"What is your commission fee?" is a common question from Sellers. Buyers wonder if there is a cost for utilizing our service. These are excellent thoughts, and we feel it's of vital importance to have a clear understanding of how fees work and how it affects you. The following may shed some light...
How are REALTORS® compensated? Is there a fee if you are selling a property? Is there a fee if you are buying a property?
Most of today's workforce is compensated either by an hourly wage, or perhaps a weekly salary. REALTORS® however, are compensated with commission fees. A commission is a written authority giving a person (e.g. REALTOR®) the right or duty to do something (e.g. sell a home). The fee for this service is usually a 'percentage' of the final selling price for the property.
There are two sides to the sale of a home. The 'selling' side, and the 'buying' side. Normally, there is a REALTOR® who works on behalf of the Seller, and a different REALTOR® who works on behalf of the Buyer. (Sometimes a REALTOR® works on behalf of 'both' of them. This is known as multiple representation). The Owner of the home will 'hire' a REALTOR® to market the property, and to represent him in the negotiations of the future deal. Part of the marketing is to place the home on the local MLS® System. By doing this, the Seller's home will be noticed by other REALTORS® working with Buyers. The Seller and his REALTOR® negotiate a commission percentage for this 'total service'. This percentage is then divided. A share will be given to the Seller's Representative, and a share will be given to the Buyer's Representative. At this point, it would seem the responsibility lies with the Owner of the property to compensate both REALTORS® in the transaction. This is probably true in 99% of the deals that are written. (However, it is also possible for the Buyer to 'hire' a REALTOR® and compensate them directly). The commission charged to the Seller is not necessarily the same percentage from REALTOR® to REALTOR®, and from the brokerages they work for. Commissions can, and will, differ according to the brokerage office selected, and the level of marketing the Seller is looking for. Also, the division of this commission between the parties is not necessarily equal.
To answer the opening questions; Yes, there is a fee when you are selling, and there is 'rarely' a fee when you are buying. This may pose another question however... Why is it done this way? Many real estate experts will say, "If there is no Buyer for the property then there is no deal, and if there is no deal then there is no commission fee to pay." So, in effect, the Buyer 'creates' the commission fee just as much as the Seller is 'paying' the commission fee when a deal is struck. The fee the Buyer ends up creating is built into the mortgage he places on the property. Most Buyers, when considering home ownership, will save for a downpayment and also the required closing costs. Few have enough money left over to compensate their REALTOR® as well. So, the Buyer uses the services of a REALTOR® to help locate a home and negotiate the deal, who will be compensated from the shared commission percentage from the Seller. After placing the mortgage on the home, and paying the agreed upon price, then both the Buyer and the Seller will (effectively) end up compensating their respective REALTORS®, when the commission fee is deducted.
REALTORS® are compensated on the closing date (the day the Buyer pays for the home and receives the deed of ownership from the Seller). However, if a deal is never made with the client, then there is no compensation. Most REALTORS® actually work for 'free' until a deal is made, unless there was a mutual agreement to take a retainer fee of some kind. When a REALTOR® helps a Seller, he will incur the costs of 'marketing' the property, from his own pocket, and he provides his personal time and effort in hopes of making a sale. If a REALTOR® helps a Buyer, he will incur the costs of 'locating' a property, from his own pocket, and he provides his personal time and effort in hopes of making a sale. Because of this, most REALTORS® like to provide concrete evaluations for Sellers to arrive at sound listing prices, and also why REALTORS® like to have signed Buyer contracts when providing services to Buyers. Sellers who properly price their home at the outset, and Buyers who sign an agency contract, are showing a 'serious nature' to their future purchase or sale, and also 'good faith' to their agency relationship with their REALTOR®.