This is a topic that causes some confusion and it’s not limited to first time home buyers. In order to understand how Real Estate commissions are paid, and who exactly pays them, an examination of how Real Estate agents are paid is in order.

• In Tennessee, only Real Estate Brokers may pay a commission or enter into a listing agreement with a seller.
• Real Estate agents work for a broker.
• Only brokers may pay out commissions. Any and all fees paid to an agent must first pass through a broker.
• It is illegal for any Real Estate agent to accept any money for any Real Estate transaction, including sales, rentals, or property management, that does not come directly from the broker he or she works for.

That being said, how does it work? Do buyers and sellers each pay their own commission? What if the buyer is unrepresented, is a buyer’s commission still paid by the seller? What if a buyer is working with an agent, and finds a property they wish to purchase, but the seller is unrepresented - how does the agent get paid then?

The key to eliminating confusion surrounding the payment of Real Estate commissions is understanding how the process works. All fees and commissions are paid to the broker. The broker then pays the agent depending on what type of split they have agreed to. New agents might receive as little as 40-50% of the total commission received by the broker. From that amount other expenses might be deducted - things like advertising expenses, required Errors & Omissions insurance, even office supplies or sign rentals.

Top Producing agents can command a larger split, sometimes as much as 100%, but then they will typically owe the broker a desk fee, and pay their own expenses. Everybody else will fall somewhere in between.

Listing Agents Fees:

An Exclusive Right To Sell is the most common listing type and gives the listing broker exclusive marketing rights for the property. No matter who sells the property, the listing broker is entitled to a commission, typically 6-7%. The listing contract identifies the fee paid to the cooperating broker, and it's not always a 50% split.

Co-Broker Splits:

The Real Estate Industry is unique in that although every agent is in competition with every other agent, everybody also cooperates and fees are shared between the listing broker and the buyer’s broker. The split may not always be equal, however. In a slow market it might make good sense for the seller to ask that the selling agent receive a greater percentage of the commission. This motivates a huge sales force on your behalf.

Buyer’s Brokers:

Buyers frequently, but not always, contract with a specific broker to assist them in Real Property acquisition. If this is an exclusive buyer broker agreement, commissions are a part of this agreement. A buyer in such a contract could become liable for all or part of the buyer agent commission, particularly in the case of a sale by an unrepresented seller, or if the co-broker split is less than the contract commission.

So Who Pays The Real Estate Commission?

The buyer always pays the commission. That’s because the commission is wrapped into the sales price. If the seller has not agreed to pay a commission, the sales price could conceivably be lowered. So, one would think that finding an unrepresented seller, a FSBO, would result in a lower net sales price, a price that reflects the absence of a Real Estate commission. Unfortunately, most unrepresented sellers have not really figured this out, and buyers of these properties are frequently disappointed.

When a home is marked with a contingency, it means there is a contract on the home, and somebody is trying to purchase it.

There are 4 possible contingencies identified in MLS listings.

• Spouse Approval - This one is pretty rare, but means either the husband or the wife locked the home up in a contract, effectively taking it off the market, pending approval.
• Financing - This is a common contingency, and means the home is under contract and the buyers are pursuing financing. It is possible to place a backup contract on the home, but usually is not a good idea unless you have determined you just must have this home.
• Inspection - This home is under contract pending the results of buyer professional home inspection.
• Sale of Home - Buyers want this home, but can’t buy it until they sell their current home. This type of contingency will accept a backup offer fairly readily if you have the ability to pursue the purchase right away. This type of contingency usually means the contract has a kick-out clause. That means if another buyer can be found, the seller will pursue the buyer that can close most quickly. A kick-out clause will contain some period of time, frequently 72 hours, to proceed with the sale, or lose the contract.

A short sale is also known as a pre-foreclosure sale. This type sale indicates the homeowner is in financial problems, and is trying to avoid a foreclosure. Sometimes they are upside down on their equity - owing more than the property is worth. This can happen for a number of reasons including maintenance problems which have not been resolved, a second mortgage or HELOC that increased the debt beyond the property value, or even declining property values in a slow market.

A short sale means the home is being sold for less than the amount of debt owed. This does take approval from the lender and frequently results in a longer than normal time frame to close. There are some good deals to be had, but expect to wait for approval, sometimes 30-45 days, maybe more. It is not unusual for a short sale to close at 90 days from the date of the offer. Because the lender is already taking less than the amount of money they are owed, they are generally not amenable to any other concessions. Which means they will not be prone to assist with closing costs or do any type of repairs.

Federal regulations dictate that the seller, who is actually not the bank, may not make any profit from the sale. Not even a nickel. Additionally, Fannie Mae guidelines prevent the seller of a pre-foreclosure home from taking out another mortgage until 2 years have passed from the date the transaction has closed, and credit must be re-established.

The Fed is actually encouraging lenders to engage in short sales, which does reduce the pressure that foreclosures induce on the housing market. The slow and often disconnected way in which short sales are performed is currently under review with the goal towards streamlining the process. But, for now, expect to wait up to 90 days before the sale is actually completed.

Short sales, along with foreclosures and distressed property listings can be found in our foreclosure area.