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How Real Estate Commissions Work

Like most professionals, such as attorneys, architects, doctors and others, real estate agents charge fees for their professional services. Unlike these other professionals, however, real estate agents only get paid if they are successful—if a sale closes. A lawyer who loses a case still demands payment, as does the doctor who may not heal the patient. For real estate agents, unless a home is sold and makes it to closing, there is usually no payment.

Work In Advance

The real estate industry does not operate on a pay-as-you-go basis. Most agents work on commission. Agents work many hours before and after a contract is written in hopes of receiving compensation at the end of the process. Generally, it works as follows:

An agent, representing a real estate brokerage firm, drafts a listing agreement to be signed by the seller of the home. The agreement stipulates compensation by either a commission or a flat fee, earned when the agent brings a "ready, willing and able buyer" to the seller.

A "ready" buyer wants to purchase the home within a designated time frame. "Willing" means the buyer has signed a contract with terms agreeable to the seller. "Able" means the buyer qualifies for the financing required to purchase the home. Once these stipulations are met, the listing agent has earned his or her commission. Still, the agent's work is not done. Following the contract comes substantial work to get a particular transaction to closing.

From the fees that a seller pays to their agent (the "listing broker"), the agent pays a fee to a "cooperating broker" who brings a buyer to purchase the property. Usually, the payment is 50% or more of the fee charged in the listing agreement.

Traditionally, it's said that the seller pays the commission, yet some would argue that it's the buyer's loan that creates the cash to pay the commission. Either way, the funds brought to the table from the buyer's loan and the seller's equity pay the real estate companies involved.