Real Estate Agent Commission Guide for Homeowners: Who pays?
By Jesus “Jesse” Gonzalez Licensed Real Estate Broker in Tennessee / September 11, 2019
One of the most important questions a homeowner has when selling their home is, “How much commission do you pay a real estate agent?” This guide will walk you through questions like, who pays, how much to pay and when to pay. As a licensed Tennessee Real Estate Broker, I will share with you all you need to know about Real Estate Agent commissions, without all the glitz and glam of the sales pitch.
Question: How much are real estate commissions?
Real estate commissions are completely negotiable. Throughout the industry, no standardized commission exist and that is a direct result of the Sherman Anti-Trust Act. This Federal law prohibits price fixing which means, Real Estate Brokers, Agents, and the Multiple Listing Services or the MLS cannot agree to set sale conditions, fees or rates. For a Broker or Agent to even hint at, suggest, elude, imply or say, that commissions are standard, is potentially a violation of Federal law. A real estate commission should always be a matter of competitive negotiations between you and the individual Broker or Agent you hire.
Since real estate commissions are negotiable, it’s very hard to say how much you should or could expect to pay a real estate agent. As a Real Estate Broker myself, for me to even do so could very well be interpreted as a violation of the Sherman Anti-Trust Act. None the less, it’s helpful to know what other agents are charging so that you can make a wise decision yourself. For this reason, I recommend that you interview at least three different agents from three different brokerages. By interviewing a variety of agents, you will get a better idea of agents are charging in your area. None the less, always remember, real estate commission are negotiable.
Question: Are there different commission structures?
Even though real estate commissions are negotiable, the truth is, most of you will discover through your interviewing that a few commission structures will be popular in your area. Here in Middle Tennessee, where I practice, the following commission structures are what I come across most often. These are in no particular order and please note, any and all references to commission percentages or amounts are hypothetical and for educational and information purposes only. I’m in no way advocating or conspiring with anyone to set or standardize rates, percentages or fees.
1. Traditional Commission Structure: This model is where the home seller pays the full real estate commission for both their agent and the buyer’s agent. The listing agent will advertise the home along with the commission split they are offering to persuade buyer agents to show your home. For example, the listing agent would charge 6% of the gross sales price to the homeowner and the listing agent will split that 50%/50% with a buyer’s agent. Each agent would make 3%. For example, the Nashville average home price is $350,000 and at 6% commission that’s $21,000 that would be split evenly between the listing and buying agents. Each agent would make $10,500.
2. Discount Commission Structure: This structure is a catch all for those agents who offer discounts when compared to the Traditional Commission Structure discussed above. In the discount commission structure, you will find a variety of options and it’s important to understand these are alternative commission structures that can come with different risk and rewards. My list below is not comprehensive and does not cover all the risk and rewards. As a homeowner, it’s your duty when considering any of these alternative real estate agent commission structures to educate yourself on those risk and rewards. Not fully understanding the risk involved could result in a loss to you.
A. Reduced Commission: A reduced commission agent is one who is willing to list your home for less than the other agents you’ve interviewed.
B. 2 for 1: This is an agent who will list your home for no commission, as long as you buy a home through him at a commission equal to or greater than he would have earned if he had charged you to list your home.
C. Flat Fee (Limited Service): A agent who will list your home for a flat fee however, offers a a-la-carte of additional services that would normally be included in a traditional commission structure.
D. Flat Fee (Full Service): A agent who list your home for a flat fee however, offers most, if not all of the same services of a traditional commission structure.
E. MLS Only: A agent who charges a small flat fee however, only puts your home in the MLS. No other services are offered.
Question: What services can I expect to get with all these different commission options?
Here in Tennessee, the minimum level of services a real estate agent must provide is outlined by law. This makes it easy to know what an agent is supposed to do for you at a very minimum level. Directly below, I will go through those duties individually however, as a matter of full disclosure, I’m not an Attorney. I can’t give you any legal advice and the information I provide should not be considered legal advice however, as a licensed Real Estate Broker, it’s a part of my job to know exactly what the law requires of me when it comes to my clients and that is exactly what I’m going to share with you now.
Duties owed to all parties in a transaction: To be clear, these duties are outlined in the Tennessee Real Estate Broker License Act so unless they are specifically waived in writing, you as a buyer, seller, landlord or tenant are entitled to these services in Tennessee
A. Agent is to diligently exercise reasonable skill and care to all parties in the transaction.
B. To disclose to each party to the transaction any adverse facts which the agent has actual notice or knowledge of.
C. Maintain confidentiality. Of course, exceptions to this rule would be adverse facts or information authorized to be disclosed.
D. To act with honesty and good faith
E. To disclose to each party to the transaction timely and accurate information regarding market conditions that might affect the transaction.
F. To timely account for earnest money and all property received from any party to the transaction
G. Must refrain from self-dealing or on behalf of immediate family or on behalf of someone or entity you have a personal involvement with without first proper disclosures.
H. To refrain from recommending to any party to the transaction the use of services of another individual, organization or entity in which the agent has an interest or may receive a referral fee without proper disclosures.
Duties owed to Client: (People who have signed a representation agreement with the agent)
A. Obey all lawful instructions of the client when such instructions are within the scope of the agency agreement.
B. Be loyal to the interest of the client. The client’s interest is to be placed above all others except where such duty would violate another duty.
C. Agent will assist the client in the following duties unless specifically waived in writing.
a. Schedule all property showings
b. Receive all offers and counteroffer and forward them promptly to the client
c. Answer any questions the client may have in negotiations within the scope of the purchase agreement and agent’s expertise.
d. Advising client as to whatever forms, procedures and steps needed to execute the purchase and sale agreement for a successful closing.
Whichever decision you make regarding how you pay your agent; it really is your responsibility to know exactly what you are paying for and the risk involved. Be informed and knowledgeable and interview at least three different Realtors from three different brokerages. Failing to do so, may cost you in the long run.