When buying or selling a home, the logistics can get complicated pretty quickly. Tiny yet crucial details and extensive payment processes result in most individuals entering the real estate market with the help of a specialist or real estate agent. When selling a home or commercial real estate space, it’s especially important to have all of the correct details to guarantee you’ll make a profit from the transaction. While there are many ways sellers can get overwhelmed along the way, real estate agents take on the burden and implement their expertise to assist sellers in confidently navigating the market. Their work is appreciated and is typically compensated at the end of the selling process through an arranged commission structure. The most common question people have when finalizing the process is, “Who pays the real estate commission?”
In this article, we’ll explore how these real estate commissions are paid, and how the manner the property is sold often dictates how these professionals are compensated. By understanding who pays the commission on a real estate sale, sellers can more confidently dictate how they’d like their real estate experience to look.
How Do Real Estate Commissions Work?
To understand how real estate commissions work we must first understand how real estate transactions work. In a typical listing agreement, instructions are defined in writing for how both the listing agent and buyer’s agent receive their commission at the close of escrow. The close of escrow occurs when both the buyer and seller have honored all responsibilities to one another. The question of who pays the real estate commission and how much the agent is compensated is decided upon when first beginning the process of buying or selling a property. The real estate industry standards suggest that the listing agent receives around 3.5% of a normal transaction with the buyer’s agent receiving 2.5%, so an approximate total of 5-6% of the sale. Where exactly the total commission falls within that range is negotiated upfront between Seller and Listing Agent. At the end of the transaction when the escrow has finally closed, who pays the commission?
Who Pays the Commission on a Real Estate Sale?
This can be a topic of debate because in some sense, the buyer is the one bringing the cash to the table to close and the seller is taking the cash away from the table. There’s a convincing argument to be made that it’s the buyer’s funds that are paying the commissions for both real estate agents. On the flip side, Escrow companies will traditionally allocate real estate commissions as a cost to the seller on their final closing statement. In fact, buyers will not see anything related to real estate commissions on their final closing statement!
The answer isn’t black and white, but on paper, it would appear that the real estate commissions are paid by the seller. That being said, there are numerous real estate scenarios in which the party who pays the real estate agent commission might work differently, or there is no commission to worry about at all. Let’s explore a few of these unique scenarios and examples.
“For Sale by Owner” Real Estate Commissions
For owners looking to represent themselves within a For Sale By Owner (FSBO) listing arrangement, it’s smart to consider who pays real estate commissions and whether or not they will be something you’ll be responsible for handling. This will vary on a case-by-case basis, but it ultimately comes down to the buyer of a property and how they discovered the property was for sale. If there is an agent that provided the avenues toward a real estate transaction and introduced the buyer and seller, it’s reasonable for a buyer’s agent to receive compensation in some form. This is often referred to as “Procuring Cause” among real estate agents. I.e. If an agent’s efforts resulted in the closing of a sale, they will expect a commission.
On the other hand, if a buyer discovers an owner’s property on their own accord and doesn’t have a pre-existing contract in place with a buyer’s agent, there is no reason to assume that a commission would require payment. The question of whether or not an agent deserves real estate commission is determined by “procuring cause”, which is whether or not “the efforts of outreach and actions resulted in the sale or lease of property. The broker who is in the procuring cause of the transaction is entitled to a commission.”
Selling to an Investor Commissions
In another real estate scenario, it’s common for sellers to experience investors and cash buyers marketing directly to the owners with cash “As-Is” offers that provide an incentive to sell quickly if necessary. In these cases, buyers will connect with sellers without the involvement of a real estate agent and it wouldn’t be expected for either party to pay commission to anyone.
This is a common tactic by investors to provide a great opportunity for sellers to save money on paying out commissions and listing costs that are procured during the process of marketing and selling a home through a real estate service. Additionally, many real estate investors and cash buyers are licensed real estate agents or brokers themselves, but will not operate as an agent within the translation process. These investors avoid using their license and charging commission to maximize their offer price and subsequent net to the seller but can still provide valuable insight into the real estate experience.
The simplest way to save money on commissions is to avoid them entirely.
