The Commission: What exactly are you paying for?
There are many mysteries to first time home buyers and sellers, but understanding how commission works is a common question – after all, the average homeowner lives in their home for nine years before making a move. The real estate transaction likely happens no more than 11 times in their lives, according to the last census.
So, how does commission work, and what exactly are you paying for as a client?
Let’s say the commissions in a transaction are six percent. It is a common myth that when you purchase a home, the Realtor you work with receives all six percent of the sale value. However, there is much more to the equation.
In a real estate transaction, commission is six percent of the sales price and split evenly between the selling agent and the buying agent (three percent each). The six percent is paid by the seller (subtracted from the proceeds of the home sale at closing), but the selling agent offers three percent to the buying agent to entice a buyer to the deal and ensure a smooth as possible transaction.
That three percent is then split between the brokerage and the agent according to their commission split agreement. That is how the brokerage and the agent generate income from every deal. As an independent contractor, the agent then pays taxes (including self-employment tax) and all expenses to run their business.
A $250,000 home would generate $15,000 in commissions. Half would go to each side’s brokerage, where the $7,500 is then split again between the brokerage and the agent depending on the agent’s compensation agreement. If the agent/company agreement is 70/30, the agent receives $5,250 and then pays 15.3% self-employment tax and regular income tax. If the agent’s income tax is 22%, their total tax burden for the transaction is about $2,000. Therefore, they take home $3,250 to cover all business expenses and use as ordinary income.
What does the commission cover?
Selling real estate is a professional career with fully trained and licensed Realtors conducting business in an ethical and skilled manner. Just as you would pay a physician or lawyer to complete a surgery or manage a lawsuit, paying your Realtor for their professional skills is compensating them for something you do not have the training or skills to do on your own.
When selling a home, your Realtor will use their expertise to position and price your home in such a manner that it meets the demand of the market at that time and that place. They will often do a comparative price analysis, a competitive price line, an absorption rate study of your neighborhood, and invite their peers to attend a pricing open house to give feedback on the final price.
Your Realtor will also create a comprehensive marketing plan that includes powerful negotiation skills to obtain the highest possible price for your home. They will take professional photography, post online through social media and other forms of digital advertising, host open houses, and use proprietary Coldwell Banker big data tools to identify the ideal buyer profile.
On the buying side, your Realtor will set up your search to include your specifications – and some that are outside the lines – to help you find the perfect home for your needs. They will coordinate showings and guide you through the complicated offer process, often in multiple offer situations in a tight market. Their job is to achieve the best price with the least hassle and get to the closing table through all appraisals, inspections, negotiations, and paperwork. This is where your Realtor’s expertise negotiating repairs with the sellers, for example, really comes into play.
When you sign the final paperwork and receive the keys to your new home, you will be thankful you had the experience and expertise of a Realtor to get you there.