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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