Real estate agents are paid on commission. The median gross income earned by real estate agents and brokers was $39,800 in 2017, according to the National Association of Realtors. The main source of that income comes from commissions on real estate sales. If you’re buying a home, it’s important to understand how any agents you work with earn their commission. If you want more holistic insight into how commissions could reduce your real estate earnings and what that means for your overall financial picture, consider consulting a financial advisor.
How Real Estate Commissions Work
Most often commissions are figured as a percentage of the property sale price and a common commission percentage is 6%. So on a $200,000 home, the commission would typically equal $12,000.
Not all deals pay a 6% commission. Real estate professionals specializing in commercial property transactions may command up to 10%. Discount residential real estate brokerages may ask for significantly lower commissions. Some offer standard commissions as low as 1%.
Sales commissions are always negotiable, at least in principle. Some agents and brokers may not be willing to negotiate. The amount of the sales commission will be spelled out in the listing agreement. This is an agreement between the seller and the listing agent regarding the marketing and sale of the home.
Sales commissions also vary by location. Some regions charge lower commissions than others, and sometimes a real estate professional may work for a flat fee. Agents earn commissions by marketing a property with listing services, advertisements, showings and open houses. An agent’s job also may include handling negotiations with buyers, overseeing paperwork and arranging for inspections, appraisals and other tasks that a buyer must pay for but may not have time to manage.
Commission Splits for All Real Estate Agents Involved
The entire amount of the commission rarely goes to the listing agent. In fact, agents are not even able to receive commission payments directly. Instead, the payment is made to the broker under whom the agent works. The broker then pays the agent according to their agreement.
Normally four real estate professionals split the commission:
- Listing agent
- Listing broker
- Buyer’s agent
- Buyer’s broker
The commission is first split between the listing broker and the buyer’s broker. This split varies. Sometimes the listing broker will get a larger portion. But around 50-50 is typical.
Then the listing broker splits his or her share with the listing agent. And the buyer’s broker splits his or her share with the buyer’s agent. Again, the split between agent and broker is negotiable. It’s often around 50-50. However, newer agents may get as little as 30%.
Experienced agents could get 100% of the commission. These agents pay “desk rent” to their brokers instead of splitting the commission. Sometimes one or more of the agents also has the additional training and licensing to act as his or her own broker. Then the agent-broker doesn’t have to split his or her share.
To put some hard numbers to all this, let’s look at how agents would be paid on a typical transaction of a $200,000 home with a 6% commission:
The total commission would be $12,000. That’s $200,000 times 0.06. The listing broker and buyer’s broker would often split that equally. So each would get $6,000. Then the brokers would pay their agents. Assuming their deals call for 50-50 splits, each agent would get $3,000.
Note that the agents and brokers are usually only paid if the transaction is completed. If something goes wrong before closing, typically nobody gets paid.
There are exceptions, however. Listing agreements generally spell out circumstances when the commission may have to be paid to the listing broker even if the house doesn’t sell. For instance, if a capable buyer makes an offer and the seller simply decides not to sell, the seller still may be required to pay the commission. Other cases like this include if the seller can’t produce a clear title or can’t turn the house over to a buyer within a reasonable period of time.
Who Pays the Commission?
The commission comes out of the proceeds of the sale before the seller receives any money. So the buyer is the one who is obligated to pay. However, since the sale price includes the commission, the buyer is also paying the commission. Sometimes buyers may be able to negotiate a lower price if a seller is representing himself or herself and therefore doesn’t have to pay a seller’s agent commission.
A seller without a listing agent may still be called upon to pay the buyer’s agent a commission. However, the commission will likely be lower than the full commission that would be paid if there were buyer and seller agents on the deal.
Like everything about commissions, a buyer and seller can negotiate the way the commission is paid. A seller could agree to pay a portion of it. If neither buyer nor seller is represented by an agent, there is no sales commission. Often in this case one or both parties would hire a real estate agent, broker or attorney to oversee preparing documents for closing.
The Bottom Line
Real estate agents are paid on commission. The percentage is based on the property’s selling price. Normally commissions are split between the buyer’s agent and broker and the seller’s agent and a broker. While the seller typically pays the commission, it’s usually reflected in the price paid by the buyer. All parties can agree to any payment terms on who pays the commission and how much everyone involved is willing to take.
Tips for Home Buying
- If you want to know how home buying fits into your overall financial plan, consider speaking to a professional advisor. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Being realistic about whether you’re ready to buy a home is the first step toward being a responsible homeowner. Use SmartAsset’s free rent-vs.-buy comparison tool to help you make an informed decision.
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