Who Pays Commission: Buyers or Sellers?

When people decide to buy or sell property, sellers want to earn as much as possible and buyers want to pay as little as possible, so unless they understand the value of having a Realtor, neither of them will be interested in paying a commission, or brokerage fee, on the sale.

Buyers bring the cash to a real estate transaction. Sellers agree to the Realtor’s fee to market their property. Both buyers and sellers benefit from a Realtor’s support, so it’s hard to say who is paying the fee.

Here’s what I mean. Let’s say Mr. Jones wants to sell his house, but he doesn’t want to pay the brokerage fee (also known as the commission), so he puts his property on the market and plants a For-Sale-By-Owner (FSBO) sign in the front yard. He chooses a sales price to compete with similar properties already on the market and doesn’t discount it for the Realtor’s commission, hoping to pocket the extra cash.

Months later, along comes Mr. Smith who wants to buy Mr. Jones’s property. He isn’t represented by a Realtor, either. He likes the idea of buying a FSBO house because he thinks it will cost less, given there are no Realtors involved.

What neither buyer nor seller realize is that they are both likely to lose in this scenario.

Without a Realtor on the selling side, Mr. Jones must use his limited expertise and objectivity to determine his property’s market value and assess any issues that make it unusual (e.g., is it in a flood plain? Does it have historic value?). With his limited marketing expertise and limited funds, he must also advertise the property to attract a qualified buyer. Once he finds one, he must then navigate the escrow process in accordance with real estate law, which he knows nothing about.

Without a Realtor on the buying side, Mr. Smith must filter through the many properties for sale to find those of interest. Sadly, he has no way to become aware of the newest, hottest listings because he has no access to Multiple Listing Service (MLS). Once he finds a house, he needs to be able to advocate for himself, which is hard to do if you don’t know your legal rights. Who drafts the contract? Who supervises inspections? Who negotiates?

Typically, there is a 6 percent commission on completed residential transactions, with a 50/50 split between the Realtor who represents the buyer and the Realtor who represents the seller—then they divvy up their percentage among others. In the end, each Realtor nets about 2 percent of the property’s sales price. That commission isn’t paid until the escrow closes; however, the Realtors have already paid for advertising the property, MLS dues, continuing education to maintain their real estate licenses, gas and time to drive clients around, and other expenses. They’ve also saved their clients from expensive legal and financial mistakes and used their personal and professional networks to advocate for their clients’ interests.

Imagine if your lawyer said, “Gee, I’m sorry we didn’t win the case. You don’t owe me a dime for all that work.” Unless it’s a personal injury lawyer, that’ll never happen. And if a personal injury lawyer wins, the commission won’t be 6 percent. It will be in the neighborhood of 25 to 50 percent. So, when people ask me, “Why don’t I just skip hiring a Realtor and keep the brokerage fee for myself?” I just shake my head. Forgive me for being biased, but I believe a Realtor’s commission is typically a small price to pay for the services rendered.

If you have questions about property management or real estate, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.

Dick Selzer is a real estate broker who has been in the business for more than 40 years.

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