Commission: Who gets paid? How? How much? Who wins? Who loses?

Understanding

Commission: Who gets paid? How? How much? Who wins? Who loses?  In any property transaction, the participating brokers and their sales agents receive commission. It is essentially their only source of revenue. With rare exception – No transaction means no revenue. The more you understand “the rules” under which they operate, the better you will understand how and why brokers and sales agents behave the way they do.

Except for private and “for sale by owner” sales, the market is dominated by individual agents (sales associates and brokers), licensed by the State of Florida. Most licensed professionals belong to the Association of Realtors^®. State regulations and Association rules determine the way you interface with these professionals and the ways in which they can interact to facilitate a sale. The following describes what some of these rules and regulations are and further, how this affects the sales process and your relationship with your Broker or agent. Some of the important items are:

Sales Associates and Broker Associates work as independent contractors for Brokers. (Broker Associates have taken the same course material and passed the same examinations as Brokers but they elect to be involved with clients and sales rather than owning or running their own Broker’s business.) Each individual has an independent contractor agreement with their Broker. One of the elements of this agreement is the determination of the commission split between the Sales Associate and the Broker. The amount the Broker receives from a transaction is determined by the listing agreement. This amount is then split by the Broker and the Broker’s participating agents based on the independent contractor agreement.

A listing agreement is a contract between the property owner and the Broker chosen to list the property. The Sales Associate only solicits and obtains the contract. Therefore, a listing agreement is in force only after it is accepted and signed by the Broker. The agreed commission is determined only by negotiation and final agreement between the property owner and the Broker. The Sales Associate represents the Broker but cannot agree to a commission other than their Broker’s standard rate without permission from the Broker. Read the listing agreement very closely. Even if you withdraw your listing, you may be required to pay commission to the Broker if your property is subsequently sold within the term of the original listing agreement.

If one of the listing Broker’s agents secures a buyer for the listed property resulting in a sale, the Broker is entitled to the entire commission specified in the listing agreement. Nearly all listing contracts allow for the listing Broker to split the commission with a cooperating Broker. This split percentage is determined by the listing Broker and must be specified in the listing agreement if the listed property is to be placed on the Multiple Listing Service (MLS). The distribution of the commission is governed by the listing agreement. Commonly, the split is 50%/50% between the seller Broker and the buyer Broker. However, some Brokers prefer to give the cooperating Brokers less than 50%, keeping more than 50% themselves. The listing client must determine whether they feel any additional effort used to support the additional commission will offset the fact that cooperating Broker’s agents may be less inclined to show property with a lesser split to them. At closing, the closing agent, often a title company, distributes the funds to the respective Brokers. The Brokers then pay their agents the portion of the Broker’s commission specified in their mutual independent contractor agreement.

Where a single developer controls a project (as in most gated communities) they often have their own “captive” sales staff. Their staff’s single focus is typically within the confines of the development, consisting of:

Lot sales directly from the developer.

New construction directly from the developer.

New construction by builders designated by the developer.

Resale of previously owned homes within the development.

Captive sales offices are not always members of the Association of Realtors^®. (All licensed sales agents must fulfill continuing education requirements, but Realtors^® have an additional obligation to complete ethics training.) If not, their listings cannot be posted to the MLS. Especially in gated communities, buyers and sellers are restricted in their opportunities. Homeowner Association constraints on signage further limit flexibility.

While a very few developers continue to restrict the activities of outside agents in their developments, most have developed working relationships. If a prospect is registered by the developer without assistance from an outside sales agent, outside agents are prohibited from participating in the commission. If an outside agent brings a prospective buyer, most developers will co-broke (split the commission) with the agent’s Broker. It’s very important to know this relationship. Often agents will spend a great deal of time and effort with a client, introduce them to a developer’s sales staff, only to find out that they had previously been registered. Even if a client simply requested information from the developers web site, via phone, or if they otherwise provided their name and contact information, they are considered “registered.”

If a client works with several different agents, conflicts over commission obligations often result. Further, agents may not be fairly compensated for their efforts if another agent can claim a precedent activity. These situations are ultimately resolved, but not always without rancor or administrative or judicial intervention. Clients are best served when they take the time to find a highly qualified and experienced agent that specializes in the type of property being bought or sold. Work with that agent exclusively unless you change your criteria.

The prevailing commission rate for sale of existing homes in the Flagler County real estate market is about 5-6%. This rate tends to drop in a sellers market but rises in a buyers market. At 6%, the sale of a property for $300,000 generates an $18,000 commission which is usually split between the seller and buyer Brokers. Thus each Broker receives $9,000. If the agent’s percentage of the Broker commission is 60% (example) the agent would receive $5,400.

This sounds like a lot, but keep in mind that only 3562 residential units were sold in Flagler County through the MLS for an average of $291,670 for a total sales volume of $1,038,929,056. If these sales were divided evenly among the active agents (1697 per the Flagler County Board of Realtors^® as of 8/25/06) each agent would be involved (either on the sell side or the buy side) in fewer than five transactions, earning about $22,000.  Of course a relatively small percentage of the agents account for the majority of sales. This is why it is so important to work with an agent who has proven success.

If you do not presently have a contractual relationship with a Broker and wish to find a qualified Broker’s agent, please visit our Referral Page. We will review your criteria and refer you to a qualified local Broker’s agent.

Toby Tobin