Real Estate Commission: What It Is And How It Works
Most people who want to sell or buy a home enlist the help of a real estate agent, and for good reason. These licensed professionals provide a variety of services that simplify the real estate market for their clients.
They even sweeten the deal financially. According to the National Association of Realtors® (NAR)’s 2019 Profile, agent-assisted homes sold for a median of $280,000. That’s $80,000 more than the median selling price of For Sale by Owner (FSBO) homes.
But if you want to benefit from their expertise, then you need to pay your real estate agent accordingly. Here’s a breakdown of how real estate commission works.
What Is A Real Estate Commission?
When you hire a real estate agent or broker to help you sell your property, you don’t pay them by the hour. Instead, they earn their main income through commission from the property sale as compensation. Agents charge their clients commission in proportion to the home’s sale price. So, the more a buyer pays for your home, the higher the commission paid.
How Does A Real Estate Commission Work?
The contract you and your agent specify how your commission payment works. The commission is usually split between the seller’s listing agent and the buyer’s agent. Before that, though, it goes through any involved real estate brokers that the agents work under.
So, the overall commission gets divided between multiple parties. This usually comes down to a 50/50 split, although it depends.
You may even pay more than one agent or broker, depending on your situation. Some home sellers opt for a nonexclusive compensation agreement that allows them to work with more than one of either.
What Do Real Estate Agent Fees Cover?
A real estate agent performs several services for their clients. When you pay them, you’re compensating for those multiple skills and actions, including:
- Access to the multiple listing service (MLS) and creating your listing
- Time spent researching properties for buyers or marketing homes for sellers.
- Compensation for showing homes or coordinating open houses.
- Mediate negotiations for things like prices, timelines, and repairs
- Knowledge and experience within the market
- Assistance with paperwork
How Much Is The Average Real Estate Agent Commission?
Usually, real estate commission costs vary between 5% – 6% of the home’s sale price, with a national average rate of 5.8%, according to HomeLight. However, the exact fee you pay may be slightly lower or higher depending on your contract and completed sale.
Here’s an example breakdown for different sale prices with a 6% real estate commission:
Home Sale Price
Real Estate Commission At 6%
Who Pays The Real Estate Commission?
When you sell your home, you are in charge of closing costs. Closing costs for a seller can include things like appraisals, home inspections, transfer taxes, title insurance and the real estate agent’s commission.
Sometimes, though, the seller may include the cost for the commission in the price of the home. That way, the buyer technically pays for the fee in the end.
FAQs About Real Estate Commissions
Still have questions about real estate commissions? Below are some answers to any you may have.
When are real estate commissions paid?
A prospective home buyer agrees to work with an agent for a period of time which culminates in the payment of a commission by the seller. So, they pay the real estate commission at the end of the sale, typically during the closing process for a home.
What is a fair commission for a real estate agent?
Real estate commission is negotiable oftentimes. So, what’s “fair” depends on the agreement you and your agent make. Generally, though, it’s recommended to stick within the 5% – 6% range.
Remember: real estate agents provide a variety of services, including acting as intermediaries, facilitating negotiations, marketing, listing, and more. So, it’s important to compensate them for their experience, work, and time.
Are real estate agent fees negotiable?
No law establishes a minimum commission rate, so you’re free to negotiate.
Occasionally, agents offer discounts if you both sell and buy through their agency. Or, you can ask for a lower fee if the agent provides fewer services than normal. For example, if you only hire them for one part of the sale process or the home is already move-in ready.
Can you avoid paying a real estate commission?
There are some ways for sellers to avoid real estate commission. For example, you can skip the fee by working with discount brokers or selling without an agent. However, it’s generally advisable to work with a REALTOR® or agent. They offer valuable expertise and market insight that can net you a higher sale price.
Do agents get paid if the sale falls through?
It depends on your situation. A home seller might only have to pay a real estate commission if the sale goes through. However, the contract signed between the seller and their agent might require payment regardless.
A seller may still owe their agent commission in certain situations, though, such as when the seller backs out of a contract. Or, if the agent still performed a service, like finding a prospective buyer.
The Bottom Line
Selling a home isn’t easy, but real estate agents can help us navigate the complex real estate market. Since they provide such an important service, it’s important to compensate them through real estate commissions.
If you’re ready to begin your own home buying process, consider applying with Rocket Mortgage® today.