How Does Real Estate Commission Work?
Many people don’t understand how real estate commissions work. Real estate agents don’t get paid hourly or receive a salary. They get paid commissions from their real estate sales.
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?
What Is Real Estate Commission
Real Estate Commission is the money real estate agents receive as payment for helping their clients buy or sell a property. The commission fee is usually a percentage of the final sales price of the property. The most common real estate commission is 6% of the sales price.
Although this is considered standard by most Realtors, per the Department of Justice and anti-trust laws, there are no set real estate commissions. Now, let’s explore the frequently asked question, how do real estate commissions work?
- How real estate commission works
- How much commission do real estate agents get paid?
- Who pays the agent’s commissions?
- Alternative Real Estate Commission Structures
- What do real estate commissions cover?
- Average Real estate commission by state
- How much do real estate agents make?
- Average Real Estate agent income by state
- Talking About Commission with Your Real Estate Agent or Broker
How real estate commission works
Real estate commissions are negotiable between the listing agent and their client. Many charge certain percentages of their sales prices, where some list a home for flat fees. Real estate brokerages share and cooperate commissions with other brokerage companies. Real estate agents have an agreement with their brokerage companies about how much of their earned commissions they share with their brokerages.
The standard real estate commission
In residential real estate, a 6% commission is considered standard, although some real estate agents charge less. The total real estate commission is specified on the listing agreement as two separate commissions. So who gets paid what?
Of the standard 6% commission fee, 3% goes to the listing broker and 3% to the buyer’s broker. Both the listing agent and the buyer’s agent will be paid by their respective brokers as part of their commission split agreement.
How much commission do real estate agents get paid?
Real estate commissions are always paid directly to the brokerage company. Real estate agents have written agreements with their companies that spell out how much they get paid out of the total commission, also known as a commission split.
Some brokerage companies split the commission 50%/50% with their agents. Some agents receive 60%, and their broker gets 40%. Sometimes, the agent’s split can be 70%/30% or even 80%/20% between them and their companies.
Sometimes the real estate agent commission is on a sliding scale where they start out at a certain percentage, and then their total commission increases because of sales activity. This is all negotiable between real estate agents and their brokerage companies.
Average Real estate commission by state
|Average Realtor Commission Rates by State|
Data from fastexpert
How much is the real estate commission for rentals?
A real estate broker also charges to list and rent investment or rental properties. This is typically a flat fee, for example, one month’s rent in commission. Again, this is negotiable between the property owners and the listing agents. People looking to rent a home usually do not pay any commission. However, in some areas, it is more common.
Who pays the agent’s commissions?
Typically, the home seller is the one who pays the real estate commission amount for the home sale transaction based on the home’s sales price. The seller pays the listing broker after the house sells. Then, the listing broker shares the commission with the buyer’s broker.
The commission is negotiable between the seller and their listing agent. Many times the seller’s brokerage company splits the commission equally with the buyer’s brokerage company. Sometimes it is not split equally. It all depends on the situation and will be laid out in the listing agreement.
Do buyers ever pay real estate commission?
Usually, the sellers pay all of the commission. This is why discount real estate brokers have become more popular selling homes for less money.
There are occasions, however, when the person listing the house pays the buyer’s agent’s broker part of the commission. One of these cases could occur because some brokerages require their agents to have a buyer’s agreement that states a certain minimum amount or minimum percentage of commission that will be due to them after the property sells. If the amount received from the listing broker does not meet that minimum, the buyers will have to pay the difference.
If the listing broker also has the buyer for the transaction, their company gets the entire commission amount. This is called “dual agency”. There can also be two different real estate agents from the same brokerage company involved in the sale. One may represent the seller and one may represent the buyer. On occasion, the seller’s real estate agent will also have the buyer for the home.
Dual agency commission
If there is no cooperating broker then the LISTING AGENT winds up making double the money because they wind up acting as a DUAL AGENT which means instead of each party having a licensed REALTOR advocating on their behalf you have ONE REALTOR acting as an advocate for both parties. Dual Agency is not legal in all states, but is very common.
Now is this a bad thing? Not always, some agents walk the tightrope very well between two parties but to make a legal analogy it’s like one lawyer showing up to represent the plaintiff and defendant in court and because of this in order to act as a DUAL AGENT both the seller and the buyer must agree to allow that agent to do so.
Alternative Real Estate Commission Structures
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 Broker – Some 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.
