How Do Real Estate Commissions Work?

Real estate agents typically get paid when a deal closes, but who's responsible for paying the commission?

U.S. News & World Report

How Do Real Estate Commissions Work?

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In residential home sales, the total real estate commission paid by the seller at closing is typically between 5% and 6% of the sale price. (Getty Images)

It might seem like an awkward question to ask when you first meet with a potential real estate agent about selling your home – amid all the conversations about staging, marketing and open houses – but it's necessary to discuss and negotiate exactly how your agent will be paid before listing your home with any broker.

Real estate agents are paid in a variety of ways, depending on whom they work for, where they live and what services they provide for you, but the overwhelming majority are paid as a percent of the sales price once a transaction is completed. The National Association of Realtors 2020 Profile of Home Buyers and Sellers reported 77% of sellers pay the agent's compensation.

What Is Real Estate Commission?

While many professional services, like attorneys or accountants, charge by the hour, real estate agents typically work for a commission in the form of a percentage of the money exchanged in the final transaction. This money is paid out only when the deal closes, so if you are not successful in buying or selling your home, your real estate agent does not make any money.

That's the case in commercial real estate as well, explains Ben Tapper, senior managing director for Lee & Associates in New York City. "We only get paid at the closing table, either when a lease is signed or a sale gets closed," Tapper says.

Some agents may offer flat fees for individual services, or you may find a broker that pays agents an annual salary, though this is less common than payment through commission.

What Percent Does an Agent Receive?

In residential home sales, the total real estate commission paid by the seller is typically between 5% and 6% of the sale price. This amount is split between the brokers, or companies the agents work for, representing the buyer and seller. Each agent then receives a portion of the commission split from the broker.

In a brokerage like Redfin where agents make a salary, the total commission is lower, most often 4% to 4.5% of the sale price, according to the company's website, because Redfin only takes between 1% and 1.5% commission in most markets. The other 3% is for the buyer's agent and broker.

How the share of the commission is split between the agent and brokerage differs based on the company, individual and other circumstances. National brokerage Keller Williams Realty reports on its website that the agent takes home 64% of the share of commission in a home sale, while the market center, or local office, receives 30%. Because Keller Williams operates as a franchise, the remaining 6% is a franchise fee, up to $3,000 (any remaining money goes back to the agent). In a situation where the total commission paid in a home purchase was 6%, a Keller Williams agent would take home 1.92% of the sale price.

How a broker splits the commission between an agent and the company varies, though 60-40 splits, with the agent receiving 60%, are popular. You may also hear of 50-50 splits or 70-30 splits. Depending on the broker, the breakdown may be fixed for all transactions, or it may be graduated over time based on an agent's individual success or experience.

However, the number of people who get a cut of the commission may be higher. Tapper explains that in commercial real estate a team structure has become popular, meaning more agents may play a role in helping a deal close. This is also common in some residential brokerage firms. As the leader of a team, "I try to compensate all the brokers and salespeople on my team for every deal that they're a part of the origination of," Tapper says.

Who Pays Real Estate Commission?

The seller typically pays the total commission at the close of sale. As a result, sellers will often factor in the amount of money they'll lose to commission when they calculate their asking price for a home, and keep the cost of commission in mind during negotiations.

In some scenarios, a property listing will include in advertisements that only 1.5% of the buyer agent's commission is covered by the seller, leaving the buyer to make up the difference separately or the agent to take less money. But this is rare and typically occurs in a special situation like with a bank-owned property. Even in those situations, it's not uncommon for the buyer agent to opt out of additional payment from his or her client.

Is Commission Negotiable?

The seller establishes a commission rate when he or she lists with an agent, and that commission is typically evenly split between the listing and buyer agent. The seller has a right to negotiate commission with the listing agent prior to putting a home on the market.

Your agent's commission or payment is part of a larger discussion of the services and work that go into buying or selling a home. "It's a critical conversation that every consumer should have with their agent about the services they receive when working with that Realtor and how that agent will help them to achieve the best possible result," says Larry "Boomer" A. Foster Jr., president of general brokerage for Long & Foster Real Estate.

There are times when you may want to pay more in commission as well. An agent and brokerage firm that goes above and beyond for their seller may see a higher commission to split, maybe 7%, with the buyer's representation – though the seller has to make this call.

How Much Higher Can I Sell My Home for With a Real Estate Agent?

If you're hoping to keep a larger share of the profits for selling your home by skipping the work with a real estate agent, you might not get the kind of success you're hoping for.

NAR's 2020 Profile of Home Buyers and Sellers reports that in 2019, for-sale-by-owner homes, or FSBOs, sold for a median price of $217,900 nationwide, while the median home price of agent-assisted homes was $242,300. So while you may be keeping at least 3% of the home sale price to yourself (assuming you are willing to pay the buyer broker's commission), you're taking more than a 10% price cut for your home.

Heather Hobrock, a real estate agent with Premier Sotheby's International Realty in Naples, Florida, explains that an agent's network and marketing reach is often a big part of selling your home for top dollar.

While there are certainly examples and situations that can have an FSBO selling for an ideal price, fewer people are likely to be aware of an FSBO home on the market that's not in the local multiple listing service, which is only accessible to local agents and who then disseminate the information to their buyer clients. "It depends on the market, (but) normally no, for-sale-by-owners don't sell well," Hobrock says.

Home sellers looking for a fast and quick deal without enlisting the help of a real estate agent may be interested in seeking out an iBuyer, or company that purchases properties for investment purchases. These deals are often fast and done in cash, but the sale price is often less than what a seller would see by putting the property on the market.

Updated on March 16, 2021: This story was published at an earlier date and has been updated with new information.

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