Foreword: Working with a Realtor or Licensed real estate agent (broker in IL) is not required when you buy or sell a home. From our standpoint, that’s the same as saying hiring an electrician isn’t required for remodeling your home. There are always instances, where due to the consumer’s personal expertise or experience, they can get the job done themselves. But most the time you want to bring in a licensed expert for a complex job; home buying and selling is a task for the experts! After all, for most people, buying or selling a home is the largest amount of money they will ever spend.
Of course, Realtors and Real Estate Agents are compensated for their services. So the question arises: who pays the Realtor? While there are no laws or Realtor codes that mandate who pays, in a typical transaction home seller pays all of the commission.
Who Pays the Realtor?
Commissions are paid at the time of closing, or the end of the real estate transaction. We often see two Realtors involved: the buyer’s agent, and the seller’s agent (also called the “listing agent”). When a seller hires a Realtor to be their listing agent, they enter into a Listing Agreement. That agreement dictates the real estate commission the seller will pay to the listing agent’s brokerage for the sale of their home. It clearly spells out the commissions, additional fees, and any money that may have to be prepaid. It outlines key obligations for each party and is a legally binding document. In residential transactions, the listing agreement usually includes the listing agency’s intent to use the Multiple Listing Service, or MLS as a tool for selling their home. A seller does not have to agree to be in the MLS, but it is an invaluable tool in the sale of your home that will bring your home to the eyes of tens of thousand of Realtors in the region. It also means that you are hiring a professional who holds a real estate broker’s license, and has agreed to the Code of Ethics set forth by the National Association of Realtors.
In the Chicagoland area, most of the time the seller is agreeing to pay the listing brokerage a commission that allows the brokerage to offer a commission split to a buyer’s agent (also known as the cooperating broker) in the transaction. The goal is to make the commission being offered competitive with other similar properties on the market. The range of co-operating commission that we see is 2% – 3%. More expensive properties tend to offer less of a co-operating commission, while properties that are bank owned or corporate owned often offer a higher commission. The vast majority of the time, the seller is paying all of the buyer agent’s commission. There are exceptions though.
Some real estate agents use a Buyer Representation Agreement. When this applies, the home buyers are agreeing to make sure their real estate agent is compensated to a certain percentage of sales price or a fixed dollar level. For example, if the Buyers Representation Agreement is written for a minimum 2% commission, and the home buyers are purchasing a home where the home sellers are offering a 1.5% real estate commission for it, then the home buyers would be responsible for making up the difference. This is more of an exception and not a rule, but a possible scenario.
How Much Does it Cost for a Realtor?
There is no set rate for hiring a Realtor or Real Estate Broker, and fees are always negotiable. In Chicago and the metro area, a typical real estate commission paid in a transaction is in the range of 5% to 6% of the sale price. Again, the commission rates are ultimately determined by what the sellers and their real estate broker agree upon, and can be any number or rate. It is paid at closing with the other closing costs in a real estate transaction. Different real estate agencies have different policies on what they charge. Some listing brokers simply charge a flat fee for the listing commission, often being a way to have their home listed for sale by owner but still appear in the MLS and offer a real estate agent commission to a buyer’s agent.
Can I still sell my home by owner after hiring a Realtor?
Sometimes, a home seller will wonder if they can still sell their home to a friend, neighbor, or other vicarious connection after entering into a listing agreement. This all depends on the type of listing agreement entered into. In Illinois there are generally two types of acceptable listing agreements: “Exclusive Right to Sell” and “Exclusive Agency”. Most real estate agents will only work with “Exclusive Right to Sell” listing agreements, which means they represent the seller and are paid commission no matter what. The reason being is that a home sale is more than just throwing up a house in the MLS. Significant time and money goes into preparing a home sale. Even the process of determining a listing price takes significant effort. Knowing that agents work on commission and are not paid unless the sale closes, it is difficult to justify competing with the home seller to earn commission fees.
“Exclusive Agency” agreements allow for a home seller to procure a buyer on their own, without the help of another broker or agent besides the listing broker. They are seen mostly with listing brokers that specialize in connecting for sale by owner clients with the MLS. Again, this type of arrangement can work for some home sellers who have lots of experience selling, but in most cases a home seller will find it best to hire a real estate agent.
Can the real estate agent collect all the commission fees?
There could be an instance where the buyer’s agent has clients that are a match for a home where he or she is also the listing broker. If the buyers and sellers are comfortable with it, that real estate agent is engaging in dual agency. Dual agency is illegal in some states, but is legal in Illinois so long as the proper disclosures and agreements are made to both parties. In a dual agency scenario, the real estate agent’s commission could be the full amount the seller pays. Dual agency has become a less prevalent practice, with some real estate brokers choosing not to engage in it as it can be a conflict of interests. Know that you should never be forced into a dual agency scenario without it being fully disclosed to you, whether you are a home buyer or home seller.
The big takeaway here is the real estate commission is customarily paid by the sellers of the transaction, and split between a listing agent and buyer’s agent. As a home purchaser, most of the time the realtor commission is paid by the home seller of the house you are purchasing. Understand there is absolutely no governing body dictating what the commission rates are. Ultimately, it’s an agreement between the listing broker and the home seller or the home buyers and buyer’s agent. As a home buyer, be sure to have the conversation with your real estate agent on who will pay the real estate commission. As a home seller, the real estate agent fees will be outlined in your listing agreement.
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