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Who Pays and How Do Real Estate Commissions Work? 

It's a bit more complicated that one would think

All too often there is confusion on how real estate brokers get paid and who pays them. Many buyers and sellers know that real estate is a commission-based profession, yet all too often there is confusion about how and how much real estate brokers are compensated.

The vast majority of real estate brokers work for a commission in the form of a percentage of the final sales price after the transaction has closed. Only when a transaction successfully closes do any of the real estate brokers involved in the transaction get paid. There are situations where a broker may work on a flat fee, but that is not usually the case.

KALHH/PIXABAY
  • kalhh/Pixabay

So, who pays? The short answer is that the seller pays. When a broker enters into a listing agreement with a seller, the commission percentage is outlined in that listing agreement. Typical industry standard ranges from 5-6% of the sales price, less any concessions or credits provided to the buyer by the seller. For example, a property closes for a sale price of $250,000 and the seller provided the buyer with a $5,000 credit toward the buyer's closing costs. If the commission is calculated on a 6% fee, the total commission would be based on $245,000, totaling $14,700. This commission will be paid by the seller, as agreed to in the initial listing agreement. This fee is most often deducted from the seller's sale proceeds and disbursed by a neutral third-party escrow company.

One might say that is a lot of money to pay just one broker, and here is where many people get confused about commission percentages and disbursement. That $14,700 does not just go to the listing broker. That commission is split with the cooperating broker. A cooperating broker in real estate is defined as: a broker who is a non-listing third party broker who finds a buyer for the property. Essentially, they are the buyer's broker/selling broker. Now we have two brokers, sharing the seller paid 6% commission, with each grossing $7,350. Now comes another step in the commission sharing.

In the state of Oregon, there are laws specifying who can receive a commission and how it can be dispersed. For the sake of example and ease in understanding commissions, we will forgo detailing the legal regulations and simply refer to this next step as a brokerage split. The vast majority of real estate brokers are affiliated with a real estate firm/office/brokerage. When the listing or selling broker's commissioned fee is distributed, it is, by Oregon state law, paid directly to the brokerage, not directly to the listing or selling broker. It is at this point where the next step in commission sharing takes place. When a broker affiliates with a brokerage, a commission split is established between the firm and the broker. These splits can vary for a variety of reasons. A 70/30 split brokerage will serve for this example. The listing and selling broker's $7,350 gross commission is then shared again on a 70/30 split, leaving the brokers with a commission of $5,145. At this point the brokers are paid the $5,145 and are responsible for payment of taxes, transaction fees, insurance, licensing, MLS, marketing costs and a host of other overhead expenditures from that one commission.

As the vast majority of real estate professionals will tell you, the general public is not aware of who pays the commission at the close of a sale and how commissions are shared with brokers and brokerages. The above example is a glimpse of where that seller-paid commission goes at the completion of a successful sale.

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