Real estate agents don’t receive an upfront payment from the seller of a home they represent. Instead, they receive a percentage of the sales price in the form of a commission. While commission percentages follow a general rule, they are not set in stone. How much commission an agent or broker charges depends on the strength of the real estate market at any particular time.
It is best practices to know up front and agree upon a commission rate before signing any agrements.
Residential Real Estate Commission
The most common “standard” residential real estate commission in Colorado is 6.0 percent of the home’s sale price. However, that rate is no longer “written in stone.” Because of competition agents/brokers routinely lower their commission fees. Increasingly, sellers are negotiating to obtain lower commissions. As is true elsewhere in the United States, the commission is paid entirely by the seller. If a house sells for $600,000, the commission adds up to $34,800 – a hefty amount of money.
In a market like Denver’s, where demand far outstrips the housing supply, a seller will likely find a real estate agent/broker who is willing to accept a lower commission. In parts of the state where the market isn’t so hot, or home prices are lower, it’s probably harder to find a real estate agent/broker who is willing to budge on the commission. However, it never hurts for a seller to try to negotiate a lower commission – the worst answer they’ll receive is “no.”
How Realtors/Agents/Brokers Get Paid
Even though only the seller pays the commission, the commission is split between the seller’s realtor/agent/broker, the buyer’s realtor/agent/broker, and the respective brokerage firms. All of these commission payments/splits are made at closing with the total commission being split into much smaller percentages, with the respective realtors/agents/brokers and brokerage firms dividing up the total commission amongst themselves.
Flat Fee Brokers
As it has changed so much of modern life, technology is also affecting real estate sales. There are realtors/agents/brokers who will list a property for a flat fee, generally in the $3,000 range. Also, Sellers and Buyers are increasingly listing or finding homes online arranging or scheduling showings via the internet.
Types of Listing Agreements
While the “exclusive right to sell” agreement is the type most often used in residential real estate sales, it is not the only kind of listing agreement offered to a seller. This exclusive right to sell means the listing agent receives a commission no matter who actually sells the home. The second most common type of listing involves a home that’s actually for sale by owner, but the “open listing” allows agents to bring clients to see the house. There’s no exclusivity in an open listing, and only the agent who actually sells the home receives a commission. Less common is the “one-time show,” which is similar to an open listing but consists of just that one showing of the home to a potential buyer. The least common type of listing is that of the “exclusive agency,” meaning no other broker receives a commission at the sale.
For practical purposes, it is basically an agreement for a brokerage to list the home on the Multiple Listing Service (MLS). The brokerage receives part of the commission at the sale but generally does little in terms of actively marketing the home.
Commercial Real Estate Commissions
The commission structure generally differs when it comes to commercial real estate commissions. The standard commercial real estate commission in Colorado is 6 percent of the sales price. Fees are still negotiable, and high-end properties usually have lower commission fees. For leasing, office and retail commissions are calculated on the basis of square footage, while industrial lease commissions depend on the length of the lease and the property’s scheduled net rents.
For example, in five year lease, it typically means a 7 percent commission is earned on the first year’s net rent, which will be reduced to 3 percent by the fifth year. The Colorado Commercial Real Estate Brokers Commission Security Act permits a real estate agent to file a lien for unpaid commissions connected with leased commercial real estate property. In order for a commercial commission agreement to be enforced the commercial property cannot have any residential component, and the written commission agreement must state when the broker’s commission payment was due and in what amount.
There are few different things that comprise the commission of a real estate property when a property is sold. Make sure you understand how much of a commission your real estate agent is taking from your purchase before you work with them.
Make sure you’re aware of Colorado laws as they relate to real estate ownership. If you have questions about your upcoming real estate purchase, don’t hesitate to contact me for assistance.