Working with a realtor for your home purchase or sale is by no means out of the ordinary. In fact, according to NAR, an average of 90% of buyers and sellers used a real estate agent to complete their transactions in 2018. Yet so many of those same consumers are unsure how much their agent was paid for their involvement, or even who paid it. It’s no surprise since the commissions are just added to the long list of costs and fees handed to you at the closing. So, how much commission do realtors make from a sale?
Let’s start from the beginning. Unlike other professionals you hire, real estate agents aren’t paid for every hour of work they put in, but instead, are paid a predetermined commission when a transaction closes. That amount is usually based on a percentage of the home’s value, but is negotiable. The total percentage then has to be split between the listing agent and the buyers agent. It would be awesome if those agents got to keep all that, however, real estate agents are independent contractors. Out of that commission, the agents then pay their brokerage fees, referral fees, transaction fees and taxes. The leftover net is the agents take home pay.
So, who pays the agent?
When it comes to who is responsible for paying the agent, that is where many buyers and sellers get confused. According to a study by Porch, 60% of millennials who where buying and didn’t use an agent, said it was because the services of an agent were too expensive. Though it might surprise you, or make you cringe if you’re selling, it is typically the seller’s responsibility to pay the total commission. The listing agent and the seller negotiate the total commission rate and then the listing agent ‘shares’ x% with the agent who brings the buyer. That’s right. The buyer doesn’t pay their agent. One more time for the people in the back. THE BUYER DOESN’T PAY THEIR AGENT.
In some cases, there are exceptions to this rule. If the home is for sale by owner, foreclosure, or some other non-traditional instance, the buyer could be responsible for covering the fees for their agent. It’s critical to read your buyer agency agreement, if applicable, to determine what compensation you may be responsible for paying the agent, including any minimum requirements.
How is it calculated?
The amount of total commission paid, like we touched on before, is completely negotiated between the seller and their agent. Total commission typically ranges anywhere from 3-6% of the home’s sale price. As a seller doing that quick math, you may need to pick your jaw up off the floor. What you need to keep in mind, is that amount gets split between the two agents involved, the one selling the house and the one who brings the buyer. The amount the listing agent shares with the buyer’s agent is also pre-determined by the seller, influenced by the area you’re in, and posted to the MLS or other marketing material so that buyer agent’s coming over will know their cut ahead of time.
Let’s look at an example:
You’re selling a home for $300,000. You sign a listing agreement to pay 4.5% total commission to the listing agent.
$300,000 x .045= $13,500 total agent commissions paid
Out of that total, the listing agent will keep, say 2% while sharing 2.5% with the buyer’s agent.
$300,000 x .02 = $6,000 to the listing agent
$300,000 x .025 = $7,500 to the buyer’ agent
Remember, each agent also has the fees to pay out, listed above, as well as put it towards any marketing costs they paid out of their own pocket to get your home sold at the best price. It is safe to assume that about half of the gross commission received by the agent, actually makes it into their pocket. If you’re trying to do the math in your head- the average agent closes about 5 transactions per year.
You’re not alone if you’re thinking about how costly it is to sell your home using a traditional agent. Several brokerages across the country are now offering services where you can get MLS access and other limited services for only a flat fee instead of a percentage of the sales price. However, be sure to do your homework and make sure this is the right service for you. Many of these providers do minimal, if any, of the grunt work when it comes to your home sale.
Additionally, there are agents across the country that are willing to discount their listing commission to make themselves more competitive in markets that are saturated with agents. True, no one can work for free, but keep in mind that the answer is always ‘no’ unless you ask.
For buyers, it feels really good knowing you don’t have to front the cost of your agent’s commission on top of the other fees associated with buying a home. In 40 states, you could even find an agent willing to rebate up to 1% of the home’s purchase price back to you, straight from their commission to help with your closing costs.
What Happens if the Sale Falls Through?
No one wants a failed transaction, but it happens more often than you’d think. So who gets paid in the case you don’t make it to the closing table? Typically, no one. Under the most common circumstances, the agents only gets paid when they successfully help you buy or sell a home. However, be sure to read your agency agreement in detail because like all things real estate, there are exceptions.
In the End, It Varies
There will never be a hard and fast answer for how much commission do realtors make from a sale. Each property is a case by case basis. What we do know is that it’s important that buyers and sellers educate themselves on the agreed on compensation, how it will be split, and when it is owed. Buying or selling can be an exciting (yet crazy) time, but we’re talking about more than some pocket change when it comes to realtor commissions. It literally pays to know your options.