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.
[See: The Best Apps for House Hunting.]
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.
Here's how to find a real estate agent to help you confidently navigate a home sale or purchase.
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.
Are these must-haves on your list?
One of the first steps you take when deciding you want a new home is determining what you need in order to be happy there. The list of your must-haves can get long, and you reasonably can’t expect to find a house that perfectly matches all your criteria. “Someone has a list of 10 things – if they can find a house that has seven or eight of those, they’re doing pretty good,” says Jeff Plotkin, a Texas-licensed Realtor, attorney, certified public accountant and vice president of Habitat Hunters Inc. in Austin, Texas. Deciding what needs win out in your next home search can be tough, but there are a few key features and amenities many buyers seem unwilling to live without.Right in your price range
Right in your price range
Being able to afford your new home is a given, but buyers are often faced with having to choose between stretching their budget to have the master suite they want or having more reasonable monthly mortgage payments. Price often wins out in the end – you’re less likely to enjoy that master suite if you’re eating soup and foregoing vacations for the next five to 10 years to pay it off. In the 2018 National Association of Realtors Home Buyer and Seller Generational Trends report, home affordability was one of the three most important factors for respondents who recently purchased a home – behind only quality of the neighborhood and a location's convenience to work.In your preferred location
In your preferred location
Homebuyers care a lot about being able to get from point A to point B – as well as points C, D and E. Your future neighborhood can dictate what school your kids go to, how long it takes to get to work and how easy it is to stop at the grocery store when you forgot an ingredient for dinner. Plotkin says buyers put a lot of stress on where the house is, rather than what’s in the house itself. They’re looking for “proximity to schools, shopping, entertainment, public transportation,” he says.Interior over curb appeal
Interior over curb appeal
A handsome exterior keeps potential buyers from quickly driving away, but insight from new construction marketing site HomLuv.com reveals that it’s the interior that most often serves as the deal-maker. HomLuv’s website allows homebuyers to begin their search for a new home from the room they care about most, whether that’s the kitchen, living room or master bathroom. The one part of the house people don’t seem too worried about? Outside. In the roughly two months since HomLuv launched, “no one has chosen to look at exteriors first,” says Mark Law, vice president of product management for BDX, a home builder marketing company and parent company of HomLuv.The right number of bedrooms
The right number of bedrooms
While the interior of the home allows more wiggle room to compromise on your needs, there are some details that buyers must have. The right number of bedrooms would be the big one. Family expansion is often a primary reason homeowners start looking for a new house, so leaving out that extra room would defeat the entire purpose of the sale. According to the NAR report, 85 percent of homes purchased by respondents in 2017 had three bedrooms or more.Window treatments for reference
Window treatments for reference
Staging matters in a home. As much as we think we can picture how a vacant house will look with our own furnishings and decor, at the end of the day we need some suggestions. Law says builders will include big picture windows in bedrooms or over the tub in a master bathroom to let in natural light, but if the photos show the space without curtains or blinds, house hunters will inevitably see a design flaw. “They’ll say, ‘I’m not an exhibitionist,’” he explains. To avoid turning homebuyers off, window treatments should be included in listing photos and for home tours.Move-in ready
The condition of the home you shop for often goes hand in hand with your budget and the neighborhood you hope to live in. If your budget is at the lower end of the price range in the hottest community in town, you’ll likely find yourself buying a house that needs a little love. If your budget doesn’t restrict it, chances are you’ll have your pick of properties that have been turned by real estate investors. “The [buyer] demand is for 100 percent move-in ready condition,” says Bobby Montagne, CEO of Walnut Street Finance, a private money lender focused on home flipping in markets in Virginia, North Carolina and the District of Columbia metro area.Possible to picture your vision
Possible to picture your vision
Even if you’re one of the detractors who prefers a fixer-upper, it’s still necessary to be able to envision how the space will look once you’ve added your personal touches. Based on reactions from HomLuv users, details as small as the cabinet color in a photo can change the way a person thinks about a house. Law says he’s found preferences differ from region to region – darker cabinets may see more love in the South, while in California the preference is for white kitchen cabinets. “You could offer a free puppy and free pots and pans with the house, but if the cabinets are dark they still don’t want it,” he says.Warranty available
For newly built homes and those that have been recently flipped with significant work, you want to know that the professionals involved stand by their work. New construction homes often come with a warranty from the builder or the option to get a third-party warranty, and you should ask the investors involved with a flip for the same level of protection. “A good builder [or] a good flipper does not have a problem with that,” Montagne says. If an issue arises within the life of the warranty related to the workmanship, you can rest easy knowing you’re covered financially for the repairs.Potential for value growth
Potential for value growth
Your home isn’t just where you’ll live – it’s also an investment. There are a few easy decisions you can make that reduce the chances of losing out on potential growth in value over time, whether that means buying in a neighborhood where home values are steadily growing, finding a home in a desirable school district or avoiding living next to a strip mall. “When you’re buying a house, you’re not only buying it for yourself, you’re buying it for resale,” Plotkin says. “So most people are not going to want to back up to commercial [property] or a busy road.”Read More
Updated on Dec. 20, 2018: This article was originally published on Sept. 2, 2016, and has been updated with new information.
She has appeared in media interviews across the U.S. including National Public Radio, WTOP (Washington, D.C.) and KOH (Reno, Nevada) and various print publications, as well as having served on panels discussing real estate development, city planning policy and homebuilding.
Previously, she served as a researcher of commercial real estate transactions and information, and is currently a member of the National Association of Real Estate Editors. Thorsby studied Political Science at the University of Michigan, where she also served as a news reporter and editor for the student newspaper The Michigan Daily. Follow her on Twitter or write to her at firstname.lastname@example.org.