Sales Commission vs. Finder's Fee: Understanding the Difference
In sales, a number of different elements come together to make a transaction happen. Besides the buyer and seller, real estate agents help negotiate deals and select sale or purchase opportunities from a number of possible options. Sales commissions and finders fees are two different forms of compensation that sales intermediaries may receive.
Negotiating Versus Finding a Deal
A sales commission is a form of incentive that a sales agent receives for facilitating a transaction. The commission is usually a percentage of the sale price. Sales agents who earn commissions can work for the buyer or the seller. A finders fee, on the other hand, is a payment that someone earns after making an introduction or discovering an opportunity that results in a sale. The finders fee rewards an agent who initiates a relationship that leads to a sale, but may not actually participate in negotiations.
Typical Fees
Sales commission and finders fee amounts vary by industry and from one transaction to another. In general, sales agents have standard rates for each type of transaction, though an individual agent may agree to accept less or ask for more in certain scenarios, for example, if the transaction is especially complex. Real estate agents typically earn sales commissions between 3 and 7 percent. A typical finders fee is 1 percent or less, which reflects the finder's smaller role in a transaction.
Written Contracts
Sales agents who expect to receive sales commissions or finders fees may require the buyers and sellers they work with to sign contracts that stipulate the amounts and terms of those payments. Without a contract, an agent may work to make a sale happen and receive no compensation, with no way to seek restitution. A sales agents may ask a client to sign an exclusive right to sell agreement, which guarantees the agent a commission if the seller engages in any transaction for the property.
Paying the Commission or Fee
Sales commissions come out of the total sale amount and go first to the seller's agent. If the buyer has an agent who also earns a commission, the seller's agent may agree to split the commission. Finders fees may follow a similar path. In other cases, the buyer or seller may voluntarily give money to someone involved in the sale in the form of a finders fee, as a means of showing appreciation and incentivizing the finder to help facilitate future business.
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