Part of the financial transactions which occur during the closing of a property is the payment of commissions to the respective real estate agents. While it may appear to be a rather large paycheck on paper, the commission is actually payment to a real estate professional for the services provided from the start of the selling/buying process to the final act of closing, ranging from a few weeks up to as long as a year or more. Real estate agents do not typically get paid any type of salary, have a company expense account/credit, and do not get reimbursed by their company. Real estate agents are considered self-employed and therefore are not compensated in any way for running their business by any other means than by commission. In other words, although a real estate agent incurs costs and expenses as a means of doing business, unlike most businesses, an agent does not receive any payment for services rendered or reimbursement unless the transaction has completely closed.

What attributes and services are provided for by the payment of a real estate commission? The seller receives representation for their interests in selling their property. This may include newspaper advertisements, newsletters, direct mail-outs, internet advertisements, listing the property with the Multiple Listing Service (MLS), a yard sign and flyers, pertinent information about how area property sales compare to their particular property, and the experience of how to properly prepare a house for showings to attract potential buyers. The buyer, on the other hand, receives representation for their interests in buying a piece of property. This may include receiving pertinent information about how the property sales of area houses compare to the current property for sale, information about the community, a guided tour from property to property, direct access to the property and assistance with meeting the financial and inspection responsibilities in a timely manner. Additionally, the sellers and the buyers both receive the benefits of the agent’s experience and education on the skills to negotiate and correctly complete the legal documents necessary to set forth the mutual agreement and understanding of both parties, the skills to advise and suggest courses of action when things do not go exactly as planned or desired, and the skills to provide counseling and support throughout the entire process.

How much out of the commission does an individual agent typically receive? Let’s take, for example, a total commission amount of $8,000. Out of that $8,000, the seller’s agent may receive $2,000, their broker/company receives $2,000, the buyer’s agent receives $2,000, and their broker/company receives $2,000. From that $2,000, each agent must pay for their own related costs and expenses which can range from $200 to $1,000, or more. For a seller, it depends on the property for sale and length of time the property was on the market, or for a buyer, however long and however many houses a buyer has shown an interest. In addition, the agent may also have to pay E&O insurance (the real estate equivalent of malpractice insurance), brokerage franchise fees, and other office related expenses.

In Texas, the seller is the one who has typically been assigned to pay the commissions for both their own agent as well as the buyer’s agent. Conversely, it is argued that the buyer is the one who ultimately “finances” the commission over 30 years. A trend is taking shape in other parts of the country, however, in which each participant pays for his/her own representation. Often times, agents will offer to cut their commissions in an attempt to appear more appealing to a homeowner looking to sell a property. Since the expenses incurred and services provided by an agent are only reimbursed by the commission, the amount of service provided is likely to be less as a result of decreasing the amount of commission. With the ultimate goal of each buyer or seller being responsible for their own level of representation by setting the commission with their own agent, this hopefully will ensure that each party receives the amount of assistance and representation for which they have paid.

In summary, a commission can be compared to the payment for services provided by a doctor, a lawyer, an architect or any other professional. If you need their service, you would choose one with the proper education and experience to take care of your needs and interests to the best of their ability. Real estate transactions, for most people, are the most expensive transactions in which they will ever take part. By paying a commission, you are paying for the education and experience of a real estate professional who will assist you in making this a smooth and successful legal transaction for the entire length of the process.

PLEASE NOTE: This information is not intended to be legal advice. Your licensed real estate agent cannot give you legal advice. If you have any questions about your legal rights or obligations, you should consult with an attorney.