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Real Estate Commissions Explained

Real estate commissions can be confusing. With so many dependencies and variations, it’s no wonder why people ask questions such as: “Who pays it? How’s it calculated? How much does it really cost?”

The unavoidable truth is that many people, including those who have purchased or sold real property with a real estate agent, have no idea how real estate commissions work, how they’re calculated, and what the commission pays for.

In part one of our Real Estate Commission series, we’re going to explain real estate commissions in simple terms and reveal the secrets behind how they’re determined, calculated, and used. 

What are real estate commissions?

A real estate commission is a professional service fee charged by a real estate agent for the purchase or sale of a home. The fee covers the successful transfer of real property from one party to another.

Most commonly, the fee is a pre-negotiated percentage of the sale price paid to the listing agent from the seller. However, some agents charge a flat fee commission instead. These kinds of commissions are increasingly common because there is no regulation on what agents can charge—and many agents find creative ways to set themselves apart.

What commission percentage do most real estate agents charge?

Most real estate agents charge 5-6 percent, although it tends to be closer to six. In 2019, the average real estate agent commission rate was 5.702% (about 2.85% per side). Of course, the exact percentage varies from one sale to another.

A small number of realtors charge a flat fee for their services, which means no percentage at all! However, it tends to be 5-6 percent across the board. Here are a few examples:

  • On a $400,000 home, a 6 percent commission would equal $24,000. 
  • On a $200,000 home, a 6 percent commission would equal $12,000.

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

  • The listing agent (the agent who represents the person selling the home) and,
  • The buyer’s agent (the agent who represents the person buying the home).

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 may still be responsible for closing costs.

For many buyers and sellers, this can be confusing because the buyer is funding the purchase price from which the commission is paid. In fact, many clients often hear that the buyer “takes care” of the commission—but this isn’t technically true. The commission comes from the funds the buyer gives to the seller for the sale of the home.

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?

Buyers pay realtor commission in-directly. It comes from the sales price which belongs to the party who is selling the property. In other words, if there is no buyer, there is no sale and there is no commission.

Another way to verify where a real estate agent commission comes from is by looking at the listing agreement and purchase contract which will clearly show commissions 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, follow 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 percent and the home costs $500,000 to purchase, the commission is $30,000.

Once the total commission is calculated, there are often 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.

You can simplify the entire process by using commission management software that allows for quick calculations, agent commission plans, and all applicable fees.

Why do real estate agents charge commission?

A home seller’s biggest expense when selling their home is typically the commission related to the work performed by a real estate agent. Naturally, a home seller may want to know exactly what they are getting in return for that huge chunk of cash and whether it’s worth it.

For the sake of example, 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 buyer’s agent. That means each agent’s split is $10,000. But the split doesn’t stop there.

To practice 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, but is always the person legally responsible for the real property transfer.

For their part, including the liability the take on, the broker gets a cut of every transaction, too. That commission split will vary based on the agent’s agreement with their broker. The split is usually determined by an agent’s experience balanced with the amount of services and leads the broker provides.

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 which leaves a net $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. 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 realtors work on a commission-only basis. In other words, if they don’t help close a real estate transaction then 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. Others receive a salary, commission, and bonuses. Others, still, receive a salary, commission, bonuses, and profits. Then there are realtors who do property management and leasing, which tops up their income.

In 2019, the average realtor salary in the U.S. was $55,644, and $40,695 of that comes from commission. However, this is just the average, and every realtor’s experience is different. 

What does a real estate agent do to earn commission?

How often have you heard the question: “What do realtors actually do for their money?”

The truth is, the roles and responsibilities of a real estate agent are numerous. In fact, this question is non-existent from clients who have positive and meaningful experiences.

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).

  • Provide Meaningful Experience: Between initial licensing and ongoing education inativies,real estate agents incur ongoing costs for license applications and renewals. Additionally, in order to maintain a real estate license agents are required to take a set number of real estate education courses each renewal period. To increase their professional skills and knowledge, many agents invest in professional memberships and designations like the National Association of REALTORS®, local REALTORS® Association, Graduate REALTOR® Institute (GRI) designation, Council of Residential Specialists (CRS) designation, and Accredited Buyer’s Representative (ABR) designation to name a few.
  • Offer Necessary Expertise: Real estate agents help value properties in order to set realistic and optimistic listing prices. They rely on their networks to connect buyers with sellers. They negotiate prices, concessions, and help make the entire as smooth as possible for their clients. Most importantly, they facilitate the difficult and complicated legal process related to the transfer of real property.
  • Manage Marketing and Advertising Efforts: Marketing and advertising are two core real estate agent competencies. This includes 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 their businesses—which means clients expect to receive the same level as service as a full service company. Real estate agents pay broker fees, transaction fees, MLS fees, franchise fees, E&O Insurance, and other various administrative fees. Additionally, agents will often pay for assistants or admin staff to provide their clients with a better experience.
  • Simplify the Process with Software Solutions: Many agents utilize software tools that allow them to keep clients up to date and ensure that their transactions close on-time and smoothly. Expenses for technology tools like transaction management systems, cloud document storage, contact management systems, and accounting tools can add up for agents.

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 that can leave about $2,000 of actual take home pay for the agent.

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

  • Expertise in local market conditions: Agents are local experts of market conditions and they use that expertise to help get their clients the most money for their home. For every listing appointment, agents will typically compile a comprehensive Comparative Market Analysis (CMA). The CMA will help guide sellers on how to accurately price their property on the market. A properly priced property can impact both the days on market and the ultimate sale price. 
  • Negotiation Skills: Agents are experts at negotiations which can help the seller get the best price and terms for the sale of their home. Their ability to mediate and respond to offers is a huge time saver for sellers.
  • Marketing Exposure: By working with an agent, a seller gets the benefit of additional marketing exposure for their home. Agents have the ability to market a home to their fellow 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 (Multiple Listing Service). The MLS is a networking tool that allows for agents to share property listing information with each other. 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 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 disclosures. That expertise can be critical to helping sellers avoid potential legal problems.
  • Showings and Open House: Agents handle the scheduling of all showings and work to gather valuable feedback from each appointment to improve the attractiveness of property. Listing agents will even staff and market Open House events to draw in potential buyers.
  • Marketing Materials: Agents create all marketing materials including new listing flyers and postcard mailings. They will also add the home to the MLS. 
  • Professional Home Staging: Agents are trained to identify the best ways to prepare a home for the market. That ensures 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. This can be everything from working with the title company, inspectors, appraisers, home warranty, and lenders to ensure a successful closing.