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How real estate commissions work

by Cheryl Lambert

There’s a saying, “Money makes the world go ‘round.” If that’s true, it’s certainly understandable that a common question from homebuyers and sellers is: “How do real estate agents get paid?” It’s vital that real estate professionals share this information with their clients, so they can understand the basics before the process of buying or selling a home even begins. It’s even more critical in today’s highly competitive market, where inventory is extremely low and homes stay on the market for a very limited time. In July, existing single-family homes on the market in the Miami-Fort Lauderdale-West Palm Beach Metropolitan Statistical Area (MSA) spent a median of only 13 days from the listing to the contract date.

All clients need to know that real estate commissions depend on several factors. These factors can include — but aren’t limited to — market conditions, type of representation and types of services provided. Currently, we’re seeing unprecedented competition among real estate agents, especially when it comes to service and commission options.

How commissions work for sellers — what clients should know

Some real estate agents will charge a flat fee, some may use varied commission models for their selling services and others will simply charge a specific percentage of the sales price of the home once the deal is done. Commissions can be negotiated at any point throughout the transaction, including at the outset, after the results of a home inspection and after an offer has been made. There is no set rate; every sale is unique. This gives consumers many different choices, including which customer service approach, broker and commission model they prefer.

Real estate agents representing the buyer often are paid by cooperative offers of compensation from the seller’s agent as an incentive for finding a buyer. This ensures greater access for first-time, low-income and many other home buyers because it saves buyers from having to pay an out-of-pocket commission to their agent at the closing, on top of their down payment and other closing costs.

The MLS — a great tool that helps a consumer sell their home at the highest price

The Multiple Listing Service establishes a comprehensive snapshot of current listings on the market and is the vehicle where brokers offer each other compensation. MLSs also enable small business brokerages to compete with large ones by having all properties listed in one location and providing equal access to the same listings, information and pool of buyer brokers.

The MLS model in the U.S. is unique in how it shares the maximum amount of information about listings in order to expose it to the largest number of potential buyers. In other countries, the market is dominated by a small number of individual brokerages who aren’t required to publicly share that information, so you end up with a system that is fragmented and inefficient.

The U.S. real estate commission structure and MLSs work for everyone – from first-time home buyers to small business brokerages. This system has staying power because it’s grounded in consumers’ best interests with a cooperative system that prioritizes and benefits buyers and sellers alike.

Share with clients the value of a real estate agent

Buying a home is the single largest and most complex transaction most people will make in their lifetime, with so many property, neighborhood, transaction, legal and regulatory details to navigate. Therefore, serving as an expert, local real estate professional to help your customers manage the homebuying or selling process is more important than ever before. Consumers can count on a real estate practitioner to look out for their needs and provide critical, expert advice. The internet only does so much — as real estate professionals, we help guide people through complicated, data-heavy and voluminous information, details and decisions (which is what their commissions pay for). The work of a real estate agent includes everything from coordinating with lenders, managing attorney reviews and advising on zoning, to arranging appraisals, serving as a professional negotiator in a highly competitive market and advising on the latest trends in the local housing market.

Effective, ongoing communication with clients is essential

It’s near the end of the complicated home-buying process. Let’s assume all inspections have been completed, and the appraisal comes in at or above the sales price. As the real estate agent, you’ve probably spent around 30 or more days working on the transaction without getting a single payment. Then, on top of that, the median time to sale (the median number of days between the listing date and closing sales date) on an existing single-family home in the South Florida MSA was 59 days in July. Even with all this time and effort, it’s not certain the sale will go through. If it doesn’t close, those months of hard work would be rewarded with $0.

Make sure your clients understand that you, and most real estate professionals, see this risk as an incentive to make sure you’re continually working in their best interests. Not being able to rely on a bi-weekly paycheck and instead relying on results drives real estate pros to work even harder and ultimately, help more and more people achieve the dream of homeownership.

Cheryl Lambert is president of Florida Realtors®. She specializes in residential brokerage and is the broker-owner with Only Way Realty Citrus in Inverness, Fla.

Florida Realtors® serves as the voice for real estate in Florida. As the largest professional trade association in the state, it provides programs, services, continuing education, research and legislative representation to its more than 200,000 members in 51 boards/associations.

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