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The Real Estate Adviser

Agents' commissions: many fingers in the pie

Dear Steve:
How is a real estate agent's commission determined, and how much is charged? Is it figured by total cost of the house or the money made by the seller?
Jeff Free

Dear Jeff:
The framework for agent commissions can vary greatly from deal to deal and market to market, but it's generally not based on the profit from a transaction. That's because the money made by a seller in a home sale can range from nothing to tens of thousands, depending on the home's size, location and condition, the seller's equity position and selling motivation (or lack thereof), and the expenses incurred in fixing up the place, among other factors.

Unlike the sale of a vehicle at a car dealership, for example, where the product owner employs a salesperson, the home seller's agent has no direct financial stake in the "merchandise" and is simply offering up a service.

That said, a real estate commission, which is paid at closing, is usually based on the total sale price of the house, although a flat-fee or by-the-hour arrangement can be made in some cases.

Ideally, when you ask selling agents how much commission they charge, their reply should be that it's negotiable. Put on your best poker face, Jeff. Of course, there are always some top-flight agents in a given market who can command non-negotiable higher fees and do -- and they may well be worth it, especially if a quick sale is what you're seeking.

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As for the agent's percentage, there's no standard, or maximum, commission that's set by law on a home sale. It's a free market -- and a fee market. The percentages can range from 2 percent to 10 percent, but generally average between 5 and 6 percent.

Be aware that some slick agents may prioritize showing (and re-showing) a particular piece of property that happens to have an unusually high commission attached to it.

But note, too, that there's more "divvying up" in the commission game than meets the eye. Most home sellers/buyers just assume the entire commission fills the pocket of a single agent. But if there's a buyer's agent representing the person who is purchasing your house, the commission from the deal is split, usually down the middle.

If your agent is part of a large company or franchise system (usually household-name type firms that have the most "for-sale" signs posted around town), then he or she may sacrifice a percentage of the commission to "the house," in part to cover the costs of overhead and marketing and those handsome blazers they're wearing. Additionally, many real estate agencies pay commission on a sliding percentage, with the agents' commissions increasing only as they pull in more revenue to the firm. Some firms pay their agents a higher cut when both the buying and selling agent are in their own office because they keep the entire deal in-house.

As you can see, that big "cut off the top" is often cut several times.

Above all, seek out a reputable agent if you're buying or selling. And, as always in real estate, proceed with caution and be armed with market research.

Good luck.

-- Posted: Jan. 24, 2004

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See Also
Buying from an unknown property owner
Know your neighbors when subdividing land
2004 resolutions for buyers and sellers
Track prime rate/other leading rate indexes
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