What is the real estate ‘commission’?

Real estate commissions and real estate services can be confusing.

With so many dependencies and variations, it’s not unusual for people to ask us questions like, “Who pays the commission? How are real estate commissions calculated? How much is the commission really?

Many people, including those who have bought or sold real estate with brokers, have no idea how commissions work, how they are calculated, or how much commission is paid.

Real estate commission is a professional service fee charged by a real estate agent for the purchase or sale of a home.

The fee covers the successful transfer of real property, from one party to another.

Typically, the commission fee is a pre-negotiated percentage of the property’s sales price and is paid by the seller. Some real estate agents charge a flat rate commission, but in Costa Rica this is unusual and although it is not a problem, owners usually seek to tie the amount to the final sale price so they prefer to express it in terms of a percentage.

There is no regulation in Costa Rica about what a real estate broker can charge, and many agents find creative ways to differentiate themselves, including charging commission.

Most brokers in Costa Rica charge a commission of 5% to 8% for buying and selling transactions. A small number of real estate agents charge flat fees for their services, meaning there is no percentage. And the commission rates are different for residential, vacation, and commercial rentals.

Although it is usually 5 to 6 percent across the board, here are some examples:

If a house sells for $400,000, a 6% commission would equal $24,000. In Costa Rica and many countries that amount would be burden with a sales or value added tax (VAT) which is 13% of the commission amount.
Therefore, if the selling price of a home is $200,000, a 6% commission would equal $12,000.

It is important to note that real estate commissions are usually split between two agents equally:

• The listing agent (the agent who represents the property, represents the person selling the house)
• The buyer’s agent (the agent who represents the person buying the house)

In the simplest terms, the home seller pays the real estate commission to both, the listing agent and the buyer’s agent. That means if you’re the one buying the home, you don’t pay the commission, but in many cases you may be responsible for other closing costs.

This can be confusing to many buyers and sellers because the home buyer finances the purchase price on which the commission is paid. In fact, many clients often hear that the buyer “takes care” of the commission, but this is not technically true. The commission comes from the funds that the buyer gives to the seller’s agent for the sale of the home.

In other words, the commission owed to a real estate agent comes from funds paid to the seller, for the full purchase price of the property.

The buyer indirectly pays the commission of a real estate agent. That is, the broker commission payment comes from the sale price of the property, if there is no buyer there will be no sale or real estate agent commission.

Another way to verify where a real estate agent’s commission comes from is to look at the listing agreement (property for sale representation agreement) and the purchase contract. These documents usually indicate the amounts or percentages of the commissions.

In some rare cases, the buyer may have their own pre-arranged representation agreement for the payment of real estate commission for search service and negotiation and transaction support. It is used with more formal clients in the commercial real estate sector or demanding clients in different types of search.

In almost all cases, a real estate commission is not a fixed payment, but a percentage of the total sale price of the home.

To calculate the total real estate commission, follow this simple formula:

1. Divide the real estate commission percentage by 100. In this case, for example, if the commission is 6%, divide 6 by 100 and you get 0.6.
2. Multiply this number by the purchase price to get the gross commission.
   For example, if the commission is 6 percent and the home purchase costs $500,000, the gross commission is $30,000.

Once the total commission is calculated, there are often many other factors to consider. Real estate brokers or consultants may have additional expenses such as other agent’s commission payment, referral payments, company payments, deductible expenses, etc… In most cases this is no longer up to the owner or buyer, but it is an internal process of the broker.

Often, the largest expense for the seller of their property is the commission related to the work performed by a real estate agent. Naturally, the seller wants to know exactly what its getting in return for the commission and if it is worth it.

Let’s break down what a real estate agent’s fee covers in a typical transaction where the total commission for a home sale is $10,000.

First, the total real estate commission is split between the seller’s agent and the buyer’s agent. That means each agent’s split is $5,000. But the division does not stop there.

To practice real estate, many agents are part of a team or company with which they share part of their commission. That commission split varies depending on the agent’s agreement with their company. The split is generally determined by the agent’s experience balanced with the amount of services and support that the company provides.

For example, suppose the split between the company and the listing agent is 50%. That means the agent and the company each get a $2,500 share of the $5,000 commission.

Of those $2,500, the agent would be responsible for paying VAT, which is usually part of the initial payment and the income tax according to her declaration and income. However, that $2,500 is not what the agent ends up earning. From your split of the commission, both the agent and the company will pay expenses directly related to the sale of the property, which may include signage, advertising, transportation, stationery, equipment, and others.

Most real estate agents work on a real estate commission basis. In other words, if they fail to close a real estate transaction, they don’t make any money. However, this is not always the case and there are other modalities:

• Some receive some form of salary and commission. In these cases, their commission percentage with the company is usually lower because they do not take the same risk.
• Others receive a salary, commission and bonuses.
• Some agents receive salary, commission, bonuses and profits from their company in proportion to the risk and investment they assume.
• Many buy, manage or lease properties to increase their income.

How often have you heard the question, “What do real estate agents do for your money?”

The truth is that the roles and responsibilities of real estate agents and brokers are many and varied. You can see what NATIVU does to support property sales as an example.

Here are just a few of the things a trained and professional real estate agent does for their clients (which also come with out-of-pocket costs):