The question everyone wants to know but nobody wants to ask – How do commissions work?
This is a question that many people who are unfamiliar with the real estate process and are curious as to how it works do not fully understand. Essentially, they want to know how real estate brokers get paid.
Well, the first thing I learned about real estate is that everything is negotiable. When agents are working with a seller, we set a number with the owner of that home as to the percentage we will sell it for. In every state, and even different areas of that state, there may be a “going rate” of what agents are typically charging their sellers. Here in Colorado that rate has been around 6% of the purchase price. However, that percentage accounts for a co-op fee. A co-op fee is a percentage paid to the buyer’s agent out of the 6% (or whatever it may be) for their part in bringing a buyer along and assisting with the transaction. Here in Colorado the going co-op fee is around 2.8%.
So, sellers pay 6% of the total agreed upon purchase price, and then it is split, according to the percentages, between the two agents. There are many more factors that can play into these numbers, causing them to go up or down, but that is generally how commissions are paid. The seller almost always pays the commissions, so for buyers, your agent’s representation is essentially FREE.
The second part to commissions is the split between agents and their brokerage. To be more clear, the seller doesn’t actually pay the agents directly, they pay which ever brokerage firm that agent is independently contracted with. Checks are made out to the brokerage firms and then the brokerages take a cut of the agents commission. These splits are different at almost every brokerage firm. They can be 70/30, where the agent takes home 70% of their commission and the company takes the other 30%. Or, they can be 80/20, 90/10, or 98/2. This is all up to the brokerage, and agents understand the split before they decide to hang their license with that particular company. Generally speaking, brokerages with higher splits, like the 70/30, usually charge less in monthly fees to the agent, and vice versa for the brokerages with smaller splits, they usually have higher monthly costs for their agents.
Like most things in life, you get what you pay for. This is true for sellers when they are looking for an agent to represent them and sell their home – if you are paying a higher percentage, that agent had better presented their value well and maintained their value throughout the whole transaction. Similarly, when a brokerage charges high monthly dues to their agents, those agents should have great resources at the office that are helping to make their business grow.