If you’re looking at earning your real estate license and starting a career in real estate, you’re probably wondering just how commissions for real estate agents work. Though the commission-based real estate transactions have been the norm for decades, there continue to be misconceptions surrounding this system of compensation. Read on for an explanation of the most common components of real estate commission.
The relationship between agent and broker
Commission payments go to the broker who manages the real estate brokerage where the agent works. The agreement drawn up between the agent and the broker is what determines the commission split. The commission split will often vary from agent to agent. For example, sometimes new agents will earn a smaller percentage of the commission than experienced agents who sell more homes or more expensive properties.
Real estate commissions are often shared among many people. In a typical real estate transaction, the commission may be split among:
- Buyer’s agent – the agent who represents the buyer
- Buyer’s agent’s broker – the broker for whom the buyer’s agent works
- Listing agent – the agent who took the listing from a seller
- Listing broker – the broker for whom the listing agent works
The commission payment
A real estate professional’s commission is taken out of the sale proceeds, and it’s generally the seller who pays the commission. Therefore, unless the buyer and seller negotiate a split, the commission payment is provided by the seller. However, many sellers factor the commission into the asking price, so it can be argued that the buyer pays at least some of the commission as well, particularly if there is a higher asking price.
Generally, commissions for real estate agents are only received when a transaction is settled. However, there are circumstances in which the seller has to pay the broker’s commission regardless of whether the transaction is closed. For example, if the broker has a buyer who is prepared to make an offer on a property, the broker may be entitled to a commission if the seller:
- Refuses to sell because they have changed their mind
- Commits fraud in the transaction or has a title containing uncorrected defects
- Cannot deliver possession to the buyer within a reasonable time
- Has mutually agreed with the buyer to cancel their transaction
In some cases, real estate agents are employed and salaried by their broker. However, it’s far more common to be paid a percentage of the commission. That’s why it’s so important to understand commissions for real estate agents, how they work, and how they will affect your annual earnings.
More resources for understanding commissions for real estate agents
Still have questions regarding commissions for real estate agents, or other topics related to launching your real estate career? Visit the Colibri Real Estate Career Hub. Plus, browse our blog for more tips and tools designed specifically for new agents.
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