When it comes to real estate transactions, everyone knows that commissions are involved; it’s how brokers get paid! But what’s not so common knowledge are the various details surrounding these commissions like who actually gets paid, who’s responsible for paying and how much is owed.
Whether you’re the tenant or landlord in the deal, you’ll want to have clear answers to all of these questions before working with a broker or proceeding with any real estate deal. Understanding the “fine print” will help alleviate the stress and potential pitfalls of being uninformed regarding commissions.
Let’s take a look at some of the most essential questions surrounding this important real estate topic…and their answers!
What parties earn a commission?
Typically, a commission is paid to both the listing agent/landlord representative and the tenant representative, if a real estate transaction has both of these parties involved and they are different from one another (here’s why they should be!).
It’s important to note that if you are a tenant looking for a property, you will want to have your tenant representative with you from the very first time you see a property. If another agent (whether you know them/asked them or not and regardless of whether they represent both buyers and sellers) bring you to a property, he/she is legally entitled to a portion of the leasing commission as the “procuring” agent.
You may never see this agent again or benefit from their advice/expertise, but since that agent showed you the property, that agent will be paid a commission. This complicates the situation if you should choose to then hire a tenant rep different from the initial agent who showed you the property – and a commission dispute may ensue. To avoid all this trouble, it is best to establish your tenant rep from the beginning and have only him or her show you properties!
Who is responsible for paying this commission?
After a lease is signed, it is typically the responsibility of the landlord (or property owner) to pay a commission to both the listing agent/landlord representative and the tenant representative. As the tenant, it is not usually assumed to be your responsibility to pay a commission to your broker. This is paid by the landlord at the time the lease is executed, unless otherwise negotiated.
How is the amount of commission determined?
The cost of commission varies and commission is most often calculated as a percentage of the lease value (also referred to as “total consideration”). When the signed lease has been executed and the tenant takes occupancy, generally one-half of the commission (paid by the landlord) is paid to the landlord rep and one-half of the commission is paid to the tenant rep.
For example, a tenant signs a 3-year lease for a 2,000 square-foot space at $20 per SF per year. The total consideration = $120,000 (2,000 SF * $20/SF per year * 3 years). The property owner pays a 6% commission (one-half to landlord rep and one-half to tenant rep). The total commission = $7,200 ($120,000 * 0.06).
It’s also worth noting that an agent may “split” their total piece of the commission, sharing it in some proportion with their broker. Commission splits range anywhere from 50/50 (most common) to 90/10, in favor of the agent.
Real estate services are NOT free.
Real estate transactions typically include commissions that are shared by the agents or advisors representing each party. Even though the property owner writes the commission check, it’s ultimately the tenant that funds the commission – in the form of rent payments (for leases) or purchase proceeds (for sales). Make certain that you are receiving full value from your “side” of the commission by having an unbiased, experienced, licensed real estate advisor assist you with the research for suitable spaces and in the negotiation of acceptable terms and conditions.
Do you have another question about real estate commissions that wasn’t answered in this article? Ask us!