Most people work with a real estate agent during the process of buying or selling a home, but the specifics of how these agents get paid can be a mystery to the general public. Let’s describe how real estate agents and brokers are paid. Who is responsible for paying? There’s a lot of interesting information you may not know.
How Real Estate Commissions Work
The most significant source of revenue is the commission. Thich is money paid directly to the brokers by the seller (and occasionally buyer) for their services during the sale of a property. Typically, this is determined as a percentage of the sale price of the property, but there are times a flat fee is negotiated instead.
Now, it’s important to know the difference between an agent and a broker. Both are licensed by the state where they operate. Agents work under brokers; they can’t operate independently. They also can’t be paid directly, the commissions have to go to the broker, who will then split them amongst the involved parties as per the terms in the listing agreement.
Another critical thing to know is that the percentage paid to the broker has to be negotiable; federal law prohibits standard commission rates. The seller usually pays the commission. Though in some instances a split between the seller and buyer is negotiated as part of the deal. In practice, most sellers include commission as part of the asking price.
How the commission is split
So how does the commission get split, and who are the parties involved? Both the buyer and seller have their real estate agents, and the corresponding brokers each works for. Now, there are variations where. For example, a broker lists a property and finds a buyer without involving another broker/agent. They’d keep the full commission. Or, they would split it with their agent who handled the sale.
We’re talking about money here (and lots of it). So, keep in mind that taxes and routine business expenses will eat into the commission as they would with any other business.
What happens when the sale doesn’t close?
Generally speaking, agents and brokers want to avoid counting their chickens before they hatch, because commissions are only paid when the sale is completed. However, there are situations where the seller is contractually required to pay the commission even if the deal doesn’t close.
Perhaps the broker has an offer from a buyer who’s ready to move forward. Or maybe the seller suddenly changes their mind and refuses to sell. There are instances when one party insists on terms that aren’t in agreement. And in some cases, one party has a spouse who refuses to sign off. In rare instances, fraud, as it relates to the sale, is committed. Parties could still be on the hook to pay at least some of the commission that they would have had the deal closed.
While the details of each deal are always negotiable, these are the basic mechanics of how real estate agents and brokers are paid in the Indianapolis real estate market and everywhere else in the United States.