Real Estate 101 – Residential Real Estate – Agents, Brokers, Commissions & More
April 20, 2021
Residential real estate agents help consumers navigate the intimidating and sometimes complicated world of home buying and selling. In return for their services, real estate agents receive compensation upon the sale of a home. Just how much do they get paid? Here is a breakdown of everything you need to know about residential real estate agents, what they do and how they are typically compensated.
Real Estate Agents, Brokers & REALTORS®
Before we begin, let’s be clear that this article focuses on residential real estate, or the sale of homes, rather than commercial real estate, which means the building and managing of stores, manufacturing, offices, etc. Of course, many of the same terms apply in both areas.
Real Estate Agent/Salesperson - To be a real estate agent (also called a real estate salesperson) in Alabama, a person must first complete 60 hours of coursework, pass a license exam, complete 30 additional hours of coursework, meet other criteria set by Alabama law, and receive a license from the Alabama Real Estate Commission (AREC). AREC is the state governmental agency that regulates the real estate profession and issues licenses with the statutory mission of protecting consumers. A real estate license allows the agent/licensee to receive compensation for helping a person in the purchase, sale, lease, or management of real estate. Real estate agents must abide by Alabama’s laws and regulations related to real estate licenses, most of which can be found here, as well as applicable federal laws. Real estate agents work for a real estate brokerage or company under a real estate broker.
Real Estate Broker - A real estate broker is a real estate agent who has been a real estate licensee for at least two years, taken 60 hours of additional coursework, met several other criteria, and received a broker’s license from AREC.
Qualifying Broker - A qualifying broker is a real estate broker who supervises other real estate agents, while still representing buyers and sellers. Every real estate agent must be managed by a qualifying broker and can only receive payment for real estate services through the qualifying broker.
REALTOR® - REALTORS® are members of the National Association of REALTORS®, a non-profit trade association for real estate agents with state and local organizations located throughout the 50 states and several territories. Real estate agents who are REALTORS® agree to abide by the REALTOR® Code of Ethics, which sets out rules of conduct in addition to federal and state laws and are subject to discipline for violating the Code of Ethics. REALTORS® can be distinguished from other real estate agents by the trademark REALTOR®, usually noted on business cards, websites, email signatures, and even license plates. You can find more information on the benefits of hiring a REALTOR® here.
Buyer & Seller Representation
Listing Agent - A listing agent or seller’s agent is just that, the agent listing the house for sale on behalf of the seller or owner of the house. Listing agents are fiduciaries of the owner and advocates for the owner’s home. Listing agents can do quite a lot in helping an owner sell a home. Examples include advice on pricing, negotiating on the seller’s behalf, staging a home for pictures, coordinating title issues with title agents (especially for estates), coordinating requested repairs, and managing the paperwork from the sale.
Buyer’s Agent - A buyer’s agent or selling agent works for the buyer, advocating for the buyer’s interests in a real estate transaction. The buyer’s agent may: help the buyer find a home, set up and attend showings, negotiate the purchase agreement, and coordinate the closing, to name a few. Like with a listing agent, a fiduciary relationship, or one with specific duties set by law, exists between a buyer and his or her agent.
Dual Agent - Dual agency occurs when agents with the same real estate company, and sometimes the same real estate agent, represents both sides in a transaction. Alabama law requires all parties to the transaction to agree in writing before dual agency can occur. In dual agency, especially where one agent represents both parties, the relationship between the clients and the agent is more limited and should be handled with care by the agent and the qualifying broker. After all, when one agent or the same company represents both parties, confidential information, like the seller’s lowest acceptable purchase price or the buyer’s highest purchase price, is known by the same agent or company. This increases the risk for the agent and the company.
Types of Payments - Commissions and Flat Fees
Residential real estate agents are typically paid a commission or sometimes a flat fee upon the sale of a home. A commission is a percentage of the purchase price of the property sold or purchased. A flat fee is a specific dollar amount that the real estate agent agrees to receive, usually upon the sale of a home but also sometimes at the outset to cover marketing costs. Real estate agents are often paid a flat fee when providing only transaction services, where the real estate professional does not advocate (is not an agent) for the consumer but helps manage the transaction (e.g., managing paperwork, coordinating closing, etc.).
The agent and his or her brokerage split the commission or fee under a negotiated agreement, but an agent must receive the fee or commission from his or her brokerage. So, the fee or commission is paid to the agent’s broker, who then pays the agent his or her cut.
A prohibited form of payment is called a net listing. Under a net listing agreement, the listing agent receives all excess proceeds of the sale over an agreed-upon amount. These agreements are expressly forbidden in section 34-27-36(a)(20) of the Code of Alabama.
Who pays real estate agents?
Commissions or fees are paid by the seller and/or buyer to an agent’s brokerage. This is governed by agreements between agents and clients.
The Listing Agreement - Typically, the seller and the listing agent sign what is called a listing agreement. The listing agreement determines what the seller agrees to pay the listing agent upon the sale of the property and may provide an amount the seller is willing to pay an agent for bringing a buyer to the table. The cooperating brokerage fee is the term used for the split of the seller’s payment that the listing agent is willing to pay to a buyer’s agent. Generally, this split is included in the listing information on the multiple listing service (MLS).
The Buyer’s Agency Agreement - On the buyer’s side, the buyer and the buyer’s agent sign a buyer’s agency agreement. While a buyer’s agency agreement may set out what the agent will be compensated upon the buyer’s purchase of a home, many buyer’s agency agreements, including the Alabama REALTORS® form agreement, state that the buyer’s agent will attempt to collect the payment from the seller or seller’s agent. And, as noted above, the seller typically offers the buyer’s agent a cooperating fee for bringing in a buyer. So, in practice, the listing agent and buyer’s agent often split the seller’s payment to the listing agent, while the buyer does not pay the buyer’s agent directly. A reason for this is simple economics. The seller has the money from the sale of the house, while the buyer’s money goes to the seller for the house.
The Transaction Brokerage Agreement – When the real estate agent provides transaction services only, the parties usually sign a transaction brokerage agreement. This agreement sets out the specific, non-agency services to be provided and the fee, often a flat fee, to be paid to the agent. Again, transaction agents or brokers do not represent or advocate on behalf of the consumer but simply help manage the transaction.
Dual Agency – In dual agency, the agents in the same company split the fee or the one agent representing both parties receives the entire fee. To reiterate what was stated above, the same agent representing both sides and receiving the entire fee naturally creates conflicts and should be entered with due care.
Keep in mind that what is typical in one location or for one company may be different than in another location or for another company. For instance, it may be common in your area for the buyer to pay his or her agent directly. Some real estate companies will not provide dual agency, while others will not provide transaction services.
The Importance of Negotiating the Payment
One last, but important, point: consumers can and should negotiate what they pay to real estate agents, just like negotiating for any other service. Commissions for residential real estate sales vary depending on a lot of different factors, including the type of house and the market. Regardless of where you are, it never hurts to ask.