How are REALTORS® compensated? Is there a fee when you sell a property? Is there a fee when you buy a property? These are excellent questions, 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...
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 the right or duty to do something. The fee for a 'REALTOR® service' is usually a 'percentage' of the final selling price of a property.
A home sale consists of two sides - The 'sell' side, and the 'buy' side. Normally, there is a REALTOR® working on behalf of the Seller, and a different REALTOR® working on behalf of the Buyer. Multiple Representation occurs when a REALTOR® works on behalf of 'both' of them. To start off, the Owner of a home 'hires' 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 where other REALTORS® working with Buyers can view the details. The Seller and his REALTOR® agree on a commission percentage for this 'total service'. This percentage is then divided upon completion of a successful transaction. 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®. 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 fee charged to the Seller is not necessarily the same from REALTOR® to REALTOR®, and from the brokerages they work for. Commissions can differ according to the brokerage office selected, and the level of marketing the Seller is seeking. 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 sell, and there is 'rarely' a fee when you buy. 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 fee just as much as the Seller 'pays' the fee when a deal is struck. The fee the Buyer creates is built into the mortgage he places on the property. Most Buyers 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 locate a home, and negotiate a 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 after 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 this time, unless there was a mutual agreement to hold a retainer fee of some kind. When a REALTOR® helps a Seller, he incurs the costs of 'marketing' the property from his own pocket, and provides his personal time and effort in hopes of making a sale. If a REALTOR® helps a Buyer, he incurs the costs of 'locating' a property from his own pocket, and 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 transaction, and also 'good faith' to their agency relationship with their REALTOR®.