They say that anyone who represents themselves in court has a fool for a client. Well, that same sentiment holds true in real estate as well. Attempting to buy or sell a house on your own is unwise given all the intricacies of the industry, and you’ll likely face an uphill climb if you decide to give it a shot.
Hiring a real estate agent can sometimes feel like a necessary evil, but rest assured, it is indeed necessary in most cases. Even so, paying an extra cost on a real estate commission can be a bitter pill to swallow considering all the other expenses that come with real estate transactions, like homeowners insurance, taxes, and the home loan.
How do real estate agent commissions work?
Real estate agents work on commission — that is, they get paid when they complete a sale. Usually, agents will take a percentage of the purchase amount as commission. An average transaction might net a 6% commission for both the listing agent working with the seller and the buyer’s real estate agent.
That doesn’t mean both agents get 6% of the sale price, though. They actually split the commission between the two of them. The individual agent’s share of the commission may be divided up even more, but we’ll get to that later.
What does that look like in practice? Let’s say you buy a house for $500,000 where both agents are due a portion of a 6% commission:
- 6% of $500,000 = $30,000
- Split between the two parties, each agent would receive $15,000 commission.
Pretty simple, right? No need for a complicated real estate commission calculator here. At least from a homebuyer or seller perspective, figuring out how much of the purchase price goes to agent fees is straightforward enough.
Because of this compensation structure, you don’t actually owe your real estate agent any money until you’ve closed on the sale. No matter how much work they put in or how much time it takes to sell or close on a property, you won’t pay a cent until your closing date.
Keep in mind that real estate agencies may charge different commission rates, so you’ll want to shop around before signing a listing agreement. The going rate for real estate agent commissions tends to vary depending on the local housing market as well. You may find that you’ll pay a higher percentage in one state compared with another.
When do you pay a real estate commission?
In most cases, the seller will be responsible for covering both agents’ commission. That means you usually won’t have to worry about paying this expense if you’re buying a home. Although there are some rare exceptions to that rule, you can expect the seller to pay both their listing agent’s commission as well as your real estate agent’s share.
Real estate commissions are due upon closing. If you’re the seller, that means you need to add these expenses to the truckload of other closing costs you’ll be on the hook for. That may include outstanding property taxes, title transfer fees, and other costs.
Just because the seller typically covers the cost of the commission, that doesn’t necessarily mean the buyer gets to skate by unaffected. Sellers may anticipate real estate commissions and build them into their asking price. In other cases, they may use commissions as a bargaining chip when negotiating closing costs. Even if the seller agrees to pick up the tab, so to speak, when it comes to real estate commissions, as a buyer, you may cover some of that cost in other, indirect ways.
What is a broker fee?
Up to this point, we’ve detailed how real estate commissions are split between both the buyer and seller’s agents. But that’s not quite true — at least in most cases. Agents often represent real estate brokers, and those brokers are going to want a cut of the action too. So, when we say each agent takes half of the commission, what we really mean is that each agent’s broker takes half of the commission.
When you pay your agent’s commission, you’re paying a broker fee. The broker then gives the agent their share as outlined by their employment contract. In essence, commissions are split four ways rather than two — your agent, your agent’s broker, the seller’s agent, and their broker — although not necessarily in even amounts.
When real estate agents join a brokerage firm, they’ll agree to share a certain percentage of their commission with the broker. That could be as low as 10%, but it could also be much higher, accounting for half of the agent’s commission or more. Agents with more experience and a track record of success are usually able to negotiate a better deal with their brokers when joining a new agency. Whereas less experienced agents may have to settle for less favorable terms.
That’s not all. Other agents may also be able to claim a slice of the pie. If one agent referred a client to another, they could be entitled to a cut of the commission. From the buyer and seller’s perspective, though, these payment structures occur out of sight and don’t impact the amount paid as a broker fee.
How much commission do real estate agents make by state?
Nationwide, the average real estate agent commission has historically hovered around 6%, but the Philadelphia Inquirer reported that figure has dropped closer to 5% in recent years. Regardless, you should expect the exact number to fluctuate a bit from state to state. Clever Real Estate put together a state-by-state breakdown to show how average real estate commissions may change depending on where you live:
What’s a fair real estate commission to pay?
