10.22.2021
Everything You Need To Know About Real Estate Commissions
Selling
In a perfect world, the process of buying and selling homes would be simple — no more complex than, say, buying or selling a vintage watch to a fellow collector you connected with online.
However, that’s unfortunately not the case. Because the purchase or sale of a home is most likely among the largest, most impactful transactions a person will make in their entire lifetime, there are a lot of moving parts and red tape surrounding the entire process. And, only a select few are made responsible to organize and facilitate these transactions.
The job of a professional Realtor® is no easy task, especially considering the financial futures of their clients depend on their expertise, execution, and ultimately their success in orchestrating a real estate transaction. In return, real estate agents earn commissions for all of their hard work.
This post is all about why those real estate commissions exist, what exactly agents do to earn them, and who is responsible for paying agents’ commissions.
Why Do Agents Charge Commission?
One of the biggest sticking points surrounding real estate commissions is around why clients have to pay them. If a real estate agent is already being paid a base salary by their companies and brokerages, why do they deserve extra commission?
The short answer to that question is service. The real estate agents that truly earn their commission do much more than just what it says on the advertisement.
Full-service real estate agents who provide value-added services like staging, property detailing, deep cleaning, marketing, photography, minor repairs, and — most importantly — expert negotiation skills all contribute to a more lucrative sale or efficient purchase for their clients. And, real estate agents deserve to be compensated for their services. In our opinion, a charge of 5% (+HST) of the value of the final sale of a home is a fair tradeoff in exchange for all of these professional services.
Juxtapose that with your common discount real estate brokerage whose agents do the bare minimum required to list a home (like taking photos and uploading the listing to the MLS), and the value of a hard-working, full-service agent practically pays for itself. This is especially true considering those discount agents will still charge their clients 3.5% (+HST) in commission anyway.
Let me leave you with this thought: If you were selling a home and were in the heat of negotiations with an aggressive buyer, you’d want an agent with top-notch negotiation expertise to be fighting your corner, not an agent who cuts corners and doesn’t genuinely care about the outcome of your sale. Would you be comfortable paying an extra 1.5% of the value of your home sale to have the real estate expert on your side of the table?
Interested in learning more about what goes into a full-service home sale? Use the links below to learn more about how I help my selling clients and what you can do to maximize your results when selling.
Who Pays Commission?
That brings us to our next question — who’s responsible for paying an agent’s commissions anyway? And, seeing as there are typically two agents involved in a transaction (one representing the buying party, the other representing the seller), who pays whose commission?
The answer to this question is a little more complex. For brevity’s sake, it’s the selling party who pays for both agents’ commissions.
That being said, both are usually covered by a total of just 5% of the total value of a home’s final selling price, which is taken directly from the seller’s earnings. From there, it’s down to both of the brokerages to split their agents’ commissions.
The catch here is determining what that 5% is worth exactly when the deal is finalized. It’s the duty of the buying agent to make the final sales price of a home as little as possible, while the reverse is true for a selling agent.
Is the idea of buying a home on your real estate horizon? Learn about what you can do ahead of time to prepare for a successful purchase by reading my guide to Buying A Home here.
Who Pays Commission On A New Development?
When it comes to new developments — that is, properties that are purchased brand-new from construction — real estate agents are still involved in deals, but without an individual selling party, commission rates work slightly differently.
During pre-construction or development real estate transactions, commissions for the buying party’s real estate agent are paid directly by the developer or development company. The rates here are kept standard — usually 2.5% of the final sales price of the unit, which ensures that the buying agent doesn’t feel any less financially motivated to present pre-construction or new development listings to their buying clients over traditional resale properties.
Love the idea of moving into a brand-new home nobody’s ever lived in before? Find out more about pre-construction real estate and which projects are catching my attention right now.
- The Most Exciting New King West Developments
- 5 Pre-Construction Projects To Keep Your Eye On Right Now
- Resale Condos vs Pre-Construction: Which Is Right For You?
How Do Agents Receive Their Commission?
As we noted above, real estate agents earn their commission directly out of the final sales total from the transaction. This 5% is deducted automatically from the proceeds of the sale during the firm closing process, which is then transferred to the individual real estate agents’ brokerage firms.
From there, the commissions are split and sent to the two deserving agents that facilitated the transaction.
When it comes to helping clients pursue and accomplish their dreams in real estate, I’m always prepared to go the extra mile. Find out more about how I work by reading about My Real Estate Approach here.
The Commission Breakdown Of A Typical Condo Transaction
It’s important to keep in mind that commission rates aren’t set in stone and that they can largely differ depending on an agent’s level of service. For instance, I’ve personally seen agents’ commission rates range from approximately 3.5% to 6%. However, most real estate transactions with reputable full-service agents will end up costing the seller about 5% of the final sales price of their home.
With that in mind, here’s a simplified breakdown of the structure of a typical condo transaction and what the resulting agent commission fees would be overall.
Let’s say you sold your condo for $700,000. The commission for both your agent and the buyers’ agent totals 5% of that total price — $35,000. Now, add on Ontario’s HST rate of 13%, totalling $4,550, and the total commission you’re paying for the services of both agents is $39,550.
Can I Sell My Home Myself And Avoid Paying Commission?
Yes, you can absolutely sell your own home in order to avoid paying real estate agent commissions. In the industry, this is known as a For Sale By Owner sale, or FSBO.
While this is perfectly legal to do, it isn’t very common; the reason being that, on average, sellers stand to make MUCH more money from a sale when recruiting the services of an experienced professional real estate agent than completing the transaction on their own.
So, while sellers who use professional agents do have to pay commission rates, they most often receive much more money from their sale in the end than they would if they attempted to sell their property on their own.
Giving advice is easy, but backing it up with real results is another. See how I’ve helped clients just like you achieve their real estate goals by visiting My Client Results page here.
What Should You Do?
Having to pay extra fees for any type of service can feel like a bit of a headache. However, if real estate commissions result in earning you more money, a quicker transaction, much less stress, and significantly cuts down on the amount of effort and leg-work you personally need to do, it’s a small price to pay in the end, all things considered.
That’s why most clients — no matter if they’re sellers or buyers — actually want to pay for the services of a seasoned professional real estate agent. While the final decision on whether you use a premium agent, a discount agent, or no agent at all is yours to make, it’s easy to see why the best Realtors® are always in such high demand.
No matter what your experience with buying, selling, or investing in real estate is, I’ll always make myself available to offer you my professional advice. If you want to continue the conversation about commissions or anything else real estate-related, let’s set up a one-on-one. Simply click Book A Consultation here to get started.