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People invest in rental properties for countless reasons and each rental property is different. Whether it’s a condominium in a city with numerous tenants or a vacation home that’s rented for only a few months of the year, owning rental property has its fair share of exciting advantages and unique challenges. At some point or another, it’s natural for rental property owners to ask themselves, “Should I sell my rental property?” Especially if the responsibility of maintaining the property has become too cumbersome, it’s a natural part of owning a rental property to one day consider selling it.
In this article, we’ll explore what makes a good rental property, as well as some of the signs that you should sell your property (or consider continuing to hold on to it). By understanding the market and evaluating the property with a focused lens, rental property owners can make sure they’re maximizing their investment.
What Makes a Good Rental Property?
To be able to properly determine if it’s best to sell or keep a rental property, you must first be able to identify how a successful rental property operates. Especially for those that are considering buying a rental property for the first time, there are many qualities of a good rental property that investors should look out for during the search. While the real estate market is constantly fluctuating, a rental property that is operating as it should will usually display a few of these common traits.
Should I Sell my Rental Property?
There are many benefits to investing in rental properties. But regardless of the many perks and the passive income it generates, there will come a time in any rental property owner’s life where they might consider selling the property. Especially in times of economic uncertainty, owning and managing a rental property can become very overwhelming and the return on the investment may not be immediately evident. This is why it’s suggested for rental property owners to keep a solid record of their investments, maintenance costs, and income generation to properly determine if the rental is still a worthwhile expenditure.
The hardest part about contemplating if you should sell or keep a rental property is choosing the right time to list the property on the market. Here are a few signs that it might be time to sell your rental property.
Maintenance Costs are Too High
Whether you’re managing a large apartment building or a small home, maintenance is a natural part of any property owner’s responsibilities. While some maintenance costs may be factored into a tenant’s monthly rent (lobby cleaning, snow shoveling, etc.), the majority of maintenance costs fall on the landlord to cover. Paying for contractors, turnover costs, and expensive repairs can all add up very quickly, and if the state of the property is degrading it’s easy for profits to be lost in the long run. Selling a run-down property is much harder than selling a well-maintained one, so understanding when maintenance costs are getting too high is important for determining when you should sell instead of holding on to the property.
Location Has Worsened
Many investors will purchase rental properties largely due to their location, perhaps within an up-and-coming neighborhood or near a popular vacation locale. Location is a huge part of any real estate transaction, and if you’ve noticed a rental property’s location has worsened it might be time to look elsewhere. Whether it’s crime rate, lack of popularity, or even sudden congestion of other rental properties in the area that are stealing potential profits, a rental property’s location should only serve to benefit the owner. Increases in local rental property regulations are another common reason why rental property owners may choose to sell. For example, some areas of the country have strict regulations on short-term vacation rentals such as Airbnb. Being forced to sell due to increased regulations or a bad location is never a good position to be in, so make sure to always be aware of the state of a property’s surrounding location.
One of the biggest benefits of owning a rental property is the passive income that it can generate, but if the tenants create more issues than the investment is worth it could be a bad sign for the property’s profits and growth. Tenants play a huge role in the success of a rental property, mainly because without tenancy the property is at risk of stagnating on the market and potentially losing value. Whether it’s excessive damage caused by tenants, difficulty filling vacancies, or simply issues with tenants paying their rent, the profit gained from managing difficult tenants will eventually dwindle. If tenants are a huge issue among others, it might be best to consider selling the property.
Property’s Value Has Fluctuated
Anyone looking to make a smart investment in a rental property will understand the importance of getting the most value out of the purchase. A rental property’s value will fluctuate frequently throughout owning it, and evaluating these peaks and valleys is crucial for making an educated choice in owning a rental property. It might be that a rental’s location has suddenly boomed and the property is now valued at a much higher value, allowing the owner to sell the rental property at a much higher price than their initial investment to cash out their equity. It could also be the case that the property has massively depreciated and the owner should sell to avoid tanking their profits. A rental property’s value will always be a reflection of current real estate market trends, location, and specific property needs, and understanding the value of the property is a natural part of owning it.
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Should I Keep my Rental Property?
