Understanding Realtor Commissions

Understanding Realtor's Commission

I work with buyers and sellers every day and realize how confusing it is to understand how realtors are compensated. It is also confusing to understand where the money comes from - and where all that money goes.

To understand commissions you must first understand the law of agency in the state of Texas. That is - who works for who. When you work with a realtor in our state the realtor can represent either the BUYER or the SELLER. They do not represent either party if there is an INTERMEDIARY AGREEMENT. Remember that when you ask a Realtor to show you properties. He/she is representing the seller unless you sign a buyer's representation agreement with them. (He gets 3% either way - so why wouldn't you want to sign him/her up to represent you and not the seller?)

Listing agents determine their fee. For simplification purposes, let's say a listing agent charges 6% for listing a home. Even though the listing agent is getting 6% - he sets aside 3% of the 6% for the agent that is going to be bringing him a buyer. (Please note: Buyer's agents don't usually like to take less than 3% for their efforts - so to offer a buyer's agent less than 3% is not a good idea.) That leaves 3% for the listing agent to keep. But wait - that is still a lot of money. Where does it all go?

THE LISTING AGENT - listing agent then pays:
30-50% to his company and/or relocation company (for office building, advertising, training, education, etc)

20% to 35% - to the IRS, 12% to Social Security and 3% to Medicare, since Realtors are self employed, and Errors and Omissions Insurance for the transaction (about $100 per transaction)

That leaves about 30% for monies spent to market the home and profit (websites, advertising, virtual tours, signage, gasoline, lockbox, copies, flyers, time, business cards, MLS dues, picture taking and editing, digital camera, etc)

THE BUYERS AGENT - buyer's agent pays:
30 - 50% to his company and/or relocation company (for office, training, risk management, etc)

20% to 35% - to the IRS, 12% to Social Security and 3% to Medicare, since Realtors are self employed, and Errors and Omissions Insurance for the transaction (about $100 per transaction)

That leaves about 30% - for realtor's expenses and profit (car expenses, NAR dues, supra key to get in lockbox, time to do several market analyses, MLS dues, continuing education, time spent looking at listings for potential homes, lunch for clients, (and all over again if the deal falls through)

THE BUYERS AGENT FOR A NEW HOME:

Many buyers do not see the need to use a REALTOR ® if they are purchasing a new home. However, builders put the cost of using a REALTOR ® in the price of the home whether you use one or not. The nice men and women that serve you warm cookies and coffee and treat you very well are still representing....THE SELLER/BUILDER. You have no representation in this transaction. Why wouldn't you want to use a realtor to represent you? For free.

I welcome your comments and questions on this one.