So, you’ve decided to buy a home—or at least to start looking for the deal of the century. With bargain home prices and mortgage rates at all-time lows, it’s certainly a great time to snap up something affordable. Unless you buy a FSBO, you’ll probably end up working with a real estate salesperson. FSBO means “for sale by owner” in the real estate world and is pronounced “fizz-bo”.
When you’re a buyer, working with a real estate pro gives you access to his or her expert knowledge—and the best part is that it’s usually free! A real estate pro will guide you through a sale at no charge because their commission typically comes from the seller’s pocket. They can give you invaluable information about homes for sale, comparable sales, neighborhoods, real estate contracts, negotiation, closing costs, loans, and so on. They can help you find something great and make sure that your deal gets to the closing table as quickly as possible.
What Is a Real Estate Salesperson?
Let’s start with some basics so you’re familiar with the players in the real estate industry and how they’re compensated. You’ll see and hear these words used to describe a real estate salesperson:
- Real estate associate
- Real estate agent
- Listing agent
- Buyer’s agent
All these terms refer to someone who’s passed a series of education and tests such as a classroom course, a pre-licensing exam, and a state real estate salesperson licensing exam. Agents must be proficient in a broad range of real estate topics including law, contracts, ethics, escrow accounting, agency rules, and advertising.
Salespeople who opt to become a member of the National Association of Realtors (NAR) are allowed to designate themselves as a Realtor®. A listing agent has an agreement to sell a property for a commission and they represent the seller’s interest. A salesperson who represents the interests of a buyer and is compensated by them, is known as a buyer’s agent. There are also transactional agents who work with both buyers and sellers but legally represent neither party. However, the vast majority of real estate professionals work with both buyers and sellers, but represent the seller because that’s who generally pays the commission.
What Is a Real Estate Broker?
Real estate salespeople have to work under the guidance of a broker and are usually a commissioned independent contractor. More about commission rates in a moment. Salespeople can’t put up their own shingle until they’ve been in the business for a certain period of time and pass their state’s real estate broker licensing exam. The broker of record can be the business owner or another person hired to manage the office, for instance. The broker contracts with clients, manages the office escrow fund, and pays a salesperson. They give salespeople certain benefits, such as office space to meet with clients, use of office equipment, an advertising allowance, and lots of coffee. Brokers might go by these various names:
- Realtor (if they’re a member of NAR)
- Broker agent
- Real estate broker
- Listing broker
- Buyer’s broker
How are Real Estate Professionals Paid?
To demonstrate how real estate professionals get paid, I’ll take you through a typical example. Let’s say you’re selling a home and put a FSBO sign in the yard. You don’t get any bites. You realize that you don’t have time to market your home properly or to meet and greet potential buyers during the week. You decide to use the expert advice and services of a real estate pro.
You meet with an agent named Susie and sign a listing contract. A listing contract is an agreement between a seller and the broker office that outlines what they’re going to do to earn a commission. You agree to pay Susie’s office, Happy Go Lucky Realty a 6% commission if your home is sold before the contract’s expiration date. Susie is now your real estate agent and will handle all aspects of marketing your property.
A week later you get a call from Susie and she says that an agent named David from Get-Er-Done Realty would like to show your home to an interested party on Saturday. Lo and behold, on Saturday afternoon Susie calls to tell you that she received a purchase offer from David’s client. You meet with Susie, review the offer, and counter it at a slightly higher price. The buyer accepts your counter-offer for an even $300,000.
Since you agreed to pay a 6% commission, you’ll owe $18,000 ($300,000 x .06) if the deal closes. Here’s what happens with your commission money: It gets split 50-50 between the two broker offices. Happy Go Lucky Realty gets 50% or $9,000 and Get-Er-Done Realty gets 50% or $9,000. Now, each of the brokers at those offices must pay Susie and David a percentage of their office commission.
A typical salesperson might be on a 50-50 split with their broker. However, top-producing salespeople might have a more favorable split, such as 60-40. Assuming that’s the case for Susie, she’d receive 60% of $9,000 or $5,400. Her broker at Happy Go Lucky Realty would keep the remaining 40%, or $3,600. David is a new agent on a less generous 50-50 split with his broker. Therefore David takes a 50% commission of $4,500 and the Get-Er-Done Realty broker keeps the remaining $4,500.
How to Negotiate a Real Estate Purchase
Many people don’t realize that a real estate sales commission is negotiable. Even though the seller may have committed to pay 6%, brokers may agree to lower their cut—especially if that’s what it takes to rescuing a dying deal.
Here’s an example: You want to buy a home for $350,000, but not a penny more. Your real estate salesperson has a perfect house for you, but it’s listed for $375,000. You offer $350,000 and the seller counters at $355,000. If the seller has to pay a 6% commission, you may be able to negotiate that it be lowered to 4.5%, saving the seller 1.5%, or $5,325. If the brokers agree to reduce their commission, it’s likely that the seller would pass the savings on to you. If they reduce the price by $5,325, it would meet your price criteria at $349,675 ($355,000 – $5,325).
I’m not suggesting that real estate pros aren’t worth their commission. I was in the business early in my career, and can tell you that most agents work seven days a week and juggle a thousand tasks a day. But when given the choice, many agents would rather have a reduced commission, than no commission. It’s just one of many negotiating tricks that you can keep up your sleeve for getting the most real estate for your money. Another tip is to request that the seller pay your closing costs, so you can keep more of your cash in the bank.
(Photo by thinkpanama)