how does real estate commisson work

How Does the Real Estate Commission Work? Who Pays and Who Gets Paid?

When you are buying or selling property, the most practical approach is to hire a real estate agent. Buyers agents and sellers agents specialize in guiding clients through the selection, negotiation, and closing process. But who pays them? One of the most mysterious aspects of property selling is how the real estate commission for agents and brokers actually works. Who pays, how much, and when are the real estate pros paid in the process?

As good business people, we like to have the services and costs laid out from the start. So why does the real estate commission go unmentioned? It’s just one of those strange traditions of the industry. Fortunately, we’re here to lay the situation out and answer the questions every property buyer and seller finds themselves wondering.

How do Real Estate Commissions Work?

Answer: They receive a percentage of the home’s selling price from the seller

Real estate agents and brokers are not paid a standard fee or by the hour. Instead, they are paid by commission. The commission is determined by a set percentage of the final sale value of the property. This means that agents are only paid if a property is bought or sold by their client. 

The typical real estate percentage is 3% each for both the seller’s agent and the buyer’s agent. In total, the commission paid to real estate agents equals to about 6% of the sold value of the property. Because the commission is based on sale completion and price percentage, it can’t be paid until the property sale is complete.

Who Pays the Real Estate Agents?

Answer: The Seller (75% of the time)

The seller traditionally covers the cost of the real estate agents. When the deal is closed, the buyer typically pays closing costs and the seller pays the real estate commission. The commission is supposed to come directly out of the amount paid to the seller for the house. The 6% (3% to the seller agent and 3% to the buyer agent) represents the agents’ essential roles in the transaction.

However, sellers don’t always cover commission. Only about 75% of the time does the seller typically take on real estate commission costs. Sometimes, sellers will ask buyers to pay commissions as part of a negotiation concession. Sometimes commission is split between buyers and sellers. And some deals are done without any agents at all.

when do agents get paid

When are Real Estate Agents Paid?

Answer: After the house is paid for

Real estate agents and brokers are paid when the deal is done. When the property sale contract is signed, the buyer initiates their loan and gives the seller the full amount owed for the property. From this amount, sellers are then expected to pay the real estate commission as part of their half of the closing costs. Buyers then pay the closing costs involved in property taxes, title transfers, and final legal fees.

Alternatives to Real Estate Commission

If you want to try something other than traditional real estate commission, keep your eye out for opportunities for, discount, flat-fee, split commission, or even a more DIY approach to real estate services.

  • Discount Full Service Real Estate BrokerSome brokerages specialize in this “discount” style model, but many provide full service just the same as any other brokerage, they just do the work for less money. 
  • Flat Fee Real Estate Services – Real estate agent asks a flat fee instead of commission
  • Split Commission – Buyer and seller each pay their own agents commission
  • Select Real Estate Services – Manage and hire your own real estate services like inspectors or repair teams.

Talking About Commission with Your Real Estate Agent or Broker

Often, real estate buyers and sellers don’t know how to bring up the matter of commission. But you should get every detail squared away before beginning your real estate projects, whatever they may be. If you are selling a property, simply ask your agent or broker what commission they expect and how that is usually sorted out with their clients. The response will tell you a great deal and give you perspective into the process to expect.

For property buyers, ask your real estate agent how they handle commission and if you can expect sellers to cover the cost. Don’t be shy to get the details hammered out so that you can confidently proceed with your business or residential property plans.