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FAQs on Fees and Commissions

mark pennIn this mysterious world of how things happen in real estate, there are a few subjects that sometimes make us, clients and agents alike, squirm. One of those subjects is that of fees and commissions to the real estate brokers, and how we actually get paid.

There have been various attempts at new compensation models along the way but, here in California, the old standard of agents getting paid if and when an escrow closes is still the norm. Agents can spend months, and even years, showing properties to buyers and never see any paycheck if they don’t successfully find and purchase a property. That generally is not a good business model, but it happens.

It’s also true that, whether I represent the buyer or the seller, the check that I earn comes out of the seller’s proceeds.  Commissions are negotiated between sellers and their agents, and at the same time the parties also decide on what percentage of that commission will be shared with the buyers’ agent and their company. Typically that’s half of the total commission, but it’s not set in stone until it’s agreed upon between the seller and his or her agent, and then is published to the general agent community via the local MLS (Multiple Listing Service).

So how much commission should a seller agree to? First of all, as previously indicated, it is a negotiated amount; a law does not control it. Most listing agents will ask for a total commission of something around 6% of the final sales price.  Often, it ends up being lower, perhaps 5%, and sometimes it actually ends up being higher, depending on what an agent is being asked to do.

mark

This seems like a lot of money, though, doesn’t it? Well, it starts off being that way. Using the December 2013 median sales price of single-family homes in Alameda County (as reported by the California Association of Realtors), for example, the total commission (at 6%) would be a little over $36,000. Let’s split that 50/50 between the listing brokerage and the selling brokerage – we’re now at $18,000 per “side.”

From that we deduct the internal fees and costs that brokerages charge their agents (new agents may split their commissions with their company by as much as 50%).  Then we subtract some of the more nebulous, though always present, costs of doing business – taxes, marketing, equipment and technology, insurance, and so forth. Also keep in mind that most escrows take around 30 days, but that does not include the amount of time that agents spend with clients before the paperwork for an escrow even begins.

Do agents “earn” their money? Most of us work very hard, and you bet we earn it. My clients know that I work nearly 24/7 for them, and that I will protect their interests like the queen’s jewels. I’ve had transactions in my career that have ended up netting me about 5 cents per hour, if I took my net commission and divided it by the time I put into the matter.

Is the current fee and commission process the best model out there? Perhaps, but either way, it remains the tradition that is most followed. The majority of us won’t get rich from this business, but if we’re willing to work hard for our clients and do the right thing, we’ll probably manage a decent living, capped off by helping people with some of the most important milestones in their lives. That makes it all worthwhile.

A Bay Area native, Mark Penn has been a REALTOR® with Coldwell Banker since 2004. He is also active in animal welfare, and is a former educator, facilitator, and air traffic controller. Mark can be reached at mark@MyHomeInSonoma.com.