Randy McCreith, Principal Broker Bella Casa Real Estate Group
How Real Estate Commissions Work
Like every other product or service in the world, a ‘cost of sales’ is built into the product or service charges. It takes money to design a functional product that meets needs, to appeal to the public, promote the benefits of it, and invites the customer to buy. There are substantial costs building ‘brands’ and identity, packaging strategically, marketing goods and services widely, and advertising precisely. At the point of sale, there are significant labor costs to get the product to you in a way you like. Marketing and sales are a large part of any product or service.
Whenever you buy something, you are paying commissions, fees, and expenses that allowed that product or service to come to market, pique your interest, make your life better and more enjoyable, and allow you to accomplish your goals in life.
In one way there is no difference in real estate. The costs of providing the real estate industry infrastructure, the development of professional sales people, the marketing and advertising budget for the property, and a thousand miscellaneous expenses are attached to the product being sold; in this case, the property. Most commonly the commissions attached to homes for sale run from 4-7% but are fully negotiable by law. These costs are paid by the seller.
In another way, real estate is unique. ‘Commissions’ in our industry is a very public issue. Even though most products and services have commissions hidden in their costs, real estate commissions are public and often misunderstood.
How does the Buyer’s Representative get paid?
In most cases, the commission fees built into the cost of the property are divided 4 ways. At the closing of a sale the commission fees are first split between the listing brokerage and the selling brokerage. Commonly the split is 50/50% or 55% to the listing office and 45% to the selling office. Once fees and expenses are taken by each brokerage (the company), then a further split is dispersed to each broker.
The listing broker’s compensation pays for their marketing expenses, personal business expenses, and personal income and profit. The buyer’s agent receives his or her portion for the business expenses of finding buyers and successfully assisting them to buy the property of their choice. It is in the seller’s best interest to motivate agents to ‘sell their property’ and the motivation for agents is the same as for anyone in business: money to support one’s life and achieve one’s dreams.