How Do Real Estate Agents Get Paid?
Whether it's by commission or a flat fee, you should know how your agent is compensated.
While compensation should never be the deciding factor when picking an agent, you should thoroughly discuss the issue with all candidates.(Getty Images)
It might seem like an awkward question to ask when you first meet with a potential 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 who 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 2018 Profile of Home Buyers and Sellers reported 77 percent of sellers pay agents a percent of the sale price.
Real Estate Agent Commission
How commission works for the buyer. Typically, the buyer is off the hook when it comes to paying real estate commission to either agent involved in the deal. However, sellers will often factor in the amount of money they’ll lose to commission when they calculate their asking price and keep it in mind during negotiations.
In some scenarios, a property listing will include in advertisements that only 1.5 percent 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. “That’s the only place I’ve seen it where the buyers shoulder some of that burden,” says Kendred Manceaux, a broker associate with Keller Williams Realty in Austin, Texas.
Even in those situations, it’s not uncommon for the buyer agent to opt out of additional payment from his or her client. “They want the client to have the house – it’s not a stopping point,” Manceaux says.
How commission works for the seller. More often than not, 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 total commission rate is typically between 5 and 6 percent, though Manceaux says some listing agents that go beyond the usual services will see 7 percent. When an agent is part of a larger brokerage or team, the commission is additionally divided, depending on the brokerage, the number of people who worked on the deal and other factors. In a brokerage like Redfin where agents make a salary, the total commission is lower, most often 4.5 percent of the sale price.
But it's not simply a matter of knowing the percentage or flat fee your agent will expect from a transaction. 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 Boomer Foster, president of Long & Foster Real Estate.
The Discussion Sellers Should Have
Every real estate transaction is unique, so don’t think there's one blanket policy when it comes to how your agent will be paid.
“The home seller should be thinking in terms of fairness, and just 6 percent across the board isn’t fair to the home seller – and in some situations, it’s not fair to the Realtor,” says Greg Hague, CEO of Real Estate Mavericks, a real estate coaching firm based in Scottsdale, Arizona.
In one of your initial meetings, and before you sign an agreement to list with an agent, compensation should come up. But compensation should never be the deciding factor when picking an agent.
Most important in selecting a listing agent is your comfort level with the agent’s experience, the agent's previous success and his or her plan to market your home. Manceaux recommends discussing how your agent is paid and being conscious of the amount. But focusing too much on negotiating for a low rate could leave you with subpar service, leading to more time on the market for your home, lower offers from potential buyers or a difficult negotiation process. "You get what you pay for," he says.
During early meetings with potential agents, Foster recommends that sellers ask questions specific to their home: "Do they know the local market? Do they have the negotiation skills needed to get you the best price? Do they serve as your trusted partner through the process?"
In his work coaching agents nationwide, Hague recommends varying the commission percentage based on the circumstances of the deal. He says if the seller ends up having a friend interested in purchasing the home, an agent shouldn’t necessarily charge 6 percent because they didn’t perform the legwork. But if the agent manages to find a buyer quickly and at or above asking price, Hague says there should be a reward for high-quality work.
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The agent and seller should discuss all compensation scenarios before signing an agreement and stipulate the possibilities in the contract itself, Hague says. If a seller is interested in putting in additional effort by seeking buyers or even showing the home, discuss the option and how it may affect the commission rate.
“When they decide that this Realtor really looks like he or she would be the right Realtor, then they bring up the fee structure and say, ‘Look, you are our choice if you’ll be fair on commission – fair to us, fair to you. Let’s talk about some of these scenarios,’” Hague says.
How to Find a Real Estate Agent
Atypical Selling Situations
Alternative forms of payment for real estate agents include a flat fee for either full service or individual tasks completed, ranging from helping prepare the home for market to writing up an offer for the buyer.
As the largest real estate company to approach compensation differently, Redfin offers across-the-board savings on fees and compensation when using its brokers. For sellers, Redfin charges 1 to 1.5 percent for its split of the commission – with a minimum that varies by location but is typically $4,500 – combined with a negotiated commission for the buyer agent, which is often in the traditional market range.
When a homebuyer is represented by a Redfin agent, he or she could potentially receive a commission refund for between 15 to 45 percent of the buyer agent commission from the deal. However, commission rebates are prohibited in several states, including Alabama, Alaska, Iowa, Kansas, Louisiana, Mississippi, Missouri, Oklahoma, Oregon and Tennessee.
Agents working in a traditional brokerage for commission may also opt to refund a share of their pay from the deal, where allowed, to the homebuyer they represent, though it’s less likely to be a blanket policy for an entire firm.
In other situations, where the home may be for sale by owner, for example, the party that pays the agent may change. Rather than having the seller issue commission, the buyer could choose to pay his or her agent out of pocket, reducing the offer on the house by 2 or 3 percent to account for the commission costs.
However, buyers who will be financing their purchase often want to include the commission in the total mortgage amount in order to save cash for their down payment or other out-of-pocket moving costs. In this case, the seller would still pay the buyer's agent once the transaction is complete.