Commission is a money term you need to understand. Here’s what it means.

What is a commission?

A commission is the fee paid to someone as part of the sale of a particular product. One of the best known commissions involves the fee paid to a mortgage broker or a real estate agent.

In most cases, this would be a percentage of the amount borrowed in mortgages or the selling price of real estate. The commissions paid to real estate agents tend to vary because they are negotiable.

Deeper definition

Typically, this would fall between 5 percent and 6 percent of the home’s sale price. Since this is usually the percentage of the home’s sale price, the exact amount involved will not be known until the house is sold, based on the accepted offer.

However, before the deal is completed, any commission applicable to a real estate agent ought to be negotiated as part of the contract between the seller or buyer and their agents.

The rates are usually split equally between the two agents, although this depends on the contract, which may sometimes see one agent receive more than the other. When this happens, it is up to the lawyers involved in the transaction to extract the commission and distribute it based on the terms on the contract.

However, this fee will not go directly to the real estate agents, but to their brokers. Licensed real estate agents typically work for brokers, who usually take a cut of the real estate agents’ fees to cover various costs involved in the process. This includes signage rental, advertising and office space.

Commission example

Assume the seller and the buyer, each with their agents, come to an agreement on a home’s sale, and the property is sold for $300,000. With a real estate commission of 6 percent, the commission due for this sale will be $18,000.

Some might argue that the buyer should meet the cost of the fees because he is paying for the house’s value. On the other hand, another valid argument is that the seller should pay the commission because it comes from the equity in the home. Whatever the case, it is important to note that the fee is derived from the home’s cost.

If you’re thinking of buying a house and will need a mortgage, this Bankrate calculator can help.



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