On Commissions & Commissions

The idea of a “commission” for any real estate deal emanates from the age old concept of “There’s no free lunch”! There is a cost to everything we do; and without which there is no value in any transaction.
The Cambridge English Dictionary defines “commissions”, inter alia, as the payment of an amount to someone who helps you to sell the goods and services, and which payment is directly related to that sale, or transaction, as a percentage of the amount received only on that sale taking place, and not otherwise.
It can also be described, among other definitions, as a system that uses such payments to get things done. Thus a commission is a success-based fee for the accomplishment of a pre-agreed project, or achievement. Over time, this has become the sale or purchase of something, or the other; or even any other monetary transaction involving various assets. For instance renting out any premises, or arranging finances for your proejct.
The theory is that the sale or transaction intended would, or could, not have taken place, but for the involvement of the other people, who are neither the buyer nor the seller, but someone in the middle who know both such categories of buyers and sellers, and bring the two of them together so that their transactions can happen. And for this, these “middle men” should be paid a reward, which is the “commission”.
There is no statutory record of when a “commission agent” became a “broker”. It is just that the person involved in getting the deal done, was said to have “brokered” the deal. He was the key player in bringing the buyer and the seller together to strike a deal. They broke the deal, as you break bread. Perhaps, that is how, when all of them were happily breaking bread, the person bringing them together began to be called a broker!
There is no law which defines how much should a commission be. But by tradition it has come to imply a flat rate of 2 % of the transaction value. It is just a tradition which has been handed down for decades, if not centuries. But again, it is different for different transactions; the
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larger the transaction, the lesser the commission. Eventually it is a pre-agreed amount.
A major problem in the concept of commissions is the need for “sharing” it. More often than not many people get involved in helping in the completion of the deal. This is the code of “good brokers”: whoever has been questioned and has given some lead to help in that deal, must be “covered”, and have a share in that commission so received on the completion of the deal. Very often, a large number of people may have been involved in bringing about the successful dénouement of that transaction, then all of them will have to be share the commissions, however small it may be! If there were ten people involved, then all of them will land up for a meeting, and for their share of the commissions!
Should any advance of the commissions received be returned, if the deal does not go through? Ethically, yes. But if the deal has broken down because of the problem with the buyer, then the seller, and also the broker, can not be held responsible.
When are the commissions payable? By its very nature, there are payable only after the deal has been done and dusted! And that is why, there is so much concern and worry about the brokers getting their shares. Since the system, as of now, is very disorganised, there is a great element of distrust about this aspect of real estate.
Often the seller and the buyer have a different set of their own commission agents. Then the two sides may decide to keep their set of commissions separately. Mixing the two may not be acceptable; as the quantum each side may receive from their principals may be different.
Again, the commissions for rentals are different. One month’s rent, and half percent of the deposit are spoken about. But more often than not, the actual amounts are less than that.
It is always better to sort the issues of the commissions and the sharing of those, in advance. Clarity is better than being duped out of your hard work of bringing two people, a buyer and a seller together.
For a Broker, It is a Hard Days’ Life.