Have you ever wondered why a realtor gets paid a commission or how it works? At some point in time, the approximately 70 – 80% of homeowners who end up using a real estate agent to transact their home will find themselves asking this question.
Rather than taking home an annual salary, a much more common method of payment for real estate agents is a percentage commission based on a home’s sales price. Most American real estate agents will sell around seven houses per year, and because the commission represents a majority of the realtor’s pay, each time they help a home exchange hands is typically for a good chunk of change.
While paying a commission may seem simple at first glance, it’s actually quite complex. In this article, we’ll go into detail on what real estate agent commissions are and how they work.
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 person buying a home, and the seller’s agent represents the person selling the house.
Why pay 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 a nearly 110-year-old association that represents over 1.1 million realtors in the U.S.
The idea of a recommended 6% commission going to the agent as payment began during the 1940s.
Over time, it rose to prevalence until it was the standard by the 1950s. For years, 6% was the 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 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 and whether it is in the form of a flat fee or as 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 with.
Listing broker: the broker has more certification and hires the agent. In some cases, 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 a 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, 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.
A flat-fee real estate agent charges a certain rate (like $3,000) up to a certain sale amount (like $350,000). These real estate agents still provide the same level of service as traditional agents but charge less.
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Who Pays the Real Estate Agent’s Commission?
The real estate broker receives the commission. Then they take a cut and send it on down to their real estate agent. Generally, the seller pays the commissions to the brokerage. The normal rate for the broker-agent commission split is 60-75%,
although this range can vary considerably.
While the seller pays the agent’s commission, the added commission for the buyer’s agent is usually wrapped into the price of the home. So, in a way, the buyer pays that commission as well.
Are Agents Incentivized to Get You the Best Price?
Agents get commissions as an incentive to see a job through to completion. In general, real estate agents get their commission only when a transaction settles. This leaves all agents with the same motivation – get the home sold or don’t get paid. As a result 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 manages to sell your home over list price for $410,000, they will make an extra $300. This additional income might make a difference for some agents, the bulk of the money an agent will make comes from listing the house in the first place.
Important Notes for Sellers
Many sellers are hesitant to use a real estate agent because of the price of commissions. Most would rather poke themselves in the eye than shell out 6% of their proceeds to an agent. Remember that that isn’t your only option, though.
Discount real estate agents 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.
If you do choose to use a discount agent, remember to set aside some money for the buyer’s agent. This will help bring buyers to you and ultimately help you sell the house. With a discount 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 actually shell out the cash toward real estate commission, but they can still save money by using a discount agent. Clever buyer’s agents will give you a commission rebate of up to 1% depending on the price of the house and number of showings.
The Clever model does real estate differently than it’s 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!