What Is ‘Commission’ in Real Estate?

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Real estate commissions can be confusing. With so many variables and variations in commission calculations, it’s no wonder that people ask questions such as: “How does commission work in real estate? Who pays it? How much does it cost?”

The unavoidable truth is that many people—including those who have purchased or sold property with real estate brokers—have no idea how real estate commissions really work.

If you’re wondering what commission is in real estate, you’ve come to the right place. In this part of our Real Estate Commission series, we explain real estate commissions in simple terms. 

We also explain how a real estate agent’s commission is determined, calculated, and used.

A Closer Look at 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 transfer of property from one party to another.

Most commonly, this fee is a pre-negotiated percentage of the property’s selling price and is paid to the listing broker by the seller. 

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However, some real estate agents charge a flat-fee commission instead. 

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

What Is the Average Real Estate Commission?

Most real estate agents charge five to six percent, although it tends to be closer to six. 

In 2023, the average real estate agent commission rate was 5.37% (with about 2.72% going to the seller’s agent and 2.65% going to the buyer’s agent). Of course, the exact percentage varies from one sale to another.

A small number of realtors charge flat fees for their services, which means no percentage calculations are involved. 

However, the commission percentage tends to be five to six percent across the board. 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.

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Who Pays the Real Estate Commission?

In the simplest terms, the home seller pays the real estate commission for both their listing agent and the buyer’s agent. 

That means if you are purchasing a home, you do not 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 gets paid from the purchase price that the buyer had paid. 

In fact, many clients often hear that the buyer “takes care” of the commission—but this isn’t technically true. 

In reality, the commission comes from the funds that the buyer gives to the seller’s agent for the services they provide toward the sale of the home.

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In other words, the commission owed to a real estate agent comes from the funds paid to the seller.

Do Home Buyers Ever Pay Real Estate Commissions?

The buyer pays for a realtor’s commission indirectly. It comes from the property’s sale price, which belongs to the party who bought the home. 

In other words, if there is no buyer, there will be no sale or real estate agent commission.

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

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 costs $500,000 to purchase, the commission is $30,000.

Once the total commission has been calculated, however, there are many other factors to consider. 

From buyer or seller credits and home warranties to rebates and concessions, calculating the final sales price and commission owed can be more complicated.

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

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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.

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To practice in real estate, each agent has to park their license with a broker. A broker is often the manager or owner of a real estate office; it’s the person who’s 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 the services and leads the broker provides the agent with.

For example, suppose the split between the broker and listing agent is 50%. That means that 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. This leaves them with a net of $3,500.

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

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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. 

In other words, 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 salary, as well as commission.
  • Some real estate agents get an annual salary, commission, and bonuses.
  • Others receive a salary, commission, bonuses, and profits. 

Then, there are also realtors who do property management and leasing, which increases their income.

In 2023, the average realtor salary in the U.S. was $95,713 per year. 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?

How often have you heard the question: “What does a real estate agent actually do for their money?”

The truth is the roles and responsibilities of real estate agents and brokers are endless. 

In fact, this question is never asked by clients who have had positive and meaningful experiences with agents.

Here are just some of the things that a trained and licensed real estate agent will do for clients (which also carry out-of-pocket expenses for the agent):

➡️ Carry the right licenses

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

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

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

  • 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 in order to set realistic listing prices. 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 difficult and complicated legal process related to the transfer of property.

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➡️ Manage marketing and advertising efforts

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

These activities include preparing properties for viewings, creating advertisements, organizing open houses, and coordinating professional home staging, photography, and video virtual 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 do this by leveraging software 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, real estate 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 the agent’s 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.

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

🏠 Expertise in local market conditions

Agents are local experts on market conditions and they use that expertise to help get their clients the most money from the sale of their home. 

For every listing appointment, agents will typically compile a comprehensive comparative market analysis (CMA). 

The CMA will help guide sellers on the accurate pricing of their property on the market. 

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

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🏠 Negotiation skills

Agents are expert negotiators, which helps the seller get the best price and terms for the sale of their home. 

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

You can learn more about these kinds of negotiation skills in this comprehensive guide by G2: The Ins and Outs of the Negotiation Process During a Contract Renewal.

🏠 Marketing exposure

By working with an agent, a seller gets the benefit of additional marketing exposure for their home. 

Agents have access to a network where they can collaborate with other real estate professionals who may already be working with the perfect buyer. 

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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 with each other.

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

Since most buyers start their home search online, 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 sellers submit all required documents and disclosures. Their expertise is critical to help sellers avoid potential legal problems and delays.

🏠 Showings and open houses

Agents will typically handle the scheduling of all showings and gather valuable feedback from each appointment to improve the attractiveness of the property. 

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Listing agents will even staff and market open house events to draw in potential buyers.

🏠 Marketing materials

Besides adding the home 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 a home for the market. This ensures that the seller only invests in necessary improvements to sell their property.

🏠 Administrative tasks

Agents handle lots of behind-the-scenes administrative tasks from acceptance to close, ensuring that all deadlines are met to keep the timeline on track. 

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

Can I Negotiate Real Estate Commission 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 have this conversation.

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You’ll need to set up a transparent and respectful negotiation and highlight how a reduced commission would be justified in your circumstances.

👉 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 the property 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 price of the property

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

For example, if it’s a $1-million home, the commission would naturally be quite high at around $50,000, and this is where an agent may be more open to negotiation.

👉 Offer repeat business

An agent might be willing to negotiate their commission with you if you’re able to offer them multiple deals. 

If you’re an investor, for example, you could let the agent know that you’ll be requiring their services for several transactions. They may lower their commission due to the volume of business they’ll receive from you.

How Proposed Real Estate Commission Changes Could Affect Commission Structures

The decades-long practice of paying realtors 5 to 6 percent in commission on the sales price of a home will come to an end. This follows after the National Association of Realtors (NAR) has agreed to settle a series of legal matters related to antitrust lawsuits

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. 

There are potential pros and cons to the settlement. As realtors would need to explain their services and fees up front in writing, it is believed that this could lead to lower commission fees overall. 

However, some believe that with less standardized fees, buyers may end up paying their agent directly. It is impossible to know for certain the effects of the settlement. Here are the possible outcomes as it relates to commissions:

🚧 Impact on buyers

The most optimistic theory suggests that buyers can expect to pay less in commission. This is due to the settlement prohibiting a predetermined compensation for the buyer agent. 

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

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 (MLS). The agent will instead 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 begin to emerge. This could result in a flat fee, the introduction of hourly rates, or a negotiation of 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 or struggling aimlessly 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. If you’d like to learn more about real estate, including how commissions work, visit our blog. We’ve put together a selection of resources for buyers and sellers so that you know what to expect and are prepared for the journey ahead.