Last Updated: June 29, 2022

Paying Real Estate Commissions

Written By: Barbara L. Pearce
Fingers inputting numbers into an iPhone calculator with money and a notepad on a table

Every so often, a major publication talks about the problems with the usual current system of paying real estate commissions; i.e., both the buyer's agents and the seller's agents are paid at the closing from the proceeds of the house, so that the seller is writing the checks to both brokers. Recently, it was the Wall Street Journal's turn to question this procedure, saying that commissions are poorly understood and rarely negotiated. While this may be true in some cases, it is certainly not hidden, at least not in Connecticut, or most other places, nor is it required. In fact, disclosures must be present in all listing agreements, and even the minimum type size is specified.

Of course, the simple reason for doing it the way it is described above is that the money is all there at the closing, and checks are being written anyway. The commissions are paid most often by the sellers, so that they are reflected in the sales price. That has to do with the way mortgages are made, with the price paid at closing being the amount on which the percentage allowed to be borrowed is calculated. This favors putting as many costs as possible into the sales price, so that the buyers can borrow a greater amount. It is not uncommon for repairs to be made before the closing for this reason, even if money is credited back later to buyers.

Buyer brokerage has eliminated the biggest issue

Which is that the buyer's agent is representing the buyer, but being paid by the seller. Fiduciary duty is determined by the listing or buyer broker agreement, and that means that the buyer has the agent's duty of loyalty. Most people don't realize that the lawyer in the transaction may be representing the bank, and its interests, but being paid by the buyers, so commissions are not alone in having multiple layers of responsibility.

Fees as a solution

The WSJ article suggests flat fees as a solution to the problem of high commissions. Flat fees would seem to cause more concern, since an agent could push buyers to buy quickly and negotiate less, since his or her time is valuable, and a quicker, easier sale would produce more per hour. It also talks about hourly rates, and we have certainly done that in some situations. It could result in lower costs to the buyers, but it would likely also result in them doing more of the work themselves, when paying the agent becomes a variable cost.

Although that might be appealing to some, some tasks could be stinted on, or skipped, to no good end. For instance, buyers who use relatives and friends to do inspections have no recourse when things go wrong, and they more often do, when work is done as a favor. Missed deadlines can have serious consequences. Although agents can and do vary in attentiveness to detail, the solution for that is for buyers to choose brokers and agents more carefully, with an eye to professionalism--the friend doing a favor issue exists here as well. While buyers may be experts in one part of the transactions, or willing to cover it to save money, it seems very relevant that national surveys always indicate that people who do real estate transactions without agents would choose to use an agent the next time! Not only does expertise matter, but time has a cost. For all the reasons that people send their laundry out, have their pets groomed, get their hair cut at salons, use lawyers to write a will, or pay landscapers and other home maintenance services, DIY is not for everyone. Millennials seem to feel even more strongly about this than earlier generations. Would you rather get your transaction done quickly and efficiently, or learn as you go? There is always that choice.

The Takeaway

This issue has been debated for years, and won't be solved by this article. The takeaways should be that commissions are negotiable, but every system has its pros and cons. Time and professional talent have value, and it is up to the principals to decide what that value is to them, in the same way that a house might have a different value for one person versus another. Choices have consequences, and costs, and they are yours to determine.

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