Updated July 2nd, 2019
Have you ever wondered why a realtor gets paid a commission or how the process works?
At some point, the approximately 70-80% of home sellers who end up working with a real estate agent will ask this question.
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How does realtor commission work?
Rather than taking home an annual salary, the prevalent method of payment for real estate agents is a percentage commission based on a home’s sales price.
Most American real estate agents sell around 11 houses per year, and because the commission represents a majority of the realtor’s pay, each time they help a home exchange hands is a significant amount of money.
While paying a commission may seem simple, it’s quite complex.
Real estate commissions are the fees paid to a real estate agent upon the sale of a home. In a real estate transaction, there are two kinds of agents: the buyer’s agent and the seller’s agent. A buyer’s agent represents the home buyer, and the seller’s agent represents the home seller.
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Why pay a commission?
The history of the real estate commission dates back to the establishment of the National Association of Realtors (NAR). Originally formed to represent the interests of real estate agents across the country through the creation of guidelines for agents to operate by, the NAR is now an over 110-year-old association that represents over 1.3 million realtors in the U.S.
The idea of a recommended 6% commission going to the agents as payment began in the 1940s. This amount is split between the agents according to an agreement.
Over time, the commission structure rose to prevalence until it was the standard by the 1950s because of price fixing by NAREB. For years, 6% was the standard rate that most homeowners expected to pay to sell their homes.
That number has been on the decline in recent years. In 2016, the average commission was closer to 5%. This is good news for sellers looking to keep more money in their pockets.
What is a listing agreement?
The listing agreement outlines the terms between the seller and the real estate agent. The listing agreement is also known as the listing contract. This contract grants the broker authority to be the owner’s agent when selling the property.
Included in the listing contract is the amount of compensation offered to the broker, whether in the form of a flat fee or a percentage of the sales price.
The listing agreement also authorizes the listing broker to cooperate with other brokers, such as a buyer’s agent, and details how the buyer’s agent will receive compensation.
Some listing agreements are exclusive, meaning you agree to only work with that listing agent unless you have a reason to back out. If you back out for reasons not listed in the contract, you could end up paying a fee.
Exclusive listing agreements give listing agents peace of mind knowing the hard work they put into marketing your listing won’t go to waste by the seller backing out last minute. If you have questions about the listing agreement, talk to your real estate agent.
They’ll be able to tell you the terms of your contract.
How do real estate commissions work?
Typically, the commission gets split four ways among the following parties:
- Listing agent: the agent whom the seller agrees to list their property.
- Listing broker: the broker has more certification and hires the agent. Sometimes, brokers can act as their own agents.
- Buyer’s agent: the agent whom the buyer hires to help them find a home.
- Buyer’s agent’s broker: the broker who the buyer’s agent works for.
That’s not the only commission structure, though.
There is also flat-fee commission, which is where the agent will charge the same amount despite the price the house sells for. Flat-fee rates are usually limited to a certain sale price or types of services.
A flat-fee MLS agent, for example, charges a flat rate for listing your home on the MLS and doesn’t do much else. If you want to add services, the rate rises accordingly.
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Who pays the real estate agent’s commission?
The real estate broker receives the commission, as all agents are supervised by a broker. Then they take a cut and send it on down to their real estate agent. Generally, the seller pays the commission to the brokerage. The normal rate for the broker-agent commission split is 50-75%, although this range varies based on the local real estate market.
While the seller pays the agents’ commissions, the added commission for the buyer’s agent is wrapped into the price of the home. Therefore, the buyer pays for commission in the home.
Are agents incentivized to get you the best price?
Agents receive commissions as an incentive to see a job through to completion. Real estate agents get their commission only when a transaction settles — unless their listing agreement states otherwise. This leaves all agents with the same motivation — get the home sold or don’t get paid. Because of this commission structure, the agents who receive the highest pay are the ones who either sell the most expensive homes or sell a larger quantity of homes.
Let’s take the hypothetical example of a traditional listing agent on a $400,000 home.
A 6% commission with a conventional split means the listing and buyer’s agent each receive ~$12,000. If the listing agent sells your home over list price for $410,000, they will make an extra $300.
This additional income might make a difference for some agents, but the bulk of the money an agent will make comes from listing the house.
Important Notes for Sellers
Some sellers are hesitant to use a real estate agent because of the high price of commissions. While agents’ fees can be high, a top agent can help you fetch your asking price or even more. Remember that paying the full amount of commission that isn’t your only option, though.
Flat-fee real estate agents who work with Clever provide top-notch service for a fraction of the price. Having a local agent sell your house can be the difference of thousands of dollars and months of waiting. When selling your home, do your research and consider using a discount agent instead.
With a flat-fee agent and paying the buyer’s agent, you can expect to pay between 3-4% of your sale price toward the commission. That’s much better than the average 6% of using a traditional agent.
Important Notes for Buyers
Buyers may not shell out the cash toward real estate commission, but they can still save money by using a discount agent. Working with a Clever Partner Agent qualifies you for a $1,000 buyer’s rebate on homes over $150,000.
The Clever model does real estate differently than ever before. By providing agents access to a higher volume, lower cost way to find clients, homeowners can receive a full-service experience without the traditional 6% commission.
At Clever, we call this a “win-win” model for both agents and clients — full-service, flat fees: now that’s Clever!
FAQs About Real Estate Commissions
How do you negotiate with a Realtor for commission?
Realtors are usually only paid on a commission basis and don’t earn a base salary. The typical rate is about 6%, with both agents getting about half and splitting it with their broker. If your home sells for $300,000, your agent may end up with only around $7,500. However, you can and should negotiate with a realtor. Interview multiple agents, ensuring you still get the services you require, even if you’re paying a lower rate.
Do Realtors only get paid commission?
Yes, typically realtors only get paid on a commission basis and don’t make a base salary. Commission is usually 5-6% of a home’s sale price, which is then split between the listing agent and seller’s agent (with part of it going to their respective brokers). Therefore, the commission is the most important and only income most agents make.
How is realtor commission calculated?
Look at your listing agreement or ask your agent to find out your total commission rate. Then multiply the purchase price by the commission rate to determine the total commission you’ll pay. If you need to estimate, you can use the listing price.
What is a typical realtor commission?
A typical realtor commission fee is 6%, which the listing agent will split with the buyer’s agent. Depending on the market, they may split it evenly or the listing agent may take a larger percentage.