Listing agreements

C - Why is the "payout" of the commission critical?

How commissions are split:

It's important to know how commissions are split between the listing agency and the agency representing the buyer. The commission percentage amount that’s offered to the buyer’s agent, or “payout”, is shown on the listing sheet. All agents are aware of this "coded" amount, although the public wouldn't notice it.

Appearing on the listing sheet are codes like "CC 3" would mean Commission Code 3% or "BA 2.5" stands for Buyers Agent gets 2 1/2% or "3% 100K/2 BAL" is code for 3% payout on the first $100,000  and 2% is paid on the "balance" of the selling price above 100,000. The commission portion that goes to the listing agency is kept secret. That's because the commission is not always split equally between the two offices.

Ask agents you interview how the commission will be divided between their office and the agency that represents the buyers. If the split is uneven, the larger share should always go to the agents that represent the buyers. This is a common and logical arrangement since you want to attract agents to show your house.

If a commission is not split equally, the selling agents should get the lion's share since they do most of the work, as opposed to the listing agent.

The payout percent should always be shown on the listing agreement.

Needless incentive:

In general, avoid offering less than the "going rate" to the buyers’ agents unless you’re in a strong seller’s market with more buyers than homes for sale, your home is in a price range that has very few competing homes for buyers to choose from, or your home is a desirable cream puff.

When buyers have a limited selection to choose from, they want to see all properties on the market. The house will sell itself, with minimal help from an agent.

Some homes are gems that any buyer would want–making an easy sale for the buyers’ agents. These homes make a strong case for offering a payout that is less than the traditional amount.

Of course if this is the case, then the home should easily sell by-owner. 

Don’t be hurt by a discount:

Suppose 3% is the standard payout in your area. When an agent offers to list your home at a reduced commission, like 4½%, there shouldn't be a reduction in the 3% commission amount offered to the buyers’ agents. Of course, if your home is a real cream puff and/or it's a hot market, a payout that's less than 3% is fine. Thus, in this example, a 4% total commission could be split 2 1/2% and 1 1/2% or it could even be agreed upon as 3 1/2% with a 2 1/2% and 1% split.

With these rates, commissions start to make sense. During the last few years, the average total commission rate nationwide was reported to be down to 5.1%.

In other words, most commission reductions should be taken off what the listing agent would normally make on a sale, not from the payout to the agents that bring the buyers.

A payout that’s only a half a percent lower than the going rate shouldn’t be a problem. Agents who are not showing your home because of the lower commission payout are not representing the best interests of their buyer clients and could face a lawsuit or face disciplinary action that could put their license in jeopardy.

Today, "blackballing" a listing is usually reserved for payouts that are only a fraction of the "going" rate. Besides, buyers have access to the homes on the market through the internet and will demand to see them–or they will get a different agent.