It has come to my attention that majority of the public has no idea where their real estate commissions go.

Even those people who have hired a Realtor, sold through that Realtor, and paid commissions have no idea who receives what piece of the pie.

Permit me to explain…

Question: What does almost every employed person in the world get that Realtors do not?

Answer: A paycheck as part of their salary.

I say “almost” because there are a ton of discount real estate companies popping up all over the map (although they usually don’t last long) and they seem to offer pay structures that buck the historical industry trend.

Majority of Realtors work on 100% commission-based pay schedules.

If you don’t sell, you don’t eat.

So where do the commissions go?  When the seller of a house pays 5%, who gets what?

Well, the first thing to consider is the following:
-buyers never pay commission
-sellers always pay commission

In every real estate transaction, there are four parties: buyer, buyer’s agent, seller, seller’s agent.  Both agents in the transaction will be paid a commission, however both agents will be paid by the seller.

The buyer essentially uses the buyer agent’s service for free.

In most real estate transactions, the commission payable by the seller is 5% of the sale price.

That 5% is divided up as follows:

Essentially, 2.5% goes to the seller’s agent, and 2.5% goes to the buyer’s agent.

Those two agents then split their commission with their respective brokerages, according to their pre-determined splits (ie. rookies might have a 60/40 split, top agents may have a 90/10 or even 95/5 split).

So have I explained it as simply as possible?

Well regardless, there are still a few more things to consider.

For example, almost all of the listings on MLS offer a 2.5% commission to the buyer’s agent.  This means that in the event that a seller’s agent cuts his/her commission to 4% from 5%, that agent will end up with 1.5% while the buyer’s agent still receives 2.5%.

Why don’t they just split it 2% and 2%?

Well, consider that if a random sample of MLS listings shows that 9/10 are offering 2.5% and one is offering 2% or 1.75%, there are some agents out there that won’t show the listing for fear of being “short-changed” on their commission, which “should” be a full 2.5%.  Keep in mind, failing to show ALL suitable properties regardless of commissions would violate the RECO Code of Ethics.

The theory is that if you are a seller or a seller’s agent, you need to provide incentive for a buyer agent to show your property.  Offering a “full” 2.5% commission is a way to do this.

Sellers and their agents have even been known to provide 3% commissions in hopes of luring eager buyer’s agents and resulting in faster sales.

So what about all these discount brokerages that we read and hear about?  How do they do business?

Well, I have actually seen advertisements reading “Sell Your House For As Low As 2.67%!”

This effectively means that 2.5% will still go to the buyer’s agent as per the MLS listing, and 0.17% would go to the seller’s agent.  (this is extremely rare, and usually only for sub-divisions in Markham or something like that…)

Suffice it to say, the seller’s agent in this case won’t exactly do a bang-up job.

It never fails to amaze me how people will list with discount brokerages in hopes of saving money.  A house is your largest asset!  Why mess around?

Consider a seller who calls in two agents: one charges the traditional 5%, the other offers to cut his/her commission to 4%.  The seller will save 1% on the sale of the house, assuming a $700,000 house, this would equal $7,000.

However, I ask you this: If an agent is willing to cut his/her commission to get the listing, don’t you think he/she would be willing to accept less for the property at selling time just to get a quick sale and a quick commission?

Ask yourselves WHY would an agent cut commission?  Clearly, they don’t have much faith in their own abilities if they’re willing to work for less.

Selling your house in this market is not just about putting a sign on the lawn.  So much more goes into selling a home, and while a “discount broker” will sell your $700,000 house for $700,000, an agent with confidence, experience, knowledge, and a far better work ethic will sell that $700,000 house for $765,000.

So to the person that saved a whopping $7000 on commission, I wonder how you feel knowing you left $65,000 on the table because you listed with a half-assed agent who has to cut commissions to get listings and to do business in this industry.

Remember the old adage: “YOU GET WHAT YOU PAY FOR.”

If somebody is willing to cut his/her commission, you have to ask “WHY”?

Most people looking for a short-cut will regret their decisions.  It happens time and time again.  But, everybody is free to make his/her own decisions, and learn from those experiences…