Brokerage Allowance

Commission paid by the seller in a transaction to the broker who arranged the sale, based upon some percentage of the selling price. A brokerage allowance usually refers only to transactions in which the broker does not take possession of the goods sold.
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Definition

A Brokerage Allowance refers to the commission paid by the seller in a transaction to the broker who arranged the sale. This commission is based on a percentage of the selling price. Importantly, a brokerage allowance typically applies to situations where the broker does not take possession of the goods being sold.

Examples

  1. Real Estate Transaction: When a homeowner decides to sell their property, they hire a real estate broker to find a buyer. The broker successfully sells the property for $500,000. If the agreed brokerage allowance is 5%, the seller pays the broker a commission of $25,000.

  2. Stock Sale: An investor decides to sell shares they own in a corporation and uses a brokerage firm to facilitate the transaction. If the brokerage allowance is 1% and the shares are sold for $100,000, the brokerage firm receives $1,000 as a commission.

Frequently Asked Questions

What is the typical percentage for a brokerage allowance?

The percentage for a brokerage allowance varies widely depending on the industry and type of transaction. In real estate, it typically ranges from 5% to 6%. In financial markets, it can be as low as 0.5% to 1%.

Does the broker take possession of the goods?

No, a brokerage allowance usually applies to transactions where the broker does not take possession of the goods. The broker’s role is to facilitate the sale and link buyers and sellers.

Is the brokerage allowance negotiable?

Yes, the percentage or amount of brokerage allowance is often negotiable and should be agreed upon by both the seller and the broker before proceeding with the transaction.

Who pays the brokerage allowance?

The seller typically pays the brokerage allowance to the broker. However, there are instances where the buyer might cover this cost, depending on the terms of the deal.

  • Commission: Payment made to a broker or salesperson for facilitating a transaction, usually a percentage of the selling price.
  • Broker: An individual or firm that acts as an intermediary between buyers and sellers, often earning a commission for services rendered.
  • Listing Agreement: A contract between a seller and a real estate broker detailing the terms under which the broker will market and sell the property.
  • Escrow: A financial arrangement where a third party holds funds or assets until the completion of the transaction process.
  • Closing Costs: Fees and expenses paid at the conclusion of a real estate transaction, which may include brokerage allowances, legal fees, and other related costs.

Online References

  1. Investopedia on Broker
  2. National Association of Realtors on Real Estate Commissions
  3. SEC.gov - Investor’s Bulletin on Broker Fees
  4. Real Estate Commission and Fees Explained

Suggested Books for Further Studies

  1. “Real Estate Principles” by Charles F. Floyd and Marcus T. Allen
  2. “The Intelligent Investor” by Benjamin Graham
  3. “Real Estate Finance and Investments” by William Brueggeman and Jeffrey Fisher
  4. “Commercial Real Estate Investing for Dummies” by Peter Conti and Peter Harris

Fundamentals of Brokerage Allowance: Real Estate Brokerage Basics Quiz

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