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If you're looking to sell or buy a property, chances are you'll need to engage a real estate agent to help you. But before you engage with one, it may be a good idea to understand how real estate commissions and fees are charged. To help with this, here's a quick guide on how real estate companies are paid.
What Is real estate?
Real estate is the land and any buildings on it, including natural or manmade resources like crops, minerals, water, or immovable property.
What is a real estate broker?
A real estate broker is someone who professionally sells or buys properties on behalf of property owners. A broker typically works independently, or they can hire an agent to work for them.
A real estate agent representing the property seeker is called a buyer's agent, while the agent representing a property seller is called the listing agent.
In each transaction, a listing agent and a buyer's agent have different duties. To understand more about this, read the full info here. The listing agent takes care of staging, marketing, and listing the property on various listing platforms.
On the other hand, the buyer's agent scouts for properties on behalf of a client. This includes organising inspections, liaising with real estate lawyers, and negotiating the property price.
The difference between agents and brokers
To understand how real estate commissions are paid, you must know the difference between agents and brokers. While real estate agents are licensed to sell or buy property on behalf of clients, the real estate brokers are the umbrella under which agents are employed.
Brokers ensure that agents comply with real estate laws. In other words, an agent can't work independently without the supervision of a licensed broker. And they typically don't directly receive commissions from clients.
On the other hand, brokers can work independently in the real estate market. Every real estate business needs to have a designated broker. The real estate agent and broker can be referred to as a realtor if registered under the National Association of Realtors.
What is a real estate commission?
Real estate brokers are generally paid for their services through commissions. These are usually based on a percentage of the property's selling price. Therefore, a real estate commission is a percentage of your property's selling price, which is paid to your real estate broker. In other words, a real estate agent will not get paid unless they sell or buy a property.
How real estate commissions are disbursed
When real estate companies complete property transactions, they receive payments via commissions. By law, all commissions are paid to the broker. The broker then shares the commission with the agents who took part in selling or buying the property.
How much are commissions?
Commissions vary according to the market conditions and the territory. Generally, the commission percentage ranges from 5 per cent to 6 per cent of the final selling price. However, the commissions are always negotiable. According to the federal antitrust law, it's illegal for realtors to impose uniform commission rates.
Who pays the commissions?
The total percentage of the real estate commission is usually agreed upon by the property owner or seller and the agent. The property owner is generally responsible for paying the commission rate. And this fee is commonly factored in when the property is listed. Therefore, it's fair to say the property buyer will pay a huge chunk of the commission. Sometimes, a buyer and seller agree to split the commission payment 50/50.
How commissions are managed
When a property goes on the market, the owner and the listing broker sign a contract known as a listing agreement. The agreement states all the listing terms and conditions, including the broker's commission. Apart from listing agreements, the listing agent and the buyer's agent also have contracts with their brokers. These agreements will state the agent's share of the commission.
How commissions are shared
Real estate commissions are generally shared four ways between the listing agent, listing broker, buyer's agent, and the broker of the buyer's agent. Sometimes the commission is distributed equally. And other times, it's a negotiated split.
In some cases, real estate agents are fully employed by brokers. They could get a bonus on every closed sale. Because they're on a fixed salary, they may not share commissions on a 50/50 basis with the broker.
Here's a summary of how real estate commissions are processed. Real estate professionals are paid to buy or sell a property. This payment is typically in the form of a commission.
The commission is calculated using an agreed percentage of the total selling price of the property. The agreed commission is stated in the listing agreement. After closing a deal, the brokers split the commission with the agents.