The Other Realtor is Only Charging 2.5%!
Understanding How Real Estate Commission Works
This is the text of an email sent to someone I had done a listing presentation whose partner was not in attendance. In follow up discussions the issue of commission being charged came up as the partner had a friend who was “only going to charge 2.5%. “
I just wanted to touch base with you regarding conversation last week when regarding real estate commission. Often there is some confusion in how it gets explained and understood, so I thought I would drop you this note.
There are basically 2 components to the commission a listing agent of the MLS charges and collects at closing. When added together they form the Total Commission as shown:
Listing Commission + Cooperative Compensation (selling side) = Total Commission.
- The Listing Commission is that piece that is earned by the company that lists your property.
- The Cooperative Compensation is what the listing company pays out to the brokerage that brings the buyer. (Note, if the listing company also brings the buyer, they earn both components.)
- The combination of the two is the Total Commission you will pay at closing.
In my agreements with clients, typically the Total Commission is 6%: ½ or 3% is Listing Commission and ½ or 3% is Cooperative Compensation. There may be variations to this formula.
It is important that in discussing commission with potential listing agents that ask the following:
- What is the Listing Commission? ________%
- What is the Cooperative Compensation? ________ %
- What is the Total Compensation? ________%
Generally, in the MLS that serves our area the Cooperative Compensation ranges fro 2-3%. If an agent is telling you that they are only going to charge you 2.5% it is critical that you understand if that is the Total Commission you will pay at closing and how it will be split (the split is the motivation a realtor has to present your home to a buyer and how they will be paid). As always, Commission is a negotiated rate between you and your Listing Agent.
As important, if not more so, are the following:
1. how will the Listing Agent market your property?
2. How comprehensive is it? What media is used,
3. What follow up?
4. What type of status reporting is done.
5. Are any market analytics provided on an ongoing basis?
6. In other words, what services, reporting, and communication will you receive for the commission charged?
These are just some thoughts that I hope clarify our discussion and help you be fully informed as you move forward in this process.
