Broker Compensation Explained: Key Details for Your Real Estate Transaction
Let’s break down the key aspects of broker compensation to help you make informed decisions in your transactions.
Seller’s Broker Compensation
When you list your property with a broker, you agree to pay them upon closing of the sale. This compensation is not set by law and is fully negotiable. Factors such as the broker’s expertise, the scope of services, and the anticipated time and effort can all impact the final compensation amount. It's important to have a clear discussion with your broker about these factors to ensure the compensation aligns with the services they will provide.
In some situations, buyers may not be represented by another broker. When this happens, the seller’s broker may need to handle additional responsibilities. To account for this extra work, the seller and the broker might agree on additional compensation. This should be clearly outlined in the listing agreement to avoid any misunderstandings.
California law allows a single brokerage to represent both the buyer and the seller in a transaction, known as dual agency. While this can streamline the process, it’s important to understand that the brokerage can receive compensation from both parties. Both the seller and buyer must be informed of this arrangement and the total compensation the broker will receive to ensure transparency.
Buyer’s Broker Compensation
When you work with a broker to find and purchase a property, the compensation for the broker is negotiable. This compensation should be documented in a buyer representation agreement. Negotiating the compensation amount based on the services provided and the broker’s experience ensures that both parties have clear expectations.
Recent regulations require that before showing any residential property, a broker must have a written agreement with the buyer. This agreement should specify the compensation amount and ensure that the broker will not receive more than what is agreed upon. This new rule is designed to protect both buyers and brokers by establishing clear expectations from the start.
Having a written agreement helps clarify the terms of your relationship with the broker and the compensation they will receive. This clarity helps prevent disputes and ensures that everyone is on the same page regarding duties and expectations.
Who Pays the Broker?
Typically, the buyer’s broker is compensated by the buyer through funds provided at closing. This arrangement is documented in the buyer representation agreement, making the buyer contractually obligated to pay their broker.
In some cases, buyers may request that the seller cover their broker’s compensation. This request can be included as a term in the purchase offer. If the seller agrees, this becomes part of the transaction’s terms. Additionally, if the seller is unrepresented, the buyer’s broker may negotiate directly with the seller for compensation. It’s important for the seller to understand that the broker will be representing the buyer only in this situation.
Historically, sellers’ brokers would use Multiple Listing Services (MLS) to offer compensation to buyer’s brokers. However, recent regulations now prohibit this practice, requiring buyers and sellers to negotiate broker compensation directly.
Be sure to share this guide with others who may benefit from a better understanding of broker compensation in real estate transactions.
Best regards,
Lindsay Woolf | CA DRE #02236711
DOMO Real Estate | CA DRE #01290500
Disclaimer: The information provided in this blog post is for general informational purposes only and does not constitute legal advice. Real estate transactions can be complex and subject to local regulations.
