.1452 or by e-mail at mjposner@warddamon.com

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