Conventional wisdom says 6% is the typical real estate commission rate for buyer and listing agents. But, as you can see from the table above, you may pay closer to 5% of the total purchase price. In addition to those regional differences, real estate agencies and brokers sometimes offer lower rates to stand out from the competition.
The explosive growth of online real estate sites has also had a massive impact on agent fees. These sites tend to undercut the industry standard on realtor commissions while also connecting homebuyers with local agents. They can be a bit of a win-win for house hunters in that regard.
At this time, 6% isn’t so much the industry standard anymore as it is the ceiling for broker fees. In most cases, you shouldn’t find yourself paying more than 6% on commission.
Can you negotiate broker fees?
Given how many aspects of the mortgage process are up for negotiation, it’s fair to assume that your real estate agent’s commission rate would be as well. That’s not always the case, though. A 2019 Consumer Federation of America report found that 73% of real estate agents would refuse to lower their commission rate if asked.
Given that average commission rates tend to fluctuate by mere fractions of percentage points, it shouldn’t come as a surprise that many agents would be pretty inflexible on this subject. If you do try to negotiate, don’t expect a drastically lower number than what was originally offered.
That all being said, you should compare real estate brokers, agencies, and individual agents to see who can give you the most favorable terms. Just be sure to do this legwork before you sign any agreement or contract with an agent.
Quick tips on real estate commissions
You may not have much luck negotiating broker fees, but you can still protect your own interest when it comes to real estate commissions. Take these final tips to heart to avoid potential headaches:
- Pay attention to your agent agreement
- Consider how broker fees impact your agent
- Scrutinize agent incentives
Pay attention to your agent agreement
There are plenty of industry standards at play when it comes to real estate commissions — how much broker fees run, how commissions are split and who shoulders the cost, to name a few. But that doesn’t mean every agency or brokerage firm will follow those guidelines.
There are certain circumstances where you may be on the hook to pay a commission even if you switched agents or didn’t even complete the sale at all. These scenarios should be described in your agent agreement. Closely read over any contract you sign so you fully understand the nature of your relationship with your real estate agent.
Consider how broker fees impact your agent
As we said earlier, you typically only pay a commission to your real estate agent when they’ve completed the transaction. No sale means no payday. That’s an important point to remember when working with an agent. If you are feeling pressured to lower your asking price by too much as a seller, stretch your budget as a buyer, or simply make concessions you’re not totally comfortable with, consider the financial incentives at play.
Let’s take another look at that $500,000 house from the seller’s point of view. The house has been on the market a couple of weeks with little activity, and the agent recommends cutting the asking price to $480,000. For the seller, that’s a $20,000 loss, but what about the agent?
- 6% of $480,000 = $28,800
- Split between the listing agent and buyer agent, that’s a $14,400 commission for each.
In essence, your $20,000 price drop only translates into a $600 loss for your agent. For them, it could be worth the tradeoff to close on the property quicker and put in less time finding a buyer. As a seller getting $20,000 less than initially expected, you may not agree with that math, though.
Scrutinize agent incentives
Even as a buyer, you should consider the forces guiding your agent’s decision-making. “Buyer’s agent” is actually a bit of a misnomer when you think about it. Agents only get paid when the property closes, which means their interests closely align with the seller’s goals.
Also be on the lookout for agents with a “dual agency” designation. Dual agency essentially means the agent is representing both the buyer and seller in a transaction. And that raises some pretty obvious questions about a conflict of interest.
Like everywhere else, money talks in the real estate industry. It’s fair to scrutinize the advice you receive from agents and wonder what incentives they may have to push you in one direction or another.
In conclusion
Real estate agents are usually paid on commission as a percentage of the total purchase price. Commission rates tend to fluctuate from state to state, but may run anywhere from 5% to 6%. As a homebuyer, you probably won’t need to worry about covering this expense since the seller usually pays broker fees as part of the closing costs.
You may find that a seller wants to offset those costs, though, by having you pay for other closing items, such as outstanding property taxes. Keep a team of knowledgeable experts by your side, including real estate agents and real estate attorneys, who can help you negotiate at the closing table and find a compromise that works for everyone.
