Before I became a real estate broker, I thought I knew how real estate brokers were paid. Listing brokers would simply split the commission with the buyer’s broker, and everyone took their money at the closing and lived happily ever after. And if there was no buyer’s broker, I figured the owner of the property would save the buyer’s broker commission.
Well, I clearly had no idea how it all worked. Here are some of the common misconceptions about real estate brokerage commissions, and the truth about how real estate brokerage commissions work.
1. Real Estate Brokerage commissions are way too high!
Actually I started RealDirect because of this myth, but eventually learned this was not, in fact, true. What I did discover, however, is that real estate brokerage commissions are almost always wrong. For every deal that closes in 2 weeks from when the property was listed, there are others that are on the market for a year and then get de-listed, only to be given to another brokerage. In the first case, the broker probably received a windfall for 2 weeks’ worth of work. But in the second case, a year’s worth of work was provided for free. So in all likelihood, any given deal is probably paying too much or too little to the broker.
2. Real Estate Agents can cut their commission to get a deal done.
While some agents will cut their commissions to get a deal done, not all can. Depending on the price of the home, the number of agents on the deal and the commission offered, it may or may not make sense to reduce the commission. And some brokerages have a blanket prohibition on this.
3. Real Estate Agent commissions are fixed by the brokerage.
Rarely do brokerages have fixed commissions – but they will often have minimums that they will take, and those are often tied to gross commission revenue rather than percentages per deal.
4. All Real Estate Brokerage commissions are 6%.
Commissions vary by region and company with some higher than 6% in low price areas with slow moving inventory, and lower in others.
5. Real Estate agents split their commissions evenly with their brokerage.
Commission splits vary dramatically between brokerages and even withing brokerages. There are 100% commission brokerages, where agents pay a fixed transaction fee per deal, and a monthly “desk fee”, and more traditional brokerages where the split is determined by how much business a broker does – i.e. the more business they bring in, the higher the split.
6. Real Estate Agents split the commission evenly between buyer’s and seller’s agent.
Listing agents offer what appears to be a 50:50 split, but it doesn’t have to be. Many listing agents are willing to pay more to buyer’s agents than they are getting for their listing.
7. If I don’t use an agent, the listing broker will make more money.
In many cases, listing brokers will keep the entire commission if the buyer comes without a broker. But some brokerages, like RealDirect, take a fixed commission or fee regardless of whether there is a buyer’s broker – so the seller gets the benefit of a direct deal, and not the broker.
8. If I don’t use an agent, the owner will save money, making my offer better to them.
While this is true for RealDirect, and for FSBO sellers, in most situations, as we have said above, the owner does not benefit from direct deals. So using a service like RealDirect for Buyers is the best way for buyers to gain an advantage on a purchase.