Who Pays the Real Estate Commission?
When it comes to buying or selling a home, the real estate agent’s commission is one of the many things that loom over the process. Surprisingly, many sellers (and especially first-time buyers) often aren’t aware of the details regarding a common aspect of a property sale or the differences that come up with certain types of sales. Agent commissions, with a few exceptions, are something that every seller or buyer will have to manage at some point, and they’re a necessary part of the process.
Occasionally we’ll hear sellers, in particular, (and sometimes investors!) complain that real estate commissions are too high, or that the service agents deliver isn’t worth the cost of the fees. The fact is that if you must view them this way, agents and their commissions are a necessary evil and an integral component of the process of a sale. While you’ll certainly come across both good and bad agents, it’s tough to argue that they’re altogether useless or unnecessary. For example, if you’re a seller, suppose your home sold on the first day it was listed. We realize this is an extreme example, but it would effectively mean your agent made a hefty commission for a fairly small amount of work – mostly taking photos, listing the home, discussing pricing with the seller and answering his or her questions. On the flip side, a property can also take weeks or months to sell. For the your agent, this can add up to untold hours spent marketing the property, holding open houses, and taking phone calls and staying on top of other listings and sales in the neighborhood. That agent is also responsible for the long-term cost of keeping the house on the market through things like signage and advertising fees. If you look at it this way, you might not want risk paying an agent by the hour, for obvious reasons.
The same goes for buyers in that some may find a house relatively quickly while others will look at dozens of homes before deciding on one. If buyers had to pay an agent by the hour, they would have the disadvantage of being rushed. On the other hand, if they were to pay the agent a flat fee, this could put the real estate agent in a position to hurry the process along more quickly. In this way, the commission system is designed to act as a sort of compromise between buyer, the seller, and their respective agents.
But wait, who actually pays these fees? This is where things get a little murky, at least in terms of semantics. If we assume that both the buyer and seller have an agent, it could reasonably be posited that both the seller and the buyer pay it, mostly because the fee comes from the proceeds of the sale and is often (but not always) split evenly between the two agents. You could either argue that the buyer is paying the fee because he or she is paying the cost of the house, or that the seller is paying it because the fee comes out of the home’s equity. Either way, it’s important to note that this fee comes out of the cost of the home and not added to the sale price. To that end, it’s a little easier to think of the commission as the seller’s burden if the they own the house outright, because they’ll emerge from the sale with the money from the price of the home minus the commission’s amount.
Still, that example is one of the more common ones, and a situation in which most homebuyers and sellers are likely to find themselves. There are, however, other circumstances and types of sales where things are likely to be quite different. For example, if you’re buying from a state or county auction at the courthouse, there’s obviously no commission in those cases. Such sales are usually limited to wholesalers, brokers, or investors who have the capital to bid on and purchase the property outright (or at least, if they’ve secured financing prior to bidding through a lender other than a traditional one).
Speaking of investors, they’re more likely to be able to negotiate a lower commission than most sellers – and buyers, for that matter – because investors thrive on quick buys and quick sales. Obviously, that isn’t the case if the investor is looking to buy and hold the property, renting it out for several years while waiting on the value to appreciate. That said, if you’re an investor and selling a fix-and-flip, be sure to use that as leverage. Most agents will be willing to lower their commission because they know that you as an investor aren’t a traditional homeowner; you are a homeowner, in a sense, but you’re also not hustling to buy a new home to live in while selling your old one and your sale is not contingent on the purchase of a new property (for more on this delicate balance, by the way, you can check out this article on the subject). This means the agent has not only a little more breathing room, but also a slightly easier job in helping you move the property. You also have the advantage of forcing a little extra competition among agents, since most are willing to take a job like this one and if one won’t do it, there are plenty who will.
HUD homes are another special case. HUD homes are properties with FHA-insured (Federal Housing Administration) mortgages that have repossessed by the Department of Housing and Urban Development due to foreclosure. In cases like that, HUD becomes the owner of the property and then sells it on the market to recoup its losses on the defaulted loan. This provides an advantage for investors in particular because not only is the home usually sold below its usual value in attempt to move it quickly, but the owner, HUD, takes care of any commissions as well. Even though it’s similar to the usual way of things in which the seller pays the commission, there often isn’t an agent on the seller’s side, meaning that if you as a buyer/investor have an agent, HUD still pays their commission.
For more on real estate agents the intricacies of sales, you can also check out our most recent article on the subject. It’s a complex web out there, but be sure to check back with us for more information, tips, and advice on real estate, and you can sign up for our email list for even more exclusive info and networking opportunities.
– Get It Right Solutions