Who Pays the Real Estate Commission in California?
In this Q&A, we're going to tackle one of the more interesting questions I get, the commission question. More precisely, we're going to tackle who pays it. The question of real estate commissions raise many questions for both buyers and sellers.
How much do Southern California Realtors® charge for their services? And who is responsible for paying these fees? How much is Real Estate commission in California?
Commission rates vary in different parts of the country and are primarily based on local custom and market conditions. For California Realtors, the commission is a percentage of the total sale price of the property. It is important to note some legal disclaimers here. 1) By law, there is no set commission amount and real estate licensees cannot agree to charge a particular amount. 2) The amount of a commission is not set in stone and is negotiable. 3) Brokerages are allowed to set a minimum amount that their agents may charge.
How are real estate commissions calculated?
The commission is calculated as a percentage of the home's sale price, although a few Realtors offer a flat fee. The Southern California market remains strong which translates into strong home prices. The median Ventura Country sale price (as of 6/6/2019 and going back 1 year) is $600,000.
How Much Commission Does a Realtor Make?
This is a great question. As I mentioned earlier, there is no officially set rate and sellers are able to negotiate this with their agents. Now while there may not be a set rate, there are minimum rates that an agent would be willing to accept and keep in mind that most agents have to pay their office as well as the buyer's agent out of this amount. For an example, let's use the median price in the section above of $600,000 for a list price and lets say you hired an agent at 6% commission, that comes to $36,000. Lets now say that your agent offers to pass 50% of that to the buyer's agent, which would be 3% or $18,000. Many agents work for Brokers that charge a portion of the commission earned, known as a split. For newer agents, that can start out at 60% going to the Broker! Out of the remaining $18,000, let's say that the agent is somewhat experienced and on a 60/40 split, where they get to keep 60% of the commission, which is $10,800. Out of that amount, they have to subtract insurance, any staff they have to pay, association and MLS dues, the cost for any marketing done, and any other overhead expenses. This can leave them with considerably less than the $10,800. On top of that, as a self-employed person, they need to pay quarterly to Uncle Sam for their estimated taxes!
You can further break this down to an hourly rate. If you assume that the house went into escrow on day 30 and had a 30 day escrow, that's 60 days or two months that the agent was working for the seller. Assuming they are working seven days a week and 50 hours a week (most work much more), that's 50 hours * 4.5 weeks per month, times two months for $450 hours. In this example, the agent would have had an hourly rate of $24 before taxes, insurance and overhead, and would potentially have a much lower net wage.
What about the buyer's agent? Do they get to keep that $18,000? Much like a listing agent, they may work for a Broker that has a split as well. For simplicity's sake, lets assume that the splits and fees are the same. The buyer's agent will also have to pay for fuel spent driving clients around, marketing for clients, vehicle depreciation and repairs. Depending on how long they worked with the client to find them the house, they could end up making considerably less of a net.
While commissions look like a big number on a closing statement, in reality the end number that the agent gets can be considerably less.
But What Happens if a Home Doesn't Sell or a Buyer Doesn't Buy a House?
This is a very real possibility! While there may be some exceptions to this rule, in general if the house doesn't sell or a buyer doesn't buy, the agent makes NOTHING! That's right, the agent could spend months working with a client and considerable money marketing a listing and get ZERO in return. Does this happen? In our current market, yes it does! In a market with low inventory, it is most likely to happen to a buyer's agent, as there are more people competing for homes. I've heard some agents mention how they've been working with buyers for over six months.
In a high inventory market, this is most likely to happen to listing agents as there are more homes available than buyers for them.
It takes a special kind of risk taker to work months on end without a guarantee of payment.
Do Home Sellers or Home Buyers Pay Realtor Commission?
Some home buyers think that if they don't work with a Realtor, they'll save money. This isn't the case as, unless agreed to otherwise, the buyer does not pay their agent any commission! In California the home seller pays the commissions out of the proceeds of their sale. This means that the home's price isn't artificially inflated to cover the cost of commissions.
Commissions are paid at the close of escrow and are typically paid directly to the agent's brokerages.
How Does a Buyer’s Real Estate Agent Get Paid?
Your agent works hard for you. Not only when showing you properties, but there are hours of work put in to find the best houses, setup the showings and when you find “the one” there are many more hours of work involved in researching the offer price, negotiating the contracts and staying on top of the lenders and service providers to make sure your escrow goes smoothly and any hiccups are dealt with before they bother you.
With all that work, your agent deserves to get paid, right? Of course! But how does a buyer's agent get paid? Well, when home sellers list their home for sale, they agree to pay a certain percentage to their listing broker for commission. The Broker then offers a cut of that commission to all the buyer's agents via the MLS. This is called the “Cooperating Brokers Commission” or “Buyer's Agent Commission.” Typically what happens at the close of escrow is the Cooperating Brokers Commission is paid by escrow to the buyer's agent's Brokerage, who then pays the agent.
With all the assistance and behind the scenes work you get from an experienced Realtor and that the buyer typically does not pay any commission, it makes no sense to enter into your biggest financial investment without the guidance and advice of a professional Realtor.
In Ventura County and surrounding communities, look to Ryan Huggins and Huggins Homes to provide you with the most comprehensive real estate services available today! We not only handle the traditional buying and selling of real estate, but we also provide property management services and real estate investment guidance. We are also experienced with short sales and foreclosure avoidance. We even have several groups of investors who can buy your home for cash if you don't want to go through the hassle of a traditional sale.
Contact the Huggins Homes team today to setup an appointment to discuss your wants and needs. Ryan can be reached at 805.905.4000 or by email at Ryan@HugginsHomes.com and Ron can be reached at 805.905.3000 or by email at Ron@HugginsHomes.com
We look forward to assisting you.