How Do Real Estate Commissions Work?

I get this question all the time when I take a listing.

When we take a listing contract, in that contract it outlines what are the Real Estate Commissions and the conditions? What are you paying to sell your house?

I’d like to clarify this because a lot of people think that whatever is in the contract is only for listing agent and then in addition to that they have to pay the buyer’s agent.

It kind of works like this.  This is a really super simple version of it (See Video) but this is your house and you’re selling it for $500,000 and let’s say that in the listing contract, you negotiate a 6% commission.

So what would end up happening is that when the house is sold, the commission is usually split in half and the buying brokerage gets 3% or half of the negotiated commission.  And whatever they do with it is up to them.  It’s really important that you are making sure you are paying a fair commission to the buyer’s brokerage.  I address that in another video.

But on the listing side here is what the listing brokerage going to get.  So when you’re sitting down with an agent, that agent is very likely going to be working with a brokerage.

That brokerage often times takes a cut.  So in this example, they’ll take their dollar or 1% (see video) out of the equations.  The agent has expenses, time, money and other things invested in getting your home sold so a lot of that money goes away.  So the agent ends up with maybe 1%.

I’m just trying to share this with you to try to help you have a perspective on what the agents are getting paid when they get a commission.  They’re not keeping all the commissions.

So even after they get their portion, here comes good ol’ Uncle Sam who will take away a chunk of that for taxes and now they get to play catch up on their bills.

So that’s kind of how it works.  There are no additional commissions for the buyers brokerage, only for the listing brokerage makes the arrangement and through a cooperative arrangement, the commissions are split.

Something to understand about the real estate industry is that it is a really unique sales industry.

We are in a cooperative – slash – competitive industry.  Let me explain.

If I worked for example for a copier company as a sales person and I went to big company XYZ and I’m working for copier company number one, and then sitting next to me is copier company number two.

Only one of us is getting the deal.  Only one of us is getting paid because we’re going to make a sale.  It’s either me or him and that’s a purely competitive environment.

In that situation, we’re sitting there thinking, “boy, how can I make myself stand out better, stronger, more valuable than this person sitting next to me?”  Only one person wins.

In real estate it’s a little bit different though.  Because yes, while every agent is competing to get their own clients.  We still have to work with the competition.

Let’s say I take a listing, and I put it in the multiple listing service.

The reason why we offer a portion of the commission to the buyer’s agent is because statistically, a buyer’s agent is going to bring the buyer to your house.

If you understand what the job of the listing agent is, it makes a whole lot more sense and the job of the listing agent is to market your house.

Just because they have a listing doesn’t mean that they are going to bring the buyer. As a matter of fact it’s going to be very infrequent that the listing agent actually produces the buyer as well.

Just do some numbers with me:

In our local association, just our local association, the one that I belong to and there happens to be three different ones in Orange County California, there’s somewhere in the neighborhood of I think about 16,000 active agents.

So now me as an agent, let’s say I’m working with 20 prospective buyers at any given time.  The odds of one of those 20 buyers being the one interested in your house is pretty darn slim.

On the other hand if we assume that 16,000 active real estate agents had 20 of their own buyers, and we offered to pay them if they bring one of their buyers we’ll share that commission with them, then that’s how you kind of make use of those big numbers.  Because 20 times 16,000 is 320,000.

So now I’m exposing to 320,000 potential buyers versus just the 20 that I have.  Not very effective right?

I just want you to understand about how commissions work because I get questions about that all the time.

If you want to completely eliminate the entire listing side commission, feel free to give me a call.  I can show you how we waive that commission for our seller’s who are buying a new house.

You can also visit http://SellOurHouseFree.com