March 02, 2018

Real Estate Agent Fees: A Quick Guide

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The fees generated by a real estate transaction are paid by the seller and typically split in several directions, depending on which professionals were involved in the sale. Here's a quick overview of how real estate fees work, who pays them and who receives them.

Real Estate Broker Fees

While both agents and brokers are licensed by their state, each agent must work under the umbrella of a broker. Payments for real estate services are always made out to the broker(s), even if those individuals didn't personally help with the transaction. This is because state laws prohibit consumers from paying real estate agents directly. In some cases, the commission is split between the brokerage of the buyer's agent and that of the listing agent.

How Broker Fees are Typically Split

At the time of settlement, the broker splits the fee in various directions. Some portion of it will go to the agent in the broker's office who provided the actual services to the client. This agent may receive anywhere from 40 to 80 percent of the total commission, depending on a variety of factors. These factors include how the lead was generated, the corporate structure of the brokerage, and the individual agreements created within a given office.

Brokers, on the other hand, are free to engage in any form of customer service or transaction, and they can receive payment directly for their assistance.

Flat Fee Real Estate Brokers

Most real estate fees are set on a commission basis, as a percentage (usually 5 or 6 percent) of the selling price of a home. Vacant land sales usually involve higher commissions because they take longer to sell and require the agent to invest a greater number of hours. Interestingly, real estate commissions are always negotiable, according to state laws, although in reality they tend to be fairly standard. The Washington Post reported in January 2017 that real estate commissions are trending downwards, with a nationwide average of 5.26 percent.

In fact, some alternative and discount brokerages actually charge a flat fee instead of a percentage commission. One discount broker, for example, charges $2,500 to list a home for sale, regardless of its selling price, and an additional $2,500 is set aside for the buyer's agent. Another online service charges only $49 to list a home on their database, but they don't provide other services. Traditional brokerages note that bargain-hunting sellers may end up losing money because they won't have the benefit of an expert sales agent helping them get the optimal return on the transaction.

How Real Estate Agent Fees for Sellers Are Negotiated

When a seller lists a property, they sign a contract with the listing broker. This contract sets the amount of commission that the seller will pay. In most cases, this fee is the seller's responsibility, although in rare cases, an agreement may be drawn up which splits the commission between the seller and the buyer. It's also worth noting that sellers typically have the commission in mind when they set the asking price, so it could be said that buyers do contribute to that cost.

On the brokerage side, real estate agents can negotiate different fee arrangements with the brokers they work for depending on how productive they are and what level of support the brokerage office provides. The commission will not be paid to the broker until the title of the property is legally transferred, so there is often a substantial delay before that payment is made.

Real Estate Agent Fees for Buyers

A buyer’s agent often puts in a considerable amount of work to earn their share of the commission, which is typically half of the total. It's important for a buyer's agent to draw up a clear agreement with the buyer so that they don't find themselves in a position of having put hours into showing homes, only to have the client call and say that they just signed a purchase agreement on a home they found on their own. The nature of these agreements, specifically how binding they are, is a subject of ongoing conversation within the industry.

Real Estate Referral Fees: The Pros and Cons

Occasionally, a real estate agent will refer a client to a brokerage in a different location, sometimes collecting a referral fee from the receiving broker of 20 to 40 percent of the commission. Traditionally, this happens when a seller is moving and is looking to buy a home in a new area. There's nothing intrinsically wrong with the concept, and if the referring agent is familiar with the new agent's track record, it can provide everyone with a valuable service. However, the most successful agents are least likely to pay such referral fees because they already have plenty of clients and don't want to provide their services at a discounted rate. More often, it's the newcomers and part-timers who are open to paying referral fees because they're looking to increase their client base by whatever means possible.

Agents considering whether to pay a referral fee are advised to ask a few questions of the referring agent: How well does the referring agent actually know the client? Is the person already pre-approved for the mortgage loan? Do they know what they want? The answers to such questions can make it clear whether it's worthwhile to pay the fee. The development of online lead generation sites has further muddied the waters, causing agents to run a risk of paying a referral fee illegally to someone in another state who is not properly licensed. The National Association of Realtors urges agents to check the licensure of any out-of-state broker before they transmit a referral fee.