Real estate sale transactions involve two parties; the buyer and the seller. It is the duty of a real estate broker or agent to bring the parties together and facilitate a deal between them. Only then will the real estate broker be entitled to his commission. But the question is: who will shoulder the broker’s fees?

Answering this question is not as easy as it sounds. In order to do so, one needs to understand the dynamics between brokers and agents and the various arrangements they use in order to get their commission.

The nature of real estate commission

Real estate commissions are the fees paid to the real estate broker for the successful closing of a sale.  Only licensed real estate brokers are authorized to enter into listing agreements with clients.

On the other hand, real estate agents must work under a licensed real estate broker as they are not allowed to represent sellers or buyers of properties without belonging to a duly licensed brokerage firm.  When a real estate agent closes a sale, the commission earned from the transaction goes to the real estate broker, who will then pay the agent a share.

Usual sharing schemes between broker and agent

There are no fixed rules to determine how much a real estate agent is entitled to as a share of the commission. Normally, such factors as the agent’s experience and the amount of business that he brings to the brokerage firm are taken into consideration in creating the sharing scheme. The agent’s share could range from 30% of the net commission received up to as much as 100% thereof. In the latter case, the agent usually only pays the real estate broker a fixed amount, otherwise known as a desk fee, as consideration for allowing him to operate under and use the broker’s license.

Types of brokers and their commissions

In most cases, brokers enter into listing agreements with property sellers where they are given the exclusive rights to sell the property. This provides the listing broker with the security that he will receive a commission once the property is sold. In exchange for his professional services, the seller agrees to pay him a stipulated commission that is equal to a certain percentage of the selling price.

In a perfect world, the listing broker would get the entire commission for himself. However, in order to sell the property, the listing broker usually finds himself collaborating with another broker, aptly known as the buyer’s broker, who represents the buyer of the property. In such an event, the listing broker and the buyer’s broker would usually work out a sharing scheme among themselves.

The buyer’s broker may also enter into an agreement where the mode of payment of his commission is specifically stipulated.

In most instances, it would be the seller who will pay his commission. However, considering that he would have to split the commission with the listing broker, the fees that he gets may ultimately be less than what is usually due to him. To illustrate, a buyer’s broker might have a regular rate of 3% commission. However, the seller might agree to pay only 5% commission to be split between the listing broker and the buyer’s broker equally at 2.5% each, in which case the buyer’s broker would collect 0.5% less than his regular rate. In such a case, the buyer’s broker may demand as part of the stipulations in the agreement that the buyer will pay the difference of .5%.

In some cases, it is the buyer who directly pays the commission of the buyer’s broker. Under this arrangement, the seller will no longer be obliged to pay the listing broker more than the portion of the commission that is due to him as the listing broker since he does not have to split it anymore with another broker. In the above example where the commission is fixed at 5% to be split between the listing broker and the buyer’s broker, if the buyer agrees to shoulder the 2.5% commission of the buyer’s broker, then the seller would only be made to pay 2.5% commission to the listing broker. Moreover, whenever the buyer agrees to pay the buyer’s broker’s commission, there is usually a corresponding reduction in the selling price to offset the amount that the buyer has shelled out for the broker’s fees.

So who pays the commission?

Going back to the original question of who pays the broker’s and agent’s commission, on paper, it would seem that the seller is the one who shoulders it. However, in reality, it is ultimately the buyer who will pay for it since the broker’s fees are typically already included in the fixing of the selling price. This is why buyers might find it cheaper to purchase properties directly from sellers who have not retained the services of real estate brokers and agents.