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Real Estate Commission Explained
Dated: April 15 2019
If you hire a real estate agent to help you buy, sell, or rent a house, this professional gets paid through a real estate commission. So how much do you pay, and what for? Is there any wiggle room to negotiate this fee?
As a real estate agent myself, allow me to tell you firsthand everything you need to know about real estate commissions, from who pays to how much to where that money goes.
How much is a real estate commission?
Rather than getting paid hourly or weekly fees, most real estate agents earn money only when a real estate deal goes through.
While there are some real estate agents who will charge a flat fee for their services, most charge a percentage of the sales price of the home once the deal is done. That exact percentage varies, but the commission is typically 5% to 6% of a home’s final sales price. On a $200,000 home, a 6% commission would amount to $12,000.
Granted, this may seem like a serious chunk of change, but keep in mind that no one makes off with the whole amount! Plus, real estate agents don't see a dime until a buyer finds a home she loves, the seller accepts the offer, and all parties meet at the closing table. That process can mean weeks or months of work.
Who pays the commission?
Buyer's and seller's agents typically split the commission. So if a home sells for $200,000 at a 6% commission, the seller's agent and buyer's agent might split that $12,000, and each receive $6,000.
However, the commission split varies from one agent to another, with new agents sometimes earning a smaller percentage of the commission than experienced agents who sell more homes or more expensive properties.
What is dual agency?
So what happens if an agent represents the buyer and the seller? In that case, the agent becomes a “dual agent” and gets paid both commissions. (Talk about a big payday!)
However, because it puts them in a sticky position of having to work for both the seller and the buyer, many agents don’t practice dual agency—and some states don’t even allow it. I believe it creates a conflict of interest. After all, clients hire me to represent their best interests. How can I do that when I'm sitting on both sides of the table?
What does a real estate agent commission cover?
Though people certainly have the option of selling (or buying) their house without a real estate agent, agents provide clients a wide range of services, including helping you price your home, marketing it (on the multiple listing service, social media, and other venues), negotiating with home buyers, and ushering the home sale through closing.
As trained experts, real estate agents can help you fetch top dollar for your house and put out fires—while also alleviating some of the stress that comes with selling a home. (It’s no picnic!) I might be biased, since I’m an agent myself, but great ones earn their keep.
Want proof? Just look at the numbers: A recent survey found that the typical "for sale by owner" home sold for $190,000, compared with $249,000 for agent-assisted home sales, according to the National Association of Realtors®. That’s in line with a recent survey from Keeping Current Matters that found that homes listed for sale with a real estate agent sell for $46,000 more on average than FSBO houses. Perhaps that explains why 92% of home sellers use an agent to sell their house.
Is a real estate agent commission negotiable?
Though 5% to 6% tends to be the norm, commission standards can vary from state to state and among brokerages. Still, there are no federal or state laws that set commission rates—meaning commission is negotiable.
In other words, if you’re a home seller, you can certainly ask your agent to reduce their commission, but be aware that he is not obligated to do so.
A factor to consider: Because the marketing dollars for a property generally come from the agent’s commission, a lower commission could mean less advertising for your house.
That being said, it doesn’t hurt to ask for a lower commission. Most agents won't take offense, and the worst case is they say no. Or, if you’re truly tight on cash—say, because you’ve maxed out your budget buying your next home—you could opt for a transactional agreement, in which the listing agent will help you set an asking price, facilitate communication between you and the buyer, write the contract, and move the process along to closing for a flat fee or lower commission, but you won’t receive the agent's full services.
It’s not ideal, but it’s the right route for some people. However, not all agents offer transactional agreements, so you may have to shop around to find one.
Bottom line: It is likely that buying and selling a home will be the biggest financial transactions of your life, so be sure you find an agent that you trust will do a great job. This is not the time to shop solely on price.
What else do I need to know about commissions?
All of the details about a real estate agent's commission (and any transaction fees the agent charges) should be outlined in the contract that you sign when you hire an agent. This is typically referred to as a listing agreement, and it also specifies how long the agent will represent you. (Generally, listing agreements last 90 to 120 days.)
Also keep in mind that there are some exceptions. For instance, rental agents work differently from purchase agents. It's usually the landlord’s job to pay the rental agent's fee, but that’s not set in stone. In New York City, for example, tenants often pay the rental agent’s commission. It's up to the landlord and the tenant to decide who pays the rental agent's fee.
Furthermore, commission is usually higher when selling a vacant lot(anywhere from 10% to 20%), since selling land often takes longer and requires more marketing dollars. Some auctions charge home buyers a 5% "premium," or commission.
As a seller, you want a real estate agent who can broker the best sales price and terms for you, but good agents aren’t cheap. As with most things in life, you get what you pay for.
For Mark Ross, founder of Ross NW Real Estate and professional real estate broker, real estate has always been the career of choice. During his 25+ years in the industry, Mark has gained experience in....
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