In most areas there is a "customary" percentage that real estate agents expect to earn as a commission. Usually, it is six percent of the sales price. In some areas it can be as high as seven percent. However, just like anything else in real estate, this amount is negotiable. When completing the listing agreement, you and your agent will agree on the amount of the real estate commission.

With the advent of the web, the real estate industry has become more competitive.  Some agents and companies are offering cut-rate commissions to get you as a client.  There are a variety of reasons for this.

When you list with a company, they can advertise your listing in newspapers, magazines, and on the web.  This pulls in phone calls and emails from prospective buyers.  By cutting your commission, they get more listings, can generate more ads, and can bring in more buyers.

Much of the time, the lower commissions are offered when you agree to tie in to other services offered by the broker, such as agreeing to use a specific lender, escrow, settlement, or title company. The broker (not the agent) will probably have some type of ownership or profit participation in those businesses.

A potential problem with agreeing to tie in to these other companies is that they are not always competitive in pricing those other products or services.  Sometimes they are priced in a way that allows them to earn back the income lost by offering a smaller real estate commission.  This doesn't always happen, but often enough that you should be a vigilant consumer.

Another common practice when you see an ad for a reduced commission is that the compensation is lowered when you agree to buy your next home through the same agent or broker. It makes more sense for the company to actually offer the reduced commission on your purchase rather than the sale, so you might expect an arrangement like that.

Finally, sometimes (but not always) lower commissions are tied to a lower level of service. All you may want is a sign in your yard and to be listed in the Multiple Listing Service.  In such a case, then a cut-rate commission may be right choice for you, too.  If you want a full service agent who actively markets your home and doesn't tie you in to additional services or require you to buy your next home through them, you may want a full-commissioned agent.

As a result, when you see an offer for a lower commission, you should analyze whether you are giving up any services or freedom to choose services in the open market, then determine if that makes sense for you.  Be sure to ask lots of questions.

Your listing contract specifies a listing price. Your agent’s job is to bring a "ready, willing and able" buyer to present an offer. If you reach agreement with the buyer, then the agent has done his job and earned the commission. Once the sale has closed, the real estate broker gets paid from the proceeds of the sale.

If the buyer proves unable or unwilling to conclude the sale, the house is placed back on the market and the agent has to begin earning his or her commission all over again.

However, if the seller backs out or does not accept an offer that meets the price and terms of the listing agreement, the listing broker has still earned the commission. They may want to be paid, even though you did not actually sell your home. Therefore, it is very important to carefully consider every detail when completing your listing contract and accepting an offer to buy your property.

During a "hot market" there is a certain marketing technique which, though very effective, could cause trouble because of the way the contract is written. This is the practice of "under-pricing" the home. In a hot market, a home that is under-priced gets a lot of attention from other Realtors, and they all start showing your home to their clients. Often, you get into a situation where multiple offers are presented and the price starts going up because of the frenzy. You end up selling the house above your asking price and perhaps above what you could have received if you had priced it traditionally.

However, the technique does have the potential to backfire, so you should build safeguards to prevent having to pay a commission "just in case."

You see, the listing contract usually states that if an offer is received that meets the terms presented in the contract (including price), the real estate agent has earned his or her commission – even if you decide not to sell. A reputable agent would never attempt to collect a commission if they were using the "under-pricing" technique and it backfired, even if they are technically entitled to one. For that reason, in the "additional terms" space on the listing contract, you should specify your true target price – when the agent has really earned the commission.

copyright 2000 by Terry Light and RealEstate ABC