Whether you are a buyer or a seller, it is important to understand how your real estate agent is getting paid.  This is actually a difficult topic to tackle because there are more and more variances to realtor commission structures. I will do my best to explain how the most common structure works and other considerations when negotiating lower commissions.

Selling / Listing Realtor Commission

With the most common commission structure, a realtor charges a percentage of the sale price as the cost of their services for selling your property.  For example, 7% of the first $100,000 and 3% of the balance.  On a $350,000 home the cost is $17,500.  This is typically split with the buyer's realtor. The listing realtor gets $8,750 and the buyer's realtor gets paid $8,750.

For the listing realtor, the fee has to cover all of the realtor's costs to list your property: professional photographs, advertising and promotions, staging, brokerage fees (these can be as much as 50% of their commission on any sale or purchase), their time, and other general costs of doing business (gas, errors and omissions insurance, office supplies, office rental, etc.).

Buyer's Realtor Commission

As I mentioned above, a buyer's realtor is generally paid by the seller's realtor as part of the listing commissions they pay.  In most cases, a buyer's realtor is free to the buyer BUT if the seller chooses a low commission structure or no commission structure, the buyer may need to pay for some or all of their services directly.

This fee is paying the buyer's realtor for their vehicle and gas costs, negotiation services, research (property, market and neighborhood), brokerage fees, their time, and other general business costs (gas, errors and omissions insurance, office supplies, office rental, etc.).

Discount Commission - Understand The Impact

Over the years, there have been many new commission structures from discount brokerages. These range from listing commissions that include no buyer's agent fee or a greatly reduced amount (ex. 2% of the sale price).  If you choose to sell using one of these structures or negotiate a lower fee with your realtor, it is important for you to understand some of the potential unintended consequences:

• De-motivating Other Realtors - With the most common commission structure, any other realtor has as much motivation to sell your property as your own agent because the pay is equivalent.  When you reduce the realtor commissions that you are paying, you are decreasing the commissions that the buyer's realtor is paid and de-motivating them to sell your property.

• Creating A Buyer Barrier -  Buyers sign agreements with realtors at the start of their relationship to determine what they will pay them, so that they are paid for the time and expenses they put into their search.  If the buyer's realtor is not paid through proceeds of the sale by the seller, the buyer has to pay those costs.  Many buyers will not be willing or are simply financially unable to handle those additional costs. And while they may still write an offer requesting the seller pay, they may also just move on to the next property that does not have this complication.

• Less Spent On Your Listing - If you reduce what your realtor will get paid when you sell, you are giving them less budget to spend on listing your property.  This could mean smartphone pictures instead of professional pictures or videos, no social media advertising budget, no staging. These are all things that improve your chance of selling faster and/or at a higher price.

• Buyer Access To View Your Property - Most full-service realtors would have a key lockbox on your front door to allow other realtors access to view the property with their clients. If you do not have a lockbox and need to be home for a buyer to see a property, it can significantly limit the times available for them to view.  If it is not convenient for the buyer, or they do not feel comfortable viewing the property with the current owner guiding them, they may just move on to the next property.

• Experience and Expertise - service and experience should also be a factor in your decision on who to hire. Is the lower commission still getting you the service and expertise you want?

These lower commission structures can still be successful. People use these structures all the time to sell and buy.  If your property is in a high demand neighborhood with little listing competition, using a discount commission may not impact you. But as we adjust to buyers having more power with higher inventory and more listing competition, it is important to understand how your realtor commission structure can improve or impede your ability to sell.

Before hiring a listing realtor, understand how they are paid, how your buyer's realtor will be paid, and what services and experience you are getting in return for those fees.