FSBO (for sale by owner)
A real estate agent’s commission covers a broad range of services. Some people feel they can sell their homes “by owner” in order to save the money spent on paying a commission fee to a brokerage company to list and sell their homes.
However, many times, the people who sell their homes by owner end up netting less money than if they hired a real estate brokerage to help them list and sell their home. Discount real estate brokers such as 1 Percent Lists offer the same services as other real estate brokers but at a discounted commission percentage.
Buying from FSBO sellers would be another time when the buyer pays the real estate commission. If buyers purchase a home that is “for sale by owner” (FSBO) and the owners are not paying any commission to a brokerage that brings a buyer, the buyers will be responsible for the entire amount of commission it states on the buyer’s agreement.
What do real estate commissions cover?
Real estate commissions are fees paid to real estate agents for their services in facilitating the sale of a property. These fees typically cover the costs of the agents’ time and effort in marketing the property, showing it to potential buyers, negotiating the sale, and overseeing the legal and administrative aspects of the sale.
This can include things like preparing and signing contracts, coordinating with other agents and service providers, and ensuring that the sale goes smoothly and is completed in a timely manner. The exact services included in a real estate commission can vary depending on the specific agreement between the agents and their clients.
It’s always a good idea to ask your real estate agent about their services and what is included in their commission before you enter into a contract with them.
Real estate agents spend time and money on your listing
Your real estate agent will prepare a comprehensive market analysis to determine the best asking price and potential sales price for the home. They spend time and money taking listing photos and marketing the home. That sign that your listing agent puts in the front yard to help attract attention costs money.
Multiple listing service
The listing agent also pays multiple listing service (MLS) dues to put your home’s listing in the local MLS which gets the listing exposure to all member brokers and agents. Without this, your home would not be visible online either. They install a lockbox on your home. They may create flyers or brochures for your home. Sometimes they pay for ads in print magazines.
Working through the entire real estate transaction
Sometimes they have to pay real estate websites to highlight your home, as the internet is the top way people are finding homes. They negotiate one or more contracts to get you the best sale price for your home. Most real estate agents typically work with you and everyone else involved in the transaction all the way to closing. Buyer’s agents show you as many homes as it takes until you find the right one. They negotiate contracts for you, as well. They also work with you throughout the entire real estate transaction.
How much do real estate agents make?
The amount of money that real estate agents make can vary widely, depending on various factors, such as the location of the properties they are selling, the state of the real estate market, and their level of experience and expertise. In general, however, real estate agents make their money by earning a commission on the sale of a property.
This commission is typically a percentage of the sale price of the property and is paid by the seller at the time of the sale. The exact amount of the commission can vary, but it is typically between 5% and 6% of the sale price.
When are Real Estate Agents Paid?
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.
Real estate commission example
If a real estate agent sells a property for $500,000, they could earn a commission of $25,000 to $30,000. This is just an example, however, and the actual amount that a real estate agent makes will depend on many factors.
(Most)Real estate agents are NOT paid on salary
As you can see, most real estate agents are NOT paid on salary but on a commission-only basis. Similar to other industries, there are top producing agents that make up the vast majority of the transactions and earn a much higher than average real estate agent commission. There are also many agents who work just enough to keep their licenses active.
Disruptive real estate technology
With new disruptive new technology and brokerage models changing the real estate industry and how many real estate agents look at commission splits, we are seeing many top-producing real estate agents starting to move toward high-volume, lower-commission real estate franchises. And we are seeing the larger agents take a larger market share.
Average Real Estate agent income by state
Considering the vast differences in housing prices across the country coupled with the fact that most real estate agents work on a commission basis, we see drastic differences in how much real estate agents make.
Average Real estate commission by state
|The Average real estate agent income by state|
|Above National Average|
|Below National Average|
Data from ziprecruiter
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. Don’t worry! Every seller’s agent is used to discussing real estate commission with their clients. But you should get every detail squared away before beginning your real estate project and before you sign the listing agreement. After signing, it may be too late.
Ask your real estate Broker what to expect
If you are selling a property, simply ask your agent or broker what commission they expect. That is usually how agents sort it out with their clients. The response will tell you a great deal and give you perspective on what to expect.
Ask your real estate agent how they handle commission
For home buyers, ask your real estate agent how they handle commission and if you can expect sellers to cover the cost of hiring a Realtor. Don’t be shy to get the details hammered out so that you can confidently proceed with your home-buying process.