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Opportunity Cost: Making Sense of Brokers' Commissions

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Buying or selling your home is an overwhelming – and often intimidating – process. There's the search for the perfect neighborhood; the comparing of square footage; and, oh yeah, the fact that your day-to-day financial dealings are generally a far cry from the six figures housing transactions can involve (yes, even that occasional Target spree?we hope). We're talking big numbers and decisions here, so it makes sense that you'd want to enlist the help of an expert to guide you through it. Problem is, the typical real estate deal involves A LOT of experts, and traditionally many are working on commission: there's the listing agent, the buyer's agent, the seller's broker, the buyer's broker, and sometimes more. As if choosing between granite and laminate countertops wasn't confusing enough?

Here's what you need to know about agent and broker compensation:

The Basics
Real estate agents work for a real estate brokerage (if it's a chain it might be the recognizable Century 21 or Re/Max logo you see on the "For Sale" signs, but it could be an independent local agency or individual too), and any fees paid to a real estate agent must go through that licensed broker first. A buyer's agent and brokerage represent the house hunters; a selling (or "listing") brokerage and agent represent the homeowners. Generally, the commission is a percentage of the sales price of the property – rumor has it that's always 6%, rumor has it wrong, more on that later – and that amount is split between brokers and then further divided between those brokers' agents.

Who Pays What
The most common kind of listing agreement between an agent and a seller gives that agent's brokerage exclusive marketing rights to the property, hopefully attracting a buyer. In exchange for these services, a seller agrees to pay a percentage of the sales price to the brokerage. Things get a little hazy here, however, as some would argue it's the buyer who's footing the commission bill because these fees come from the proceeds of the sale and are often divvied up (relatively) evenly.

Let's say a buyer working with an agent purchases a home for $100,000. At the "standard" 6% rate, that would make the commission on the sale $6,000. According to financial site Investopedia, you could argue the buyer is paying that price because he or she is paying for the property OR that it's really the seller who's picking up the tab because it's coming out of the home's equity. "Either way," the Investopedia article says, "it is important to note that this fee comes out of the cost of the home – it is not tacked on in addition to the sales price." So in our example, the seller would come away with $94,000 ($100,000 - $6,000).

Who Gets Paid What
The percentage each broker and each agent gets out of that overall commission can vary and is established in your initial contacts, so pay attention. While even splits (each brokerage gets 3 % if the commission is 6%) are pretty common, contracts can stipulate one receiving more than the other. It's up to the brokerage to determine how much of their cut their agents receive, and those numbers vary: more junior agents can get anywhere from 30 to 50% of the broker's commission, with deductions for things like office expenses and advertising; top agents might be making 100% and paying their brokerage a flat, agreed-upon "desk fee."

Let's Make a Deal
The storied 6% commission isn't always the case. In fact, real estate research firm Real Trends reported the average commission nationwide in 2009 was at 5.36 %. A 2011 New York Times article pointed out an important factor to consider: The real estate industry can sometimes be a bit squirrelly when it comes to discussing these fees publicly and some of that is related to antitrust laws forbidding a mandated 6% commission. Fees are always negotiable, so there's no harm in asking. Agents may be more willing to be flexible if your house is on the higher end of the market or if it'll close a deal in a tough economy.

To Fee or Not to Fee
Last March, Koenig & Strey made waves here in Chicago when it was reported the brokerage would charge potential buyers a flat $250 fee to have its agents work with them. Such fees had been common in other parts of the country, but were new to our Windy City. Coverage of the move was a bit overblown, realtors say, as it only applies to a few specific services and didn't affect much else, but it's just one example of a changing fee structure landscape in which buyers and sellers have more options than ever. Firms like ZipRealty offer discounted rates and other incentives, for example, while others, like Help-U-Sell Real Estate operate with an a la carte service menu. (Keep in mind with such businesses, you get what you pay for – i.e. dealing with people with less experience and an often inferior level of service than a full-blown agent and brokerage would offer). As commission models evolve, experts say, educating yourself through research and thorough readings of any contract is still your best bet.
·Curbed University [Curbed Chicago]