How Does Real Estate Commission Work?

Many people don’t understand how real estate commissions work. Real estate agents don’t get paid hourly or receive a salary. They get paid commissions from their real estate sales.

Per the department of Justice and anti-trust laws, there are no set real estate commissions. Now, let’s explore the frequently asked question, how do real estate commissions work.

How real estate commission works

Real estate commissions are negotiable between the listing agent and their client. Many charge certain percentages of their sales prices, where some list a home for flat fees. Real estate brokerages share and cooperate commissions with other brokerage companies. Real estate agents have an agreement with their brokerage companies about how much of their earned commissions they share with their brokerages.

What is the total real estate commission and who gets it

In residential real estate, 6% commission is considered standard, although some real estate agents charge less. The total real estate commission is specified on the listing agreement as two separate commissions. So who gets paid what?

Of the standard 6% commission fee, 3% goes to the listing broker and 3% to the buyer’s broker. Both the listing agent and the buyer’s agent will be paid by their respective brokers as part of their commission split agreement.

How much commission do real estate agents get paid?

Real estate commissions are always paid directly to the brokerage company. Real estate agents have written agreements with their companies that spell out how much they get paid out of the total commission, also known as a commission split.

Some brokerage companies split the commission 50%/50% with their agents. Some agents receive 60% and their broker gets 40%. Sometimes, the agent’s split can be 70%/30% or even 80%/20% between them and their companies.

Sometimes the real estate agent commission is on a sliding scale where they start out at a certain percentage and then their total commission increases because of sales activity. This is all negotiable between real estate agents and their brokerage companies.

The Seller Pays All of the Commission

Who pays the agent’s commissions?

Typically, the home seller is the one who pays the real estate commission amount for the home sale transaction based on the home’s sales price. The seller pays the listing broker after the house sells. Then, the listing broker shares the commission with the buyer’s broker.

The commission is negotiable between the seller and their listing agent. Many times the seller’s brokerage company splits the commission equally with the buyer’s brokerage company. Sometimes it is not split equally. It all depends on the situation and will be laid out in the listing agreement.

If the listing broker also has the buyer for the transaction, their company gets the entire commission amount. This is called “dual agency”. There can also be two different real estate agents from the same brokerage company involved in the sale. One may represent the seller and one may represent the buyer. On occasion, the seller’s real estate agent will also have the buyer for the home.

Do buyers ever pay real estate commission?

Usually, the sellers pay all of the commission. This is why discount real estate brokers have become more popular selling homes for less money.

There are occasions, however, when the person listing the house the buyer’s agent’s broker part of the commission. One of these cases could occur because some brokerages require their agents to have a buyer’s agreement that states a certain minimum amount or minimum percentage of commission that will be due to them after the property sells. If the amount received from the listing broker does not meet that minimum, the buyers will have to pay the difference.

Buying from FSBO sellers would be another time when the buyer pays the real estate commission. If buyers purchase a home that is “for sale by owner” (FSBO) and the owners are not paying any commission to a brokerage that brings a buyer, the buyers will be responsible for the entire amount of commission it states on the buyer’s agreement.

How much is the real estate commission for rentals?

A real estate broker also charges to list and rent investment or rental properties. This is typically a flat fee, for example, one month’s rent in commission. Again, this is negotiable between the property owners and the listing agents. People looking to rent a home usually do not pay any commission. However, in some areas, it is more common.

What do real estate commissions cover?

A real estate agent’s commission covers a broad range of services. Some people feel they can sell their homes “by owner” in order to save the money spent on paying a commission fee to a brokerage company to list and sell their homes.

However, many times, the people who sell their homes by owner end up netting less money than if they hired a real estate brokerage to help them list and sell their home.  Discount real estate brokers such as 1 Percent Lists offer the same services as other real estate brokers but at a discounted commission percentage. 

Your real estate agent will prepare a comprehensive market analysis to determine the best asking price and potential sales price for the home. They spend time and money taking listing photos and marketing the home. That sign that your listing agent puts in the front yard to help with attract attention costs money.

The listing agent also pays multiple listing service (MLS) dues to put your home’s listing in the local MLS which gets the listing exposure to all member brokers and agents. Without this, your home would not be visible online either. They install a lockbox on your home. They may create flyers or brochures for your home. Sometimes they pay for ads in print magazines. 

Sometimes they have to pay real estate websites to highlight your home, as the internet is the top way people are finding homes. They negotiate one or more contracts to get you the best sale price for your home. Most real estate agents typically work with you and everyone else involved in the transaction all the way to closing. Buyer’s agents show you as many homes as it takes until you find the right one. They negotiate contracts for you, as well. They also work with you throughout the entire real estate transaction.

how much do realtors make in real estate commission

How much do real estate agents make?

As you can see, most real estate agents are NOT paid on salary but on a commission-only basis. Similar to other industries, there are top producing agents that make up the vast majority of the transactions and earn a much higher than average real estate agent commission. There are also many agents who work just enough to keep their licenses active. With new disruptive new technology and brokerage models changing how many real estate agents look at commission splits, we are seeing many top-producing real estate agents starting to move toward high-volume, lower commission real estate franchises. And we are seeing the larger agents take a larger market share.

Average annual real estate agent salary

Considering the vast differences in housing prices across the country coupled with the fact that most real estate agents work on a commission basis, we see drastic differences in how much real estate agents make.

Here is a breakdown of real estate agent income by state.

State of Alabama $69,575
State of Alaska $75,172
State of Arizona $73,849
State of Arkansas $65,918
State of California $82,611
State of Colorado $70,210
State of Connecticut $76,717
State of Delaware $85,294
State of Florida $67,145
State of Georgia $71,241
State of Hawaii $78,893
State of Idaho $77,650
State of Illinois $65,560
State of Indiana $73,376
State of Iowa $69,498
State of Kansas $70,192
State of Kentucky $71,840
State of Louisiana $70,584
State of Maine $76,628
State of Maryland $91,113
State of Massachusetts $81,493
State of Michigan $65,889
State of Minnesota $72,782
State of Mississippi $65,757
State of Missouri $64,512
State of Montana $74,617
State of Nebraska $89,212
State of Nevada $74,581
State of New Hampshire $85,074
State of New Jersey $74,705
State of New Mexico $68,782
State of New York $87,938
State of North Carolina $60,057
State of North Dakota $74,559
State of Ohio $72,184
State of Oklahoma $82,915
State of Oregon $71,262
State of Pennsylvania $76,055
State of Rhode Island $75,619
State of South Carolina $70,477
State of South Dakota $72,381
State of Tennessee $72,712
State of Texas $75,225
State of Utah $71,254
State of Vermont $80,225
State of Virginia $88,041
State of Washington $92,287
State of West Virginia $76,425
State of Wisconsin $72,395
State of Wyoming $78,673
Data from Investopedia

Talking About Commission with Your Real Estate Agent or Broker

Often, real estate buyers and sellers don’t know how to bring up the matter of commission. Don’t worry! Every seller’s agent is used to discussing real estate commission with their clients. But you should get every detail squared away before beginning your real estate project and before you sign the listing agreement. After signing, it may be too late.

If you are selling a property, simply ask your agent or broker what commission they expect. That is usually how agents sort it out with their clients. The response will tell you a great deal and give you perspective on what to expect.

For home buyers, ask your real estate agent how they handle commission and if you can expect sellers to cover the cost. Don’t be shy to get the details hammered out so that you can confidently proceed with your home buying process.

Add a Comment

Your email address will not be published.