Sharing My Knowledge of How Commissions Actually Work

I reveal some insider secrets about how commissions work nowadays.

Here’s what your real estate agent doesn't want you to know about real estate: commissions. I recently had a conversation with a seller about commissions. We discussed who paid them and who got the benefit. In light of some recent headlines about the Department of Justice and the real estate community as a whole, I thought I would share with you how real estate commissions really work. 

Let's first take a look at the settlement sheet. It's a detailed accounting of every penny in the real estate transaction. The years may look different, but this will be a good example. Let's pretend we have a purchase price of $200,000. The seller may have agreed to pay their seller's brokerage $6,000 in commission, but only agreed to pay the buyer’s brokerage $5,000 in commission. This is a very real possibility.

Note that the total commission does not have to be split equally between the buyer's brokerage and the selling brokerage. Who gets paid how much is entirely the result of negotiations between the listing brokerage and the seller. In an extreme example, the seller could decide that they're not going to pay the buyer’s brokerage fees at all. There is a danger to the seller here if the buyer is forced to directly incur the extra expense of the buyer's agent. It may result in either a lower offer price or no offer at all.

"I'll tell you the secrets that most realtors won't tell you."

Now let's take a look and see what happens if the buyer buys a property that's off-market and not listed for sale with another brokerage. The buyer could choose to pay the brokerage fees as an included expense and just take that money out of pocket. The buyer may choose to reduce the purchase price to offset the cost of the brokerage fees and the seller might accept the lower offer if they know they don't have to pay the commissions. There are some benefits to both buyer and seller here. Some of the closing costs like transfer taxes and title insurance are tied directly to the purchase price so a lower purchase price may result in lower overall closing costs.

The third scenario would be for the buyer to roll some or all of the closing costs into the mortgage using a seller credit or seller assist. This reduces the net amount owed to the seller, but like I said, it rolls the cost into the mortgage and reduces the buyer’s out-of-pocket expenses.

I certainly hope that you got some valuable information about how real estate commissions really work. There are a lot of different options and how they can be structured. The old model of 6% is pretty well gone. These days, commissions are not fixed by any rule or regulation. They're entirely negotiable just like everything else in real estate.

If you have any questions, reach out to me. I'll be happy to answer them, and I look forward to hearing from you.