YesTalk-213 - How Real Estate Agents Commissions Work

Welcome to Kevin Ward's Yes Talk for Realtors. This is Kevin Ward. I'm going to talk about how real estate agent commissions really work and I'm going to talk about it in five simple steps. We're going to talk about how commissions are determined, how they're set. We're going to talk about how they're split. We're going to talk about how they are paid, we're going to talk about who can get paid. And, and the final question is, are they worth it? So stick around. It's going to be an interesting video and I'm sure I'm going to get a lot of interesting comments. So whatever your opinions are on real estate commissions, make sure you put in the comments below. Whether you are a real estate agent, a new real estate agent, a seasoned real estate agent, a discount real estate agent, or a buyer or seller or somebody who's been screwed by agents or somebody who's had a fabulous agent, please put your comments and in this, the spaces below. All right, so number one, how are commissions determined? How are they set? Well, here is the law. Real estate agent commissions are 100% negotiable. They are fully negotiable. There is no set commission anywhere. Now, a broker has the right to determine their his or her commission, how much they're willing to accept for their services. It's their services. They can set their fee, but it's not set by law. It is set by the individual broker. Now, traditionally, a very common commission structure in residential real estate in North America in the United States is 6 has been 6%. Now that goes all the way back to European common law. And that has been the case for hundreds of years. And so in America Today, you'll see 6% is still the most common in some areas where there's higher price range properties. Sometimes you'll see 5% being common as well. So 5 to 6% is typically considered a full service commission, although there are agents that charge 4% and there are agents that charge 7 or 8 or 9 or even 10% depending on the circumstances. So there are, those would be considered full service Commission. Like a 5 or 6% commission would be considered full service. Now then there is what they call a discount commission. Now what's discount? Well, it's anything that you consider to be less than the standard full service commission. So a discount may be 4.5% or 4% or 3%. That would be considered a discount commission. Now there are also flat fee brokerages out there, and a flat fee brokerage is one that charges a set fee instead of a commission. Now, commissions are typically a percentage of the sales price. Okay, so we talk about 5 or 6%. We're talking about 5 to 6% of the final negotiated sales price between the buyer and the seller. Okay, a flat fee would be like as somebody who charges $997 or $497 or $1,000 or $2,000 or $5,000. It's a set fee for listing and selling some property. So the listing side, the listing agent's commission may be a flat fee, and then the buyer's agent commission. I'm going to talk about how commissions are split here in a second. It may be a percentage. So it can be done any number of ways. And again, it's all negotiable. Now, typically, flat fee commissions are paid up front, Whereas real estate commission commissions that are full service commissions would be paid at close. At the close of the transaction. So that's how commissions are set. Let's just say they are fully negotiable. Now, how are they split? So on the whiteboard here, let's just say you have a house for sale, and the house is. The actual sales price is 500,000 dol. Now, the list price does not matter when it comes to real estate commissions. Typically they are paid on the final sales price. So let's say that you have a house that sold for $500,000. It goes under contract for $500,000. That is the sales price. And let's just say that the commission is 6%. So we have a 6% commission on a $500,000 sale. So you're talking about a total commission in that would be, your gross commission would be 500,000 times 6%. A 30,000. $30,000. That'd be a $30,000 commission. All right, I'm doing this all in my head, so I just had to double check my math, be a $30,000 commission. Now, typically, commissions are split between two different sides. There's two different parties here. So you have first is the listing, the listing broker. So you have the listing broker, and then you have the selling broker. Not the selling broker is typically the broker or the agent that brings the buyer. Okay? And the listing broker would be the agent or the broker that has the listing. So the listing side represents the seller. So the listing, this typically represents the seller, and the selling agent typically represents the buyer. Now, you may hear this. The seller, the selling agent may be called the buyer's agent. The listing agent would be called the seller's agent. Now you have the broker, okay? So you have the broker and you have the agent. Now sometimes the broker is the agent and sometimes the agent is the one actually doing the selling and the broker is their sponsoring who sponsors them. So I'll get to that in a minute. So then on the selling side, you also have the broker and the agent. Now, in almost every state, certainly in North America, in the United States, every state, a broker is kind of the head honcho in the real estate space. A broker's license allows you to list and sell real estate, get paid commissions. An agent license, which may be called a salesperson's license or sales license in most states, requires that you have a sponsoring broker. So a broker