What Is A Realtors Commission? Your Complete Guide 

You’ve probably heard about real estate commissions if you’ve ever bought or sold a home. But even seasoned buyers and sellers often aren’t sure how these fees are calculated, who pays them, or how much Realtors take home.

While the average Realtor earns around $101,000 per year, commission structures can vary a lot based on location, brokerage policies, and the details of each transaction.

In this guide, we’ll explain Realtor commissions, how they work and are calculated, and what buyers and sellers need to know before a deal closes.

What Are Real Estate Commissions?

A real estate commission is a professional service fee charged by an agent for home sales or purchases. The fee is due after the successful property transfer from one party to another.

Most commonly, this fee is a pre-negotiated percentage of the property’s asking price, which the seller pays to the listing broker. 

However, some real estate agents charge a flat-fee commission instead, meaning no percentage calculations are involved. 

There is no regulation on what agents can charge. However, commissions fall between 5% and 6% of the final sale price. 

What Is the Average Real Estate Commission?

As mentioned above, most real estate agents charge between 5% and 6%. The average agent commission rate is 5.37% (with about 2.72% going to the seller’s agent and 2.65% being the buyer’s agent’s fee), but the exact percentage varies from sale to sale. 

Here are a few examples:

• If a house sells for $400,000, a 6% commission would equal $24,000. 

• Similarly, if a home’s sale price is $200,000, a 6% commission would equal $12,000.

It’s also important to note that real estate commissions are usually split between two agents:

• The listing real estate agent: The agent who represents the person selling the home.

• The buyer’s real estate agent: The agent who represents the person buying the home.

Who Pays the Real Estate Commission?

Usually, the home seller pays the real estate commission for both their agent and the buyer’s agent. However, the seller can sometimes negotiate their own agent’s commission.

That means if you are purchasing a home, you don’t pay an agent’s real estate commission, but you are still responsible for some closing costs like title insurance and appraisal fees.

For many buyers and sellers, this could be confusing because it’s commonly believed that commission is deducted from the buyer’s purchase price. 

The commission comes from the funds the buyer gives to the seller’s agent for the services they provide in selling the home. In other words, the commission owed to an agent comes from the funds paid to the seller.

Do Home Buyers Ever Pay Real Estate Commissions?

The buyer indirectly pays for a Realtor’s commission, as it comes from the property’s sale price, which belongs to the party who bought the home. In other words, there will be no sale or real estate agent commission if there is no buyer.

Another way to verify where a real estate agent’s commission comes from is by looking at the listing agreement and purchase contract. These documents will clearly show the commission amounts or percentages.

How Do You Calculate Real Estate Commissions?

In most cases, a real estate commission isn’t a set fee payment but a percentage of the home’s total sales price. 

To calculate the total real estate commission, use this simple formula:

1. Divide the real estate commission percentage by 100.

2. Multiply this number by the purchase price to get the gross commission.

For example, if the commission is 6% and the home’s purchase price is $500,000, the commission is $30,000.

Brokers can use our real estate commission calculator to determine exactly how much the commission would be.

However, there are many other factors to consider when calculating the total commission. From buyer or seller credits and home warranties to rebates and concessions, calculating the final sales price and commission owed can be more complicated.

Real estate brokers and agents can simplify the entire process with commission management software that allows for quick calculations, different agent commission plans, and all applicable realtor fees.

Why Do Real Estate Agents Charge Commission?

Let’s break down what a real estate agent’s fee covers in a typical transaction where the total commission on the sale of a home is $20,000.

First, the total real estate commission is split between the listing agent and the buyer’s agent. Let’s say each agent’s split is $10,000, but the split doesn’t stop there.

To practice real estate, each agent must park their license with a broker. A broker is often the manager or owner of a real estate office and the person legally responsible for the property transfer.

For their part, to cover the liability they take on and recover other costs, the real estate brokerage also gets a cut of every transaction. 

This commission split will vary based on the agent’s agreement with their broker. The split is usually determined by an agent’s experience, balanced against their services and leads the broker provides the agent with.

For example, let’s say the split between the broker and listing agent is 50%. That means the agent and broker each get a $5,000 share of the $10,000 commission. 

