When it comes to buying and selling real estate, there are always various costs involved. Depending on your role (buyer or seller,) you’ll have certain closing costs and fees, and may also have costs for things like inspections. One cost a seller in California will always see on their closing sheet is agent commissions. But do you really understand what commissions cover, how they’re paid and how commission fees are achieved? Most people don’t, so let’s take a deep dive into commissions.
What Are Real Estate Commissions in California?
The standard commission in the State of California for real estate transactions is 6%. However, by law this commission rate is negotiable. Traditionally, the listing agent will split this commission with the buyer’s agent and they will each get 50%. So on a 6% commission listing, each agent would get 3%.
There are many brokerages who openly advertise having extremely low commissions - these are considered discount brokers. When it comes to real estate agents, you truly do get what you pay for. So when an agent agrees to a much lower commission (or worse, woos you with something like a 1% commission,) you can be certain that you will not be working with a full service agent. When we get down to the section on “What Do Commissions Cover”, you’ll see some of the services that are often eliminated by discount agents in order to accommodate these hyper low commissions.
Who Pays the Commission?
Per the closing sheets, it’s the seller who pays the commission to the listing agent (remember, the listing agent then shares half of that with the buyer’s agent). But the reality is something different from that. Commissions are paid out of the negotiated proceeds of the sale of a house. In other words, they are paid out of the funds that the buyer pays the seller for the property. As such, commissions are really paid by both the buyer and the seller.
When working with the right agent, a seller can ensure that all of their closing costs are covered in the negotiation. This includes the commission fees. A good agent should be able to negotiate to cover their commissions.
What Do Commissions Cover?
An interesting point to keep in mind is that commissions are paid at closing. So that means that agents for both the seller and the buyer are working for free until the deal is done. For a buyers agent, this can mean the expense of time spent on the home search. But for a listing agent, this can include significant out of pocket expenses.
Commissions for listing agents generally break down in three expense areas:
- 33% to the brokerage - for overhead, insurance, etc.
- 33% to the agent - broken down further when you take out taxes and business operation expenditures
- 33% for “other agent expenses” - this includes photography, advertising, printing, open house expenses and more, all focused on the promotion and sale of the listing
Oftentimes, a listing agent can work for months to get a property ready to sell, and all of this work is done without compensation. This means the expenses for marketing the property are coming directly from the listing agent’s own pockets.
If you take a look at these expenses and then reconsider section 1 above about discount brokers, it should make you wonder “where are they cutting expenses?” In most cases, discount agents have to cut their expenses by spending less of their time on the sale of your home and severely limiting their costs that support the promotion and sale of the listing. So while you may “save” money in your commission rate, you’re likely paying more than you save by having fewer buyers see your home, less adequate negotiations and ultimately getting less money for your home. Discounts can be expensive and when you're dealing with such an important asset the question is "Can you afford to cut corners?"
Overall, a good, full commission agent is worth their weight in gold. They are the agents who will take their fiduciary duty to you seriously and negotiate for you the highest possible price. And what can be more important than that?
IMPORTANT NOTE: I have not and will not verify or investigate the information supplied by third parties.