typically has more experience and they have, they've, they have more training and so forth. So that is getting a broker's license is more difficult and, and typically require some experience before you can get a broker's license. Compared to a real estate salesperson's license, an agent can be brand new and they have to have a sponsoring broker. So the vast majority of real estate transactions in America are done by agents who have brokers. Most brokers, if they're broker owners of companies, may not be doing their own real estate transactions. Some do, some don't. But I'm going to treat it as if, and especially because most of my audience here is, if you're watching this, you're probably not a seasoned broker, you're probably a brand new agent or somebody thinking about getting in real estate. You're going like, how does this whole thing work? Well, when you get into real estate, you get your real estate license, you're going to get your license as a real estate agent, not as a broker. You will have a broker. So all commissions, all real estate commissions belong and are owned by the broker because the listing is owned by the broker. So even if you go out and you as a real estate agent get a listing, you get a seller to hire you to sell the house, the broker actually is the one they hire, hiring with you as their salesperson underneath that broker. So the commission is owed, will be owed to the broker, and then the broker will give you your cut of that, whether you're on a split or however that structure is worked in your office. Okay, so typically commissions, then this is the gross commission, which is actually controlled by the. Sorry, is controlled by the listing broker. So the broker is the one who actually controls the commission. However, whenever they take the listing and they put it in the mls, they offer a co broke or what we call typically Call a cooperative offer of commission that says if you bring the buyer to another broker or agent, I will cooperate with you in the sale and I will split the commission with you. Now, the split does not have to be 50 50. It is totally negotiable. However, traditionally, you see, a lot of times you'll see a 5050 split. So in the case of a 5050 split, we. What you are going to see is you are going to see 3% go to the buy sell listing side and you're going to see 3% go to the selling side. So in that case, that 3% is going to go. That 3% is going to be here, $15,000, $15,000 goes to the listing broker and $15,000 goes to the. That'd be 15,000 goes to the selling broker, and then the broker pays their agent out of the commission. Okay, so if you are, let's just say that I'm an agent and you're an agent here, and you are on a. We'll say you're on a 7030 split. Okay, you're on the 7030 split. So with the 7030 split, you're going to get 70% of the 15,000 and the broker is going to get 30%. So that would be to the broker, they would get 30%, which is going to be $4,500, and then you're going to get the other $9,500, which would be the. Your split. Okay? So on the sale of a $500,000 house, if you're on a 7030 split as a real estate agent, you're going to get $9,500 and your broker is going to get $4,500. And it would be the same over here if they're on a split. Now, let's just say that this is a hundred percent. This, this person's on 100% split and they get all $15,000, but they pay their broker a set fee on every transaction or they just pay their broker a flat fee every month, regardless of how many homes they sell, so forth. So however that's worked out, the net, the gross commission, the whole, the big part belongs to the broker, and then the broker splits it out to you as the agent, depending on your split and your arrangement with them. That is how real estate agent commissions are split. Now, how are they paid? Typically, real estate commissions, this commission right here is typically going to be paid by the seller. The seller is typically the one that pays the commission. Now, there's the reasons for that one tradition. But the logical Reason for why sellers typically pay it is because they're the ones selling a house. And typically they have the equity, which typically means they are going to get a big chunk of cash on the seller of their property. Whereas a buyer is taking their available cash and they're using it to purchase the property. And so they already have a whole big set of closing expenses. So it's just typically easier for sellers to pay the commission. So typically, sellers, they pay the full commission at closing out of the proceeds of the sale of their house, out of the money they're going to net out of the sale. They pay that commission, and then that commission is then split among the different parties to the transaction, brokers, agents and so forth that are involved. Now, also, how they are paid is they're paid at closing, and they are paid by the title company or the escrow company or whoever the closing company is in your state. Or they are paid out of escrow, closing. So all of the funds, the buyer brings all of their funds to closing. If they're taking out a mortgage, taking out a loan, then the bank wires all that loan money to the escrow company, the closing company, and that closing company is going to disperse the funds. Now, typically, they're going to disperse the funds to the brokers. By law, the broker owns commission. They have to cut the check directly to the broker, unless the broker submits to the closing company a commission disbursement agreement, okay. Or a commission disbursement statement that basically says, we authorize you as the broker. I authorize you to cut a check directly to my agent for $9,500 and so forth. 