Real Estate Commission Basics

Whether you’re in the market for a new home, or looking to sell your existing home, it’s important to understand how real estate commissions work because they aren’t insignificant.

In fact, a real estate agent’s commission can take a big bite out of your home sale’s proceeds, or drive up the price of a home you’re looking to buy.

Fortunately, real estate agent commissions are both negotiable and variable, so don’t feel you have to go with what one particular agent demands.

Additionally, there are a variety of market disruptors changing the landscape, with companies like Redfin only charging 1.5% to list a home (4.5% total if the buyer’s agent takes 3%) and REX, which only charges 1%.

The Home Buyer Doesn’t Pay Commission

You may be wondering who pays the real estate commission, the buyers or the sellers.

Well, if you’re buying a home, you will not have to pay any direct, out-of-pocket real estate commission fees to your real estate agent. However, one could argue that the commission is baked into the higher asking price.

Conversely, it is the seller who must forfeit a chunk of the selling price to both the buyer’s and seller’s agent when their home finally sells.

The typical commission tied to the sale of a home these days is 5% of the sales price, though it can be as high as 6% or 7%, and lower than 5% in some cases.

The seller’s agent typically sets the rate of commission, and then works out a deal with the agent representing the buyer.

In many cases, the two agents will split the commission 50/50, though it can vary based on market demand and other factors.

So they may each get 2.5%, assuming it’s an equal split. However, sometimes one agent will represent both the buyer and seller in a dual agency, collecting the entire commission. But if one agent represents both parties, the total commission may (should) be reduced.

Sometimes one agent will agree to take less than half of the commission to get the deal done.

There may also be a situation where one agent represents both buyer and seller, known as double-ending the deal. In this case they can earn the full commission.

Real Estate Agents Work for Brokers

Real estate agents work for real estate brokers, who get a split of the commission as well, with newer agents typically forfeiting more of their total commission, and vice versa.

Other fees such as advertising costs, sign rentals, and office-related expenses may also be deducted from the agent’s commission. Though there are also 100% commission structures, where real estate agents get 100% of the commission.

Fees will range based on what brokerage you decide to work with, or which one the seller is being represented by.

It’s possible to negotiate the amount of the commission paid, but larger companies tend to bargain less, as they have more in-house fees and will pitch better service. If an agent is asking too much, you can ask for a lower amount, but expect plenty of resistance.

And if the buyer’s offer comes in short, both the buying and selling agents may agree to lower their commission to get the deal done. This tends to work via a credit to the buyer to cover closing costs.

Real Estate Agents Work for You Too

Remember, they need to earn your business, as they are working for you. If you’re looking for a cheaper option, you’ll probably have better luck working with a smaller or independent agent, as opposed to a large company with lots of overhead.

Just understand that the level of service may be diminished, and you could wind up lowering the sales price to accommodate a buyer, thereby costing you more in the long run than the commission would have set you back.

Also, you shouldn’t concern yourself too much with agents trying to steer you toward a more expensive property so they can earn more commission. The reality is that a home worth another $10,000 will only bump an agent’s commission by a couple hundred bucks. And most agents will be more concerned with getting a sale, even if it’s slightly lower than other possible outcomes.

Keep in mind that it is possible for the selling agent to offer a cash incentive to the buyer’s agent to find a suitable buyer, but that should be disclosed if you inquire about it.

It’s also possible to buy and sell homes without the use of an agent to save money on commission, but you should understand that it can be complicated and time consuming. For novices, it’s recommended that you use an agent.

Make sure you take the time to interview your real estate agent to ensure you know exactly what you’re getting. Ask for referrals, and if you’re unclear on anything, don’t be afraid to ask questions. They are working on your behalf and should appease you at all steps along the way.

Remember, a good understanding of real estate commissions can save you a lot of money.


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