From that $5,000, an agent would be responsible for paying federal and state taxes, which could amount to 30% or more, leaving them with a net of $3,500.

However, that $3,500 isn’t what the agent takes home. From their commission split, both the agent and the broker will then pay for expenses directly related to the sale of a home. 

A listing agent’s transaction-related expenses may include costs for everything they do to facilitate a successful real estate transfer.

Do Realtors Work on Commission Only?

Most real estate agents work on a commission-only basis, so if they don’t help close a real estate transaction, they don’t make any money. This isn’t always the case, though:

• Some realtors receive some version of a real estate agent’s salary, as well as commission.

• Some real estate agents get an annual salary, commission, and bonuses.

• Others receive a salary, commission, bonuses, and profits. 

The average salary for Realtors in California is $84,669 per year or $41 per hour. However, this is just an average, and Realtors’ levels of industry experience also play a role.

What Does a Real Estate Agent Do to Earn Commission?

The roles and responsibilities of Realtors are endless. Here are just some of the things that a trained and licensed real estate agent will do for clients, which also incur out-of-pocket expenses for the agent:

➡️ Carry the right licenses

Between initial licensing, ongoing professional training, and registration initiatives, real estate agents face ongoing costs for license applications and renewals. 

Additionally, agents are required to take a set number of real estate courses within each renewal period to maintain their licenses.

To increase their professional skills and knowledge, many agents invest in professional memberships and designations like the following:

• National Association of REALTORS® (NAR).
• Accredited Buyer’s Representative (ABR). 
• Council of Residential Specialists (CRS).
• Graduate REALTOR® Institute (GRI). 
• Local REALTORS® Association.

➡️ Offer necessary expertise

Real estate agents help value properties to set realistic listing prices, and they rely on their networks to connect home sellers and buyers. 

They negotiate prices and concessions and help make the entire process as smooth as possible for their clients. 

Most importantly, they facilitate the challenging and complex legal process related to the transfer of property.

➡️ Manage marketing and advertising efforts

Marketing and advertising are two core real estate agent competencies and essential skills for successfully selling a property.

These activities include preparing properties for viewings, creating advertisements, organizing open houses, and coordinating professional home staging, photography, and virtual video tours.

➡️ Provide trustworthy client services

Real estate agents often operate as a business would, which means clients expect to receive the same level of assistance they’d get from a full-service company. 

They provide this level of service by leveraging tools that allow them to keep clients up to date and ensure that their transactions close on time and run smoothly.

Agents pay broker fees, transaction fees, multiple listing service (MLS) fees, franchise fees, errors and omissions (E&O) insurance, and various other administrative fees. 

Additionally, agents will often pay for assistants or admin staff to help provide their clients with a better experience. These additional costs are factored into the commission structure of real estate transactions. 

Is It Worth Paying Real Estate Agent Commissions?

Transaction and business-related expenses can cost an agent as much as 30% of their share of the real estate commission. 

On a $5,000 commission, after taxes and expenses have been deducted, it can leave the agent with about $2,000 of actual take-home pay.

So, what services does a good agent provide for that fee? The following are just some of the skills and services offered by an agent:

🏠 Expertise in local market conditions

An experienced agent is a local expert on market conditions, and they use that expertise to help get their clients the most money from the sale of their homes. 

Agents typically compile a comprehensive comparative market analysis (CMA) for every listing appointment. This CMA will help sellers accurately price their property on the market. 

A properly priced property can impact both the days on the market and the ultimate sale price. 

🏠 Negotiation skills

More experienced agents are expert negotiators, which helps the seller get the best price and terms for selling their home. 

Their ability to mediate and respond to offers forms part of the required skill set, greatly benefiting sellers during real estate transactions. 

🏠 Marketing exposure

Working with an agent gives you additional marketing exposure for your home. Agents have access to a network to collaborate with other real estate professionals who may already be working with the perfect buyer. 

Beyond that, only sellers working with a licensed agent can get their home listed in the MLS. The MLS is a networking tool that allows agents to share property listing information.

Properties in the MLS are also made public on websites like Zillow, Realtor.com, and Redfin. 

Since 97% of buyers start their home search online and 20% first contact an agent, having a property listed in the MLS can provide the necessary exposure to help the property owner sell their home faster and for more money.

