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How Real Estate Agents are Paid

By far, the most common agreement is for real estate agents to be paid 6% of the sales price when a house changes hands between a buyer and seller. This has been the norm for so long that few buyers or sellers even question it. However, on a $300,000 sales price this amounts to $18,000. This commission is almost always paid from the seller’s proceeds when the deal closes. The buyer pays the bulk of the other closing costs. According to a National Association of Realtors 2018 Profile of Home Buyers and Sellers report, this happened 77% of the time.

The Standard 6% commission Isn’t a Law

Although this is the well accepted standard, when this amount of money is involved both the buyer and seller should have a working knowledge of what is happening. The percentage can vary from state to state and from one specific listing to another. Even this tends to stay within a relatively tight range from 5% to 7%. A 5% fee is typically a discount fee that comes with fewer services and a 7% fee should provide services beyond typical. There are brokerages like Refin using innovative models like paying agents a salary and charging a lower commission around 4.5%.

Since buyers aren’t paying the commission, they typically care less and know less about how agents are paid. Since sellers typically do pay both the listing and buyer’s agents, it’s important for the seller to carefully read the listing contract and understand how much the commission will be, what services to expect, how the commission will be shared, and other details. One little known fact for both sellers and buyers is that there is information in MLS listings that only MLS members (agents) see. That includes commission details such as how much it is and how it will be shared between agents.

Typically, the commission is shared equally between the seller’s agent and the buyer’s agent. Each side of the deal receives 3% of the standard 6% commission. Most agents work for a brokerage office that also receives a portion of the commission. How each agent shares their portion of the commission with their brokerage office varies significantly based on the agreement between the agent and their office. Much of this can learned through proper real estate training.

Agreeing on a Seller’s Commission

Along with asking other important questions, before signing a listing agreement, seller’s should ask the commission amount, terms, how long the agreement is for, and if there is a cancellation fee. Read the entire contract carefully.

The commission or compensation shouldn’t be the only criteria for deciding on a listing agent but it should come up early in the discussion and before making the decision. Other things you want to consider include the agent’s specific plan for marketing your home, experience level, and recent success selling homes similar to yours.  Questions to ask are “what do you know about my local market?” and “what negotiation tactics do you use to get the best price?”

Commissions for Unique Situations

Your deal may have special circumstances affecting a reasonable commission. For instance, you may have a friend or someone else who is ready to buy your home. You only want an agent to help negotiate the deal and oversee the paperwork and process. No marketing will be required. A reduced commission would be appropriate. On the other hand, you may need a quick sale for the highest possible price. The agent may need to work exclusively on your deal for a few weeks. You should expect to pay a higher commission.

And then there are buyers who find a For Sale By Owner (FSBO) home they want to purchase. No agent commission is in place. A big reason some sellers choose to not to have an agent is to save the commission. The buyer should also benefit from this savings. However, if the buyer is using an agent an arrangement needs to be made to compensate the buyer’s agent who is traditionally paid half of the listing commission. The buyer could choose to directly pay his/her agent but should expect the purchase price of the home to be about 3% below the market price that would include the selling agent’s commission. Alternatively, the seller could be asked to pay closing costs traditionally paid by the buyer. Some serious negotiating might be needed.

In one way or another, both the buyer and selling agent commissions are wrapped up in the sales prices of the home. Neither the seller nor the buyer wants to write a check for these from their personal checking account. Typically, the commissions are wrapped into the loan amount the buyer takes out as a mortgage. For that reason, both the buyer and the seller should understand how real estate agents are paid.

Please comment with your on real estate agent commissions, or if you have a question. Also, our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions, inquiries, or article ideas to askbrian@realtybiznews.com.

Brian Kline

Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years with articles listed on Yahoo Finance, Benzinga, and uRBN. Brian is a regular contributor at Realty Biz News

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