If you're going to hire a real estate broker to sell your real property, you need to understand how the broker gets paid. Traditionally, the broker receives a commission from the seller when the sale is completed.
The amount of the commission is set by the listing broker and may be negotiated between the seller and the listing broker. The terms for payment of the sales commission need to be included in the real estate brokerage contract or listing agreement.
How Is the Listing Real Estate Broker's Commissions Set?
The listing broker is the real estate agent who represents the seller in marketing and selling the home or property. Most people selling their home hire a listing broker for this (though it's possible to sell a home "by owner").
Although in the past, real estate associations set mandatory commission rate schedules for their members, these have been banned. Commissions are now set by the individual broker, based on a standard rate, with some negotiation possible by the seller. The seller and listing broker agree on the type of listing, the rate of the commission, and the conditions which have to be met for the commission to be paid. This information is then included in the brokerage or listing agreement.
For example, the seller and the listing broker may agree that the listing broker has an exclusive right to sell the property and that the broker will receive 5% of the sale price of the property when the property is sold to anyone. Or, the broker may be able to claim a commission if a ready, able, and willing buyer presents the seller with an enforceable offer that meets the terms authorized by the listing, even if the seller doesn't accept the offer. Look carefully at the listing agreement you sign with the listing agent to make sure he or she can't collect a commission in a situation that you think its undeserved.
What the Listing Broker Does to Earn the Commission
Once you've listed the property with a real estate agency or with a multiple listing service (MLS), the listing broker takes various measure in order to sell it, as enumerated in the listing agreement.
This often involves holding multiple meetings with the seller, assisting with disclosure and other paperwork, making suggestions for fixing up and decorating the house, hiring an artist and photographer to create a high-quality image for use in advertising, creating ads for placement online and in print, creating an informational sheet to present to visiting prospective buyers, showing the house to prospective buyers (individually and at open houses), and more.
In order to legally recover a brokerage commission, the broker must, in most cases:
- have signed a brokerage or listing agreement with the home seller
- perform the duties of a real estate broker
- meet the conditions of the brokerage agreement
- be licensed as a real estate broker, and
- be the predominant force in bringing about the sale.
Many states, such as Pennsylvania and Kentucky, require real estate brokers to obtain written brokerage contracts as a prerequisite to collecting a commission.
Brokers' Commissions When More Than One Is Involved in the Transaction
Often, a broker other than the listing broker brings prospective buyers to the property. That broker may be known as a buyer's agent (if the buyers separately contracted with the agent to represent them) or a selling broker (who may be affiliated with the listing broker).
The listing broker usually offers to split the commission evenly with the buyer's agent or selling broker, though the exact amount may vary.
A selling broker who is working with the listing broker and shows the property to prospective buyers must explain (disclose) the nature of this relationship and that he or she will receive part of the listing broker's commission as payment for services, and also obtain the buyers' consent to this arrangement.
The real estate commission typically is split 50-50 with the second broker. However, before you imagine that your broker is getting rich, note that only about 10% to 30% goes directly to the listing broker; the remainder goes to the listing broker's firm.
What to Do About Disputes Over Commissions
If you and your listing broker get into a disagreement over the amount of the commission or whether the broker really earned it, look first to the brokerage or listing agreement. It may specify that disputes are to be resolved using alternative dispute resolution methods such as arbitration or mediation, or by having the dispute decided in a lawsuit in small claims court or civil court.
If the brokerage or listing agreement does not provide a resolution method, the parties can agree to arbitration or mediation or the wronged party may file a lawsuit.
If you have any questions or concerns about paying a real estate broker's commission, you may want to consult a real estate attorney.
Questions for Your Attorney
- How are commissions for real estate brokers set in our state? What are the factors in setting a commission? Can I carve out exceptions to the broker's right to a commission, for example, if I produce a buyer while my house is listed?
- Will provisions for the payment of the buyer's agent's commission be addressed in my brokerage agreement with the listing broker, or is that matter between the brokers? Is the buyer's broker paid directly or at closing, or do I rely on my listing broker to see that he or she gets paid?
- What must a real estate broker do in order to obtain a commission, and at what point in the sales process has a broker earned the commission? Do I still owe the commission if the sale falls through?