One of the biggest misconceptions out there with regards to real estate is that dealing with the real estate agent’s commission.
Whenever people hear the word “commission” they cringe. It almost sounds like a dirty word to them. And, to an extent, I can understand why. We all know that one guy who tried to sell you Cutco knives or Mary Kay products, some other Pyramid Scheme crap. That person was paid on “commission.” And we all hate that person! So it is natural that you might associate the word commission with a negative emotion.
But let me give you a quick run-down on commission-based pay and what it means for you in real estate.
Commission-based pay, defined is:
“a sum of money paid to an employee upon completion of a task.”
It is a way of paying once something has been “closed,” and it is used as an incentive in business to increase productivity.
Basically, the person earning a commission has to actually see something through to completion in order to get paid. Nobody wants to finish this more than the commission-earner.
However, one of the biggest misconceptions out there is that YOU are actually paying your estate agent’s commission. That could not be further from the truth.
In both leasing and buying property, you will never directly be paying for your Real Estate agent. (At least not here in Austin, Texas. Some other cities are different)
So, in an attempt to dispel the idea that your realtor is some sort of leech on your money, let me try to explain how the commission works:
Let’s imagine a scenario where this commission-based pay issue might get a little hairy.
Let’s say I’m a buyer and you are a real estate agent working for a local broker in the city–say, Housing Scout for example.
I am looking to purchase a $500,000 house, and I am looking to get the best deal possible. I see a listing in my neighborhood for a house valued at $500,000 that I like, and so I get in touch with the Real Estate Agent listing the property to tell him I want to buy the house. Let’s say the Listing Agent’s name is AJ.
AJ is the only Agent I am working with right now. He is working with me but he is working on behalf of the owners of the house, and—despite what he may say to me—he actually has their best interest at heart, rather than mine.
If I place an offer of $500,000 on the house,—assuming everything goes well—I will be out $500,000 and then 6% of that will go to AJ as his commission to compensate him for procuring the sale of the house. AJ makes a quick $30,000 from the sellers this way. I pay $500,000—the asking price—and once the money is exchanged, I get a house in exchange for money, the previous owners of the house pay AJ.
Now, let’s say that rather than finding the house myself I hire YOU to represent me and find a house for me. If I were to get you to represent me, you would become my representative in the transaction of the sale. You would try and negotiate a fair price on my behalf, and you would have a fiduciary duty to me.
Now, if that same $500,000 house transaction were to take place, there would be two real estate agents involved: you, serving as my representative; and AJ, serving as the agent for the sellers—the listing agent.
The property still sells for $500,000 in this new scenario. 6%, or $30,000 is still set aside as AJ’s commission, but it is paid by the sellers rather than by you. Again, I should repeat—because this is worth stressing—this is not your money anymore. The money has legally changed hands, and now you have a house rather than $500,000.
AJ would now split the commission with you, as a professional courtesy for bringing him a buyer on the house. Now you and AJ each receive $15,000. Everybody wins. AJ and you get paid out of the $500,000 of the seller’s new money.
The biggest misconception I come across is people thinking that they can somehow “save” money by not including a real estate agent to represent them when buying or leasing a property. To use the example above, I could reasonably understand why a buyer might think:
“Oh, I am paying my realtor $15,000 for basically doing nothing! Why don’t I just go to the seller’s agent directly and have him agree to take a lower commission? I could save $15,000 and it would be the same for the seller agent!”
Well, actually…no it wouldn’t.
Their commission is set, and the price of the property was set at $500,000 without taking into account a real estate agent’s commission.
In other words, the realtor will get 6% of the commission either way. Do you want it to go entirely to the seller’s agent? Or would you like to see some of it go to someone representing you in this transaction?
And, further, it is not entirely honest to say, “I am paying my realtor $15,000.” Since the money has changed hands, it is no longer your money, and it is disingenuous to say that you “paid” for anything other than the property.
Imagine you go into a store and spend $200 on groceries. Let’s say that $30 of that money goes into the Manager’s pay for the night, and then he, in turn, uses that money to fill up his car. Can you honestly say that you paid for his gas?
No, no you can’t. Because the money changed hands.
When it comes to real estate, always find a good agent who you trust to represent you. You have nothing to lose by getting a good representative. They only get paid once the job is finished, and you don’t have to pay a dime!