While it’s natural to eventually sell a rental property, timing is often the most important factor when contemplating if you should sell or keep a rental property. Selling prematurely can be a very bad decision. Especially if a rental property is running successfully with reliable tenants and low upkeep, it might be best to simply leave a good thing alone for the time being. If you haven’t been forced to consider if you should sell a rental property, it’s likely still a lucrative and worthwhile investment. Let’s explore some of the major reasons you should keep a rental property and consider holding out for the long-term benefits.
Long-Term Equity and Profit
The housing market and state of the property’s mortgage are what will ultimately determine a property’s selling price, and the housing market continues to grow. This has caused rent prices to increase, which has led to larger returns and extra cash flow for rental property owners in recent years. This can generate long-term profits, especially for those that rent out their property for a price that fully covers the mortgage payment and operating costs.
If tenants are consistently making their rent payments and operational costs are minimal, rental property owners can benefit from passive cash flow that can help them make additional investments outside of the one rental property. Landlords are also able to rely on annualized tax benefits, potential appreciations, and refinancing options that can help maximize profits and combat occasional shortfalls.
Avoid Losses in Poor Market Conditions
If the real estate market conditions are poor, it might not be the most lucrative time to sell. A huge benefit of owning a rental property is the protection it provides against inflation. Rental properties are an incredibly valuable asset and investment during times of high inflation and typically gain value at this time. Renting during any economically difficult period is a nice form of cash flow because housing and real estate is a 24/7 industry. While there may be challenges in managing the property during times of poor market conditions, selling during this time could potentially result in a hefty loss of potential profits and appreciation.
Sell or Keep Rental Property Calculator
When wondering if it’s the best choice to sell or keep a rental property, it’s helpful to have a general guideline of what you should be looking for in a return on investment. As we’ve covered, a rental property needs to generate positive profits from the investment of purchasing and maintaining the property. Being able to accurately determine the financial performance of the property can be a bit more complicated, so having a general rental property formula for calculating profitability is helpful.
Cap rate is a simple calculation used by rental property investors to learn a property’s profitability. It’s calculated by taking the net operating income, or gross rental income minus property expenses, divided by the property’s purchase price. To get this percentage, landlords need to have a firm understanding of their property’s annual expenses to get an accurate snapshot of a property’s performance. These expenses include everything from property taxes and insurance fees to maintenance and management costs, but all play a huge role in calculating the cap rate of a rental property. Subtract these expenses from the annual income collected from renters to get the net operating income.
Cap Rate = Net Operating Income / Purchase Price
Ex: Susan purchases a rental property for $200,000. The gross annual rental income is $24,000 with $10,000 in annual expenses, creating a net operating income of $14,000. By dividing $14,000 by $200,000, Susan will end up with a cap rate of 7% for her investment.
The higher the cap rate, the better the property is performing. Keep in mind, the cap rate for any property will constantly fluctuate based on the property’s needs and market conditions. Buying a property for a low price and renting it out for a high one or gradually increasing rent prices over time can increase a property’s cap rate. Cap rates will vary largely based on location, but if the cap rate is lower than usual for the area and neighboring competition, it might be time to sell for renters looking to maximize their investment.
180 Homes & Properties Specializes in Selling Rental Properties
Whether your rental property is underperforming or you simply wish to move on to something different, it’s normal to occasionally ask yourself, “Should I sell my rental property?” By knowing how to properly calculate a property’s performance and identify the signs of a successful and care-free rental property, owners can more easily gauge if they should sell or keep a rental property and make the choice that will support their long-term goals.
When it comes to determining if you should sell or keep the rental property, it helps to have a simple option for selling that won’t demand an overwhelming amount of time, stress, and energy. 180 Homes can help sell your rental property with a streamlined process that gets your property sold and owners paid quickly. From handling tenant affairs to taking on maintenance needs, 180 Homes experts have the skills and expertise to help. Learn more about how 180 Homes can help rental property owners sell their property and move on to the next great investment.
Mortgage interest rates have been all over the place in the past 30 days. One day they drop significantly and the next they are on the rise. If you lock in rates at just the right time, you may be able to time the market perfectly. Before you celebrate your interest rate reduction there are a few things to consider. A lower interest rate may not mean a lower monthly payment. While this sounds hard to believe it is often the case when you refinance. Getting the lowest possible interest rate is great but there are a few other items to consider. Before you start your refinance application here are some things you need to keep in mind.