Who pays the commission in a real estate transaction? Episode #274

Who pays the commission in a real estate transaction?

Hello. Welcome to Todd Miller TV. The question of the day – and I get this question all the time – Who pays the commission in a real estate transaction? Is it the buyer? Is it the seller? Where does it come from?

So I’m going to go through first the process by which it happens and then explain sort of the myths of who thinks who pays. OK. All right. So we will start with a house. We will just say the house is $100,000. That’s the market value.

So he can choose to do all the work on his own or he can hire an agent. OK? We’re just going to pick a number and say the agent goes in and says, “Hey, I’m going to charge six percent,” so six percent. Now that percent is what the listing broker is charging this person. They’re charging the seller six percent of whatever they get. They’re going to take that. They’re going to keep that.

Now what they do is they go out there to other agents and go, “Hey, we’ve got this listing. It’s six percent. If you bring the buyer, we will give you three. We will sort of split it with you. If not, that’s fine. We will just keep the whole six. One of our agents will sell it or we will just sell it ourselves,” or whatever.

So in that case that’s six percent split in half or split however. It doesn’t have to be split in half, whatever they’re offering. So we will just say three percent, boom. Buyer agent gets that amount. All right? Title company is going to get a couple of grand. Title insurance, escrow fees and then money to pay off some back taxes, things like that. Bang, seller nets 92,000.

Who pays the commission in a real estate transaction?

Well remember the buyer is having to come in with 100 grand. So the misconception is that the buyers always say or a lot of buyers says, “Well, I’m paying the commission because it’s my money funding the deal and that money gets used to fund the transaction.” Actually that’s not true. That’s false logic and I think buyers say that to make themselves feel better because this is what really happens.

The seller, that money comes out of his 100 grand meaning if you want to buy this house, it’s 100 grand whether or not he uses an agent. If you’re trying to make an economic argument that if we don’t use the agent, that seller will sell it for 94 grand. Then what I say is go out and find yourself a seller and just start knocking on doors and say, “Hey, I will buy your house for six percent under what we believe market value is,” and most of the times, the sellers could say, “No, I will just hire an agent and make sure I’m getting as much as I can and getting all the exposure,” et cetera. So, Who pays the commission in a real estate transaction?

So 100,000 comes out of the seller. Now you’re probably saying, “Well, if I’m the buyer, I would pay my agent.” You’re not paying your agent and the seller is not paying your agent. Actually, the listing broker gets the six percent and then he splits it with the buyer agent. The buyer agent is paid by the listing broker, not by the seller. There is not an agency relationship between those people. The buyer agent doesn’t have agency relationship. He’s being paid from the listing broker.

Now I’ve heard this many times that well, I bring the funds. So that’s like saying, well you’re also paying for – when he sells his house and goes buy a car, you bought them the car. You just paid for a car for him, right? Then when he invests that money and makes the money, you paid for other things for him. That’s not the case.

As a matter of fact, if you’re a seller and I say to you, “Well, I’m going to charge you 20 percent. Don’t worry. You’re not going to pay for it. The buyer is paying for it.” You’re going to say, “No, no, no. Houses with 100 grand, I’m only going to get 80 grand if I paid a 20 percent commission, so no.”

So if that was the case, if buyers really paid it, sellers would not negotiate because this number can be anything from a dollar to whatever, a million dollars. It could be whatever is negotiated. So misconception, the buyer doesn’t pay the commission unless the buyer has a separate agreement with the agent to where the buyer is paying the agent commission to a certain amount or something like that.

But you’re not actually paying the commission. It’s just part of the transaction and just because you bring the funds doesn’t mean you’re paying it. What you’re paying for is the house. If you’re paying for the house and the commissions, you’re paying 106 grand.

I know it’s controversial on Who pays the commission in a real estate transaction. A lot of people out there have misinformation and they think very simplistically but actually it’s very organized the way it works. It works this way for a reason. Sellers pays a listing, pays a commission most of the time on a . Anyway, that is my update for today. I hope to see you on another video. Thanks.