Understanding how real estate commission works is a first step in saving money in your next real estate transaction. As in anything, knowledge is power.
This way you know exactly what you’re paying for and where the money is going.
The Key Players
In a traditional real estate transaction, there are six different players involved in the sale of a home
- The home seller.
- A listing agent hired by the seller to market the home and negotiate on their behalf.
- A listing broker, which may also be the listing agent or another individual the listing agent works for.
- The buyer.
- A buyer’s agent hired by the buyer to find their new home and negotiate on their behalf.
- A buyer’s agent’s broker, which, again, may also be the agent, or another person the agent works for.
While every real estate sale may be somewhat different, a real estate commission is typically only one fee, usually a set percentage of the sale price, that gets split between the listing and selling sides of the transaction.
The overall commission percentage is usually split 50/50 between the two brokerages, the listing brokerage, and the selling brokerage. Then, the real estate agents are paid a percentage based on their agreement with the broker. In some brokerage models, particularly in the case of franchise brokerages, there is usually a franchise fee taken right off the top.
Then the brokerage and agent handle their split. Other models may not charge the agent a commission split, but they usually make it up by charging “desk fees” or other monthly fees to their agents in lieu of commission splits. Commission arrangements vary, but the point to keep in mind is that no one person gets to keep that giant commission. It’s split up six ways to Sunday, and the Realtor generally gets far less than the consumer expects.
Real estate commissions are set on a case-by-case basis for each sale in accordance with the Real Estate Settlement Procedures Act (RESPA). By law, commissions are always negotiable, but traditionally, you can expect to pay 5-6% of the home sales price for most brokerage models.
The commission is decided by the seller at the time the listing agreement is signed. To clarify, this means all commissions are negotiated prior to signing a contract. This includes the commission for the listing brokerage, as well as the selling brokerage.
In many states, the brokerage can act as a dual agent and represent the seller and buyer to the same transaction at the same time. In this case, the Realtor does earn both sides of the commission, but it’s justified because that Realtor is :
(1) In a better position to service both parties without a middle-man.
(2) The Realtor assumes the risk for both sides of the transaction, and
(3) The Realtor is working for both sides, so they’re earning it.
A typical agreement is for the seller to pay the commission fees at the time of the settlement, or closing, along with other closing costs. Closing costs are always associated with a real estate settlement, as the closing agent (Escrow) earns a fee, Title Insurance must be purchased for the benefit of the buyer as well as the lender, lender fees, mortgage points, etc.
A reputable Realtor will make sure you receive a good faith estimate from Escrow or the settlement agency as soon as possible, as fees must be disclosed, and sellers have the ability to shop around and/or negotiate settlement fees.
Disruption on The Seller Side of the Transaction
There has been somewhat of a movement since the internet has taken center stage in the purchase of homes. With the influx of technology into the real estate workflow and lead capture, has opened the same door that Amazon used and disrupted the real estate industry.
This is the low cost or flat fee real estate brokerage model. These real estate business models vary dramatically in the real estate services they provide. The real “game changer” is the new listing model where the seller only pays the Seller’s Agent a smaller fee — but still offers the higher percentage to the Buyer’s Agent. These real estate brokers acknowledge that the seller side of the real estate transaction can be streamlined, similar to how Amazon has squeezed every bit of efficiency out of the worldwide shipping industry. See our article on Choosing the right real estate broker.
Get Your Buyer’s Agent for Free
Depending on your generation, many home buyer’s don’t realize, the fee for a buyer’s agent is already negotiated into most home sale contracts, even before the sign goes up in the yard. And while some economic-minded people might suggest otherwise, this is not simply a pass-through cost from the seller directly to the buyer.
Meaning, if the buyer didn’t have an agent, they could get the house for cheaper (wrong). Well, maybe they could get it for a little cheaper, but you can’t say that wouldn’t happen anyway. If a buyer shows up to a home sale without their own buyer’s agent, the selling agent keeps the whole commission.
It’s not like they’ll discount the price of the home because their buyer doesn’t have an agent… that commission agreement was made already, back when the original sales contract was signed. So if you’re a buyer, find a Realtor you like and stick with him or her. They will devote all their time and energy to assisting you as long as they know you’re using them to write your offer.
Always go over every contract with your Realtor prior to signing anything. Realtors are generally granted a limited authority under the law to explain the contracts to you, but if you have any unsettled questions, you can always consult a real estate attorney also.
Nonetheless, when you get ready to buy or sell your next home, a Realtor can be of great assistance in more ways than you can imagine, particularly when problem-solving skills are required. Don’t be afraid to hire yourself a buyer’s agent, and if you’re the seller, understand the listing agent doesn’t get all that money – but in fact, puts more than half of it to use as marketing and an invitation for other Realtors to bring their buyers over and put in that next big offer!
For more information about hiring a buyer’s agent, a listing agent, or you just have more questions about how the real estate commission works, contact your local trusted Realtor today.