The following is an example ONLY and is not meant to imply any, or all real estate transactions are done exactly the same. Neither commissions nor splits are set by anyone other than the Seller and the Sellers Agent. There is NO such thing as a "SET" comission rate. All Realtors® are independent contractors and as such, negotiate their commissions with their clients.

In our experience, many consumers are not aware of how commissions in real estate transactions work. We felt the need to try and clarify this to our clients and readers.

We will use a "typical" example here and are only using figures to illustrate. This in no way implies it is the ONLY way or that ANY of these figures are "set" between Realtors®.

In reality, the Listing Broker is called a Listing Broker, but the Buyer's Broker is commonly referred to as the "Selling" Broker in case you hear that in your dealings. In Colorado there are ONLY Brokers, Employing Brokers and Broker Associates. There are no longer "Sales Associates". There are ONLY three types of "Agency" in Colorado. Seller's Agent, Buyer's Agent and Transaction Broker.

EXAMPLE: Let us assume Mr. Jones wishes to list his house with a Realtor®. He contacts Broker Smith and they set up a "Listing Appointment". Prior to the appointment, Listing Broker Smith would usually, and should, run a "Comparative Market Analysis" on Mr. Jones' home. That will give the Listing Broker and Mr. Jones a very close idea of what his home SHOULD list for. (Of course, Mr. Jones can have the Listing Broker LIST the home for whatever price he wishes if the Listing Broker agrees to that).

Let's assume that the Listing Broker and Mr. Jones agree that the home should be listed for $300,000.00 per the CMA. Mr. Jones and Listing Broker Smith agree that a commission will be paid of 6% (offering 2.8% to Buyer's Broker) based on the ACTUAL selling price . They sign the Exclusive Right to Sell Contract and off goes Listing Broker Smith to market Mr. Jones' home. The following is how it works:

The following are some of the costs borne by the Listing Broker:

Listing Broker lists home in Multiple Listing Service with all the terms of the sale, property descriptions etc.
Listing Broker puts out For Sale signs
Listing Broker puts home in Brokerage newspaper advertising
Listing Broker has fliers printed about home for distribution at Open Houses etc.
Listing Broker uses any number of other devices to market home, magazines etc.
Listing Broker coordinates previews and showings with other Brokers
Listing Broker puts lock box on door
Listing Broker accomodates and coordinates the Appraisal and Inspection with seller

The following are some of the costs borne by the Buyer's Broker:

Buyer's Broker meets with Buyer and signs Buyer Agency Contract
Buyer's Broker interviews buyer and assesses needs and wants
Buyer's Broker recommends Buyer be pre-Qualified or pre-Approved for a loan in an amount Buyer is willing to pay
Buyer's Broker begins search of Multiple Listing Service and other means to find a selection of homes available in the Buyer's qualification range and desired type of home -cost
Buyer's Broker sets up previews of homes selected and personally sees them prior to showing buyer - cost
Buyer's Broker weeds out homes that do not match buyers specifications and sets appointments to show the homes selected to the Buyer
Buyer's Broker prepares Offer to Purchase with Buyer
Buyer's Broker contacts Listing Broker and presents Buyer offer
Buyer's Broker presents Seller Counter-offer to Buyer and explains
Buyer's Broker presents Counter-offer agreed to by Buyer back to Listing Brokert
Buyer's Broker informs Buyer that offer is accepted contingent on Appraisal and Home Inspection
Sale of property goes to Closing
Listing Broker and Buyer's Broker attend Closing to ensure all terms of the Sale are met
Title Company disburses all funds at Closing

Remember that Listing Broker would pay 2.8% to Buyer's Broker? That means the Listing Broker got 3.2%. Correct? OK.

Assume the property sold for $300,000.00. The TOTAL Commission paid by seller was 6% of $300,000.00. That equals $18,000.00. Of that amount the Listing Broker and Buyer's Broker had to split, typically 50-50, with their Employing Brokers.

Of the amount each received the:

Listing Broker paid franchise fees (typically 6% of his share), office fees, advertising costs
Listing Broker paid office expenses, insurances and other costs to market the property
Buyer's Broker paid franchise fees (typically 6% of his share), office fees, telephone expenses
Buyer's Broker paid office expenses, insurances and other costs associated with representing the Buyer

In each case the Broker Associates who were representing the Seller and the Buyer probably ended up with about one per-cent of the sales price of $300,000.00 or $3,000.00. And they each had to bear the costs to serve their clients. To have an income of $30,000.00 a year each would have had to sell or effect purchases of ten $300,000.00 homes.

We think when people understand this they can realize that they are getting a LOT for their money when they use a Realtor® to represent them in a real estate transaction.

Some Sellers think Realtors® should cut their commissions. But if they did, where would the marketing money come from? And what incentive would Buyer Agents have to show the property? It is a costly proposition at the least.

Sellers need to consider this when listing their properties. It MUST be priced right consistant with Comparative Market Analysis. The Listing Realtor® must charge a fair commission in order to properly market the property and attract Buyer Agents and offers.

Some sellers want to sell their property themselves which is fine. But they cannot even get close to exposure they will get from a Realtor®. Their liability is horrendous. Their ability to qualify buyers is extremely limited. They are also held to the same LEGAL standards as Realtors®. They must make the same disclosures to buyers and so on. And if the property is for sale for months on end, or they get sued by a buyer, they lose way more than it probably would have cost them to list with a Realtor®. But God bless the free enterprise system!

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