How Do Real Estate Agents Get Paid?

I've started writing about common questions that buyers and sellers have, and, believe it or not, how we get paid is still one of them.  To understand the payment process, we first have to go over the legalities of licensing.  Each real estate company has one broker for legal purposes.  At Pearce, for example, I'm that person.  All agents at Pearce "hang" their licenses with us, although some of them are salespeople (who must work for a broker), and some are brokers themselves (who could work independently or can work for another broker).  Over 90% of real estate companies across the country have fewer than ten agents, and the broker sells him- or herself.  That makes Pearce Real Estate one of the largest firms in the State, and across the country.  The principles of agency, however, are the same regardless of size.  It's also useful to note what Realtor designates (and it needs a trademark sign, which is above my pay grade on a computer!):  It means that the company, and therefore all of its agents, belong to the National Association of Realtors, agree to abide by its Code of Ethics, and can participate in the Multiple Listing Service (MLS).  Most local firms are Realtor firms if they sell residential real estate, and, increasingly, commercial firms are not. We are, and we handle both types of property.

When a seller signs a listing agreement, or a buyer signs a buyer broker agreement (and those two contracts are basically equivalent), they sign with the broker in charge.  Only the broker in charge sets the rules--commission rates and terms--or can legally change or cancel the agreement.  Most compensation is offered through the MLS:  When a listing is posted there, it has a BBC (Buyer Broker Commission) offered, and the listing firm is required to pay that amount to the broker who represents the buyer, unless a change is agreed to by both firms, or firm if it is a sale with both brokers at the same company (which we call an "in-house" sale).   In order to have an in-house sale, both buyer and seller must sign a Dual Agency agreement.

When the property closes,in most cases, the closing attorney makes out a check or checks to the brokerage firm--checks cannot be made out to individual agents.  Firms differ widely in the way they compensate agents within their firms, both in the percentage of the check that goes to the agent, and in what expenses they pay toward the transactions.  In addition, some (usually national) firms also charge buyers and sellers "transaction fees", which are paid on top of the commission, and go only to the real estate company. In some cases, the commission is divided evenly between the listing side of the transaction and the selling side.  Increasingly, the listing firm keeps a higher amount, and offers a BBC that is less than half of the total.

Agents are legally independent contractors, so they don't get a salary, or a regular paycheck.  They earn money only when property closes or rents, and they share that with their firm.  It used to be that the firm got half and the agent got half, but now it can vary.  Some companies pay higher amounts (sometimes much higher percentages) to the agent, but often charge them for their desk, their postage, their copies, and their marketing.  Many transaction-related expenses are borne by the agent personally.  If he or she takes you to lunch, that comes out of his or her pocket.  If a problem arises during the selling process, and is paid for by the broker, that is also often coming out of the agent's share.  If you were referred to your agent or agency by another real estate agent or company, either here or somewhere else, that agent's firm can be receiving up to half of the total amount paid.

If all of this is making you feel as though the poor agent is at the bottom of the heap, you could be right, especially if you don't end up selling or buying, and they get nothing for all of their work.  What my goal is, however, is to make you understand what they make, and when, and to help you appreciate their excellent efforts on your behalf!

Any Plans to Buy or Sell in this Tax Year?

It may seem ridiculous for me to be posting on a hazy, hot, and humid August morning that time is running out for real estate sales this year.  However, much of commercial real estate is driven by tax concerns, and taxes play an important role all the time, even when the reasons for activity relate to other concerns.  Therefore, it's wise to consider that it takes a long time to close most properties that need environmental testing or financing, so now would be the time to get moving, if you intend to accomplish anything by the end of 2016.  In the real estate field, we try not to count on much getting done after mid-November.  Since that is about ten weeks away, I'm not being overly cautious to say that Labor Day should be your signal to ramp up your search or your sale.  Even leases can be affected by the calendar year for taxpayers, if you are interested in deducting costs of fit-up or commissions.

So time's awasting--get moving!

Picking Up in Late Summer?

August is traditionally a time for beaches and BBQs, not real estate.  Many people are on vacation, and those who remain start to think of Labor Day as the acceptable point at which to pick up projects like moving or expanding.  And yet, this year, we seem busy as we hurtle toward September.  A lot of what we are working on has yet to close, and our commissions so far this year still lag behind last year's, but many of our agents say that they are busier than they have been in years. 

Some of this reflects the fact that every transaction is harder than it used to be; you can't count on anything simply proceeding through to completion without a few bumps along the way.  Some, though, does seem to suggest that Connecticut may at last be joining the ranks of all the other states that are embracing recovery.  While jobs have not gotten back to their 2006 high, they are headed in the right direction.  Ditto housing prices and construction permits.  Also consumer confidence, which is evident in the proliferation of new restaurants and retail ventures. 

Maybe this is the new normal.  A less seasonal, less steady expansion, but a tentative and welcome leap forward.  Okay, a step forward.  But it's progress, and we are glad to see it!

Commission Overrides

Most people are familiar with the typical residential commission situation, where the listing agent controls the rate and the offering to the buyer's agent.  That is, the owner signs a listing contract with the real estate broker, and he/she offers a BBC (buyer broker commission) to cooperating agents who represent buyers.  Sometimes half is offered, but often less than half is posted; the theory there is that the expenses of marketing a listing outweigh the costs of servicing a buyer.

The commercial market doesn't work that way, in most cases.  Many properties are not advertised on the MLS, because many commercial brokers don't choose to belong.  Therefore, the custom is for the agent representing the buyer to confirm the commission with the listing broker, usually in writing.  It is not uncommon for the buyer's agent to ask for a "full" commission (also known as an override) from the owner, for bringing in the buyer.  Here the theory is that the agent who controls the buyer controls the transaction.

I'm not advocating for one method over the other, but I'm pointing out the difference, because there is often a "shoot the messenger" atmosphere when we ask the owner to pay an override.  Although it's negotiable, like all real estate commissions, an owner who wants to fill his or her space may feel pressured into paying it.