A Real Estate Commission Agreement—What Is It All About?

Standardized Legal Documents A Real Estate Commission Agreement—What Is It All About?

A Real Estate Commission Agreement Explained

There are so many subcategories of regular legal documents that it’s enough to confuse even the people who deal with contracts all the time.

If you are about to enter into a real estate commission agreement, here’s everything you should know before closing the deal.

What Is a Real Estate Commission Agreement?

A real estate commission agreement is a contract that outlines the terms and conditions of a real property exchange. The agreement itself works similarly to other real estate purchase agreements. The only difference is that the realtors who work for the parties are paid on commission. 

What Is a Realtor’s Role in Real Estate Purchase, and How Does Commission Work?

Sellers pay for the real estate agents or brokers, whether they work for the seller or the buyer. Both the property owner and the purchaser can choose not to employ a realtor or broker, but that’s not the smartest decision. The agents can make the entire transaction easier since they:

  • Have extensive market knowledge and can promote the real property the right way
  • Possess excellent negotiable skills
  • Understand all the intricacies of real estate agreements and explain them to their clients

By definition, the seller pays a percentage—around 3% to 6%—of their home’s purchase price to the realtor. Since the buyer actually purchases the property, they pay for the agent, though indirectly.

The agents who work on commission charge their clients in proportion to how much the home sells for. This means that the higher the price a buyer pays for the home, the higher the agent’s commission is.

What Is the Difference Between Exclusive and Non-Exclusive Compensation Agreements?

If you choose to work with a realtor who gets paid on commission, you can opt for an exclusive or non-exclusive compensation agreement. Check out the table below to see what the differences between the two are:

Type of Compensation Agreement

Characteristics

Non-Exclusive, Not for Compensation Agreement
  • Allows the buyer to work with more than one agent or broker
  • States that the buyer is not responsible for compensating the broker or agent
  • Details the buyer’s and the agent’s or broker’s obligations
Non-Exclusive Representation Agreement
  • Includes compensation for the agent or broker
  • Stipulates that the buyer won’t pay the agent if the seller is financing them 
  • Outlines the buyer’s, agent’s, and broker’s duties
  • Enables the agent or broker to get higher compensation than initially agreed upon if the seller is willing to do so
  • Allows the buyer to choose a single agency, i.e., that the agent represents only them and not the seller as well
Exclusive Agreement
  • Bans the buyer from working with other realtors or brokers
  • Stipulates that the compensation the agent or broker receives is negotiable

Except that the buyer cannot work with more than one agent, an exclusive agreement is entirely the same as the non-exclusive representation agreement. An advantage of exclusive agreements for buyers is that the agent or broker will work hard to find the best property and negotiate the best price for that single buyer.

Bonus Info About Real Estate Commission Agreements

You should always pay attention to use or write a contract that abides by your state’s or county’s laws.

What real estate commission agreements usually have in common is that they:

  1. Need to be in writing if they are exclusive and if their duration is one year or longer
  2. Require the agents, realtors, and brokers to provide a notice of negotiability if they want to get compensated for their work
  3. Have to include a termination date if they are exclusive
  4. Must be between the parties who have a real estate license

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