35, 4,500 comes to me. 9,500 goes to the agent or whatever the terms are. If they've got fees or anything else involved, then that all is between the broker and the agent. The broker sends a cda, a commission disbursement agreement or arrangement to the closing company, and then they're going to split that out. So that is how they are paid. Now, third, fourth question, who can get paid in a real estate transaction? Answer, only licensed brokers and agents can get paid for services as real estate agent for can get paid commissions in a real estate transaction in most states. Now, in some states, a licensed attorney can function as real estate broker, so they can also get paid commissions. And where this question comes up a lot more often than not is when it comes to referral fees. So how are referrals fees paid? Well, a referral fee would be paid out of the commission. Okay, who can be paid referral fees for referring a client to an agent. And the answer is only someone who is licensed in a state to receive real estate commissions. Okay, now that would be a real estate agent, a real estate broker, license broker, a licensed agent or an attorney. In most states, attorneys with their attorney license are licensed to do real estate transactions and are allowed to be paid a commission. But a non real estate licensed person cannot receive a commission or a referral fee for referring business to a real estate agent. Okay, so who can get paid? Brokers and agents and attorneys as a general rule are the ones that can get paid. Now the final question. So let me do the referral fees. So how are referral fees done? So let's just say that this seller was referred to this agent by another agent in another office or another company or another state or whatever it was. So and let's just say that they charge them for simple numbers, we'll say a 30% referral fee. Okay, so there's a 30% referral fee now I think for all two Ls, but a 30% referral fee is now going to be paid out of this $15,000 out of the listing side of the commission, typically $15,000, 30% of that is going to go to that referral agent. So at closing now, instead of it just having this $15,000 split between the broker and the agent, 30% is going to come off the top of that and is going to be paid to the referring broker. Alright, so how that works is you got a total of a $15,000 commission check. 15,000 that is going to be split now three ways. So it's $15,000. So 30% of that, which is 45,000 is going to go directly to the referring broker. And so what's left now is $10,500. That $10,500 is now going to be split between the broker and the agent. In this case, if it's on a 70, 30 split, then 70% of this, which is approximately going to be 7, we'll say 7,350. I'm not sure if that's exactly right. 7,350. And the rest 3,150 is going to go to this is going to go to the agent and this 73, no, I'm sorry, 7350 goes to the agent and 3150 goes to the broker. Okay? And that's how that works. So the $4,500 goes to the referring agent. And by the way, even a Referral, the broker owns the commission. So this referral would be paid, $4,500 would be sent to the broker, and then the broker would pay to the agent in their company, whatever split their own or whatever their arrangement is for referrals in their company. So that is the final straw on who can get paid, how they're getting get paid, and all of that. So then the final and biggest question that I'm not going to spend a whole lot of time in on this video, is our real estate commissions worth it? Well, here is the truth. And now if you're watching this and you're a homeowner, a seller, or a buyer, I'm sure you have a whole lot of opinions on this. If you're a real estate agent, you have an opinion on this. And here is the truth. Here's the reality. Real estate commissions are a fee paid for a service. And how good the real estate agent is is determined by the value of the service that they deliver. So if you are a skilled real estate agent who is skilled at delivering great results for a client, then you have a whole lot more value than a real estate agent who has no clue what they're doing. And all they're doing is they're just filling out paperwork and opening up houses, and that's all they're doing. And they do not know how to deliver a better result for their client. How do you develop, deliver a better result for a client? Well, for example, if you're a listing agent and you're helping sell the house, your ability to position a house in the market to make sure it's priced right, to get much of buyers in there, to get the best offers, to negotiate those offers, to get the best terms and price, and then even in the negotiation period, even in the contract period, to be able to protect your seller from losing equity, for example, to a lot of expensive repairs and all of that, your ability to help a seller get the best terms and price and net the most money in their pocket at closing determines your true value for a seller. Your ability to advise them, but mostly is your ability to deliver them the best results. Because what most sellers want is I want the most money in my pocket. So your ability to get more money in their pocket actually increases your value. If you can help them sell a house for more money, better terms, even if your commission's higher, a lot of times the extra money that you can get them will more than cover your commission. So the commission is actually an investment for the seller in hiring a skilled