🏠 Contract expertise

Agents and their brokers are educated about their state’s real estate contracts and will help you submit all the required documents and disclosures. Their expertise is critical to help you avoid potential legal problems and delays with closing the deal.

🏠 Showings and open houses

Agents will typically handle the scheduling of all showings and gather valuable feedback from each appointment to improve the property’s attractiveness. Listing agents will even staff and market open house events to draw in potential buyers.

🏠 Marketing materials

In addition to adding your property to the MLS, agents create all marketing materials, including new listing flyers and postcard mailings. 

🏠 Professional home staging

Agents are trained to identify the best ways to prepare your home for the market, ensuring you only invest in necessary improvements to sell your property.

🏠 Administrative tasks

Agents handle many behind-the-scenes administrative tasks from acceptance to close, ensuring that all deadlines are met to keep the timeline on track. If this isn’t done, your deal may not close smoothly.

This can entail working with everything from the title company, inspectors, and appraisers to home warranty issuers and lenders to ensure a successful closing. 

Can I Negotiate Fees with My Agent?

We understand you may want to negotiate the commission with your selling agent, but you would need to consider some key information before you speak to the agent directly:

👉 Familiarize yourself with the market

If the market leans toward sellers, an agent might be more open to a lower commission. This is because there is a higher chance that lower-priced properties will sell quickly, possibly with less effort required.

On the other hand, in a buyer’s market, a real estate agent may be less keen to reduce their commission because the process is likely to be more challenging and time-consuming.

👉 Consider the property’s selling price

If the price of the property is high, real estate agents may be willing to lower their commission. 

For example, if it’s a one-million-dollar home, the commission would naturally be relatively high at around $50,000, and this is where an agent may be more open to negotiation.

👉 Offer repeat business

Over 40% of buyers use an agent referred to them by a friend, neighbor, or relative. An agent might be willing to negotiate their commission with you if you can offer them multiple deals or solid referrals. 

For example, if you’re an investor, you could let the agent know that you’ll require their services for several transactions, and they may lower their commission due to the volume of business they’ll receive from you.

Finally, agents may be willing to lower their commission fees if they represent both the buyer and the seller in a real estate deal, which is known as dual agency.

How Real Estate Commission Is Changing

The decades-long practice of paying realtors 5% to 6% commission on the sales price of a home has come to an end. This follows after the NAR agreed to settle a series of legal matters related to commissions involving several major brokerages.

Following the case, part of the settlement includes changing particular rules that critics believe have artificially inflated real estate commissions. The proposed changes will impact both buyers and sellers as a whole. 

The settlement has potential pros and cons. As realtors would need to explain their services and fees up front in writing, this could lead to lower commission fees overall. 

However, with less standardized fees, buyers may end up paying their agent a direct fee negotiated upfront. Let’s look at how the NAR settlement impacts real estate commission:

🚧 Impact on buyers

As a result of the settlement, buyers can expect to pay less in commission due to the settlement prohibiting a predetermined compensation for the buyer agent. 

A potential downside is that it could result in a scenario in which the buyer pays the agent’s commission instead of the usual seller’s commission. 

Another possibility is that the settlement could empower buyers to negotiate lower fees with the real estate agents, giving the buyer more leverage in deals. 

🚧 Changes in compensation models

As part of the settlement agreement, agents are prohibited from offering set commissions on the multiple listing services. Instead, the agent will enter into a buyer’s agency agreement with the buyer.

This will disrupt the status quo and open the door to negotiation outside the MLS. With increased commission negotiation, alternative commission models may emerge. This could result in flat fee services, introducing hourly rates, or negotiating the 6% split. 

Learn More About Real Estate on the Paperless Pipeline Blog

Always remember that the expertise you’re receiving from your agent is priceless and could be the difference between selling your home and struggling to navigate the property market.

You also get peace of mind that your deal is being handled professionally, which avoids unexpected hiccups throughout the buying and selling process.

Although real estate commission might appear expensive, the value you get is well worth it when you sell your property successfully or find your dream home. 

Want to dive deeper into how commissions work and what to expect as a buyer or seller? Check out our blog where we’ve compiled a selection of resources for sellers and buyers so that you know what to expect and are prepared for the journey ahead.