professional agent if you have a buyer and you're an agent representing a buyer, same thing is your ability as the agent to help that buyer get a great terms and price, find the right house, negotiate for them to get the best terms, price, advise them to help them make the right decisions along the process in terms of getting financing, in terms of repairs, negotiating, all that kind of stuff. Your ability to get a better result for your client makes you worth have more value. Because the bottom line is in reality is 6% of a 500 of $500,000. That's a lot of money. Real estate commissions are a lot money. Is it worth a lot of money for the service that real estate agents deliver? And my answer is it's like buying a car. Not all cars cost the same because not all cars have the same value. And so I look at as a professional real estate agent who is highly skilled and knows how to deliver a better result is like a top of the line luxury car. I mean it is a better car, it is better built, it lasts longer, it's more reliable, this got nicer features, interior, it's a better experience, it's faster. All of the things that make, for example, let's just say a Mercedes Benz that costs $100,000. We'll just take an example of a Mercedes Benz $100,000 car and comparing that to a Hyundai, no offense to Hyundai or anything else, but just a lower end car, that's not necessarily a bad car but, but it's only $40,000. Okay, now you take a used Hyundai and it may only be worth $20,000 compared to a brand new or you take a 10 year old car, it may only be worth, you know, $10,000. Well, a $10,000 car and $100,000 car, the reason they're priced different is not because one car salesman is a better salesman, it's because it's a better car. It's not because they charge more, it's because it's a better car, it's a better product. The same with real estate services. So not all real estate agents are created equal. They have different levels of skills, different levels of training. How good you are at delivering a better result for your clients is the biggest determinant in your value. And I think the biggest rip off, the biggest injustice in the real estate industry are agents that are unskilled, unethical, they're incompetent, they don't know what they're doing and they go out there and they try to charge a full commission and it's like Delivering a used Hyundai level of service and wanting to charge the same price as a brand new Mercedes, that is a ripoff. But are real estate agents too expensive? It depends. If you're delivering a used car level of service and charging a new car, luxury car price, yes, you're charging. Real estate agents are a rip off. But if you have a skilled agent that knows how to deliver great results, then the value that they deliver will more than be cover the cost of their service. It's just like hiring an attorney, just like hiring an accountant. It's just like hiring a doctor. When you hire somebody that's good, that can deliver a great service for you and deliver a great result, it's like hiring a hairstylist. You can go get a $12 haircut and you can go get a $120 haircut. What's the difference? The scissors? No, it is their ability to do a good job and deliver a great result. Okay, so real estate agent commissions work and their worth is based on the worth of the agent. So it's not just a matter of all real estate agents are the same. And that's one of the misconceptions the public has a lot is that they like all real estate agents are the same. So I just want the cheapest one. Well, that's like going to the car dealership saying all cars the same. I'm just gonna look for the cheapest one. They're not all the same. If you go any real estate, enter into any real estate office that's a large office, let's just say an office that has 100 or 200 agents, you will have the top 2% of agents in that company will outsell the bottom 50%. Why? Because they're better. Okay. Now that doesn't necessarily mean they're more ethical. It doesn't mean, but it just in general, you'll have agents that have not sold a single house. You'll have agents that have sold one or two houses a year. And you'll have agents that are selling one or two homes a week. And they are tipped they're going to be more skilled, more experienced, and depending on their level of expertise, their value can be dramatically worth. It's not just a matter of how many homes they've sold. It's a matter of how good are you. If you're a real estate agent, how good are you delivering results? That's how you earn your commission, that's how you develop your worth. And when you're great at it, what's going to happen is Your clients are going to be happy. No matter how much you cost them, they're going to be happy and they're going to talk about it, to talk about to their friends. They're going to give you video testimonials, they're going to give you reviews, and your value is going to show up in the amount of business that you get and the amount of satisfied customers that you receive. I could go on and on on this, but I hope this has been helpful for you. If it has, make sure you give the video a thumbs up. Subscribe here if you haven't. And I want to hear your comments. What are your perspectives? I know some of you there's going to be some. I'm sure some nasty comments are going to come up on this one because yeah, anytime you start talking about that moolah, people get on edge. But I hope you enjoy it and I look forward to reading your comments. I'll see you on the next video. Hey there, it's Kevin.

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