Real Estate Commission: Who Pays for What In The Sale?

Who pays my agent? is a question you might have if you're buying or selling a home.

For their clients' successful sale or purchase, real estate brokers put forth a lot of effort. This entails setting home prices, marketing listings, putting together documentation, negotiating, and generally guiding their clients through the frequently perplexing home-buying or home-selling processes.

What do you pay for all of these services, then? And who pays them—you or someone else—if anyone at all? Let's examine the standard real estate commission structure.

What is real estate commission?

When you hire a real estate agent or REALTOR? (a member of the National Association of REALTORS?, the primary trade association for real estate professionals), they are compensated with a commission determined by the value of the property you are buying or selling.

The real estate commission varies depending on the area and brokerage. The buyer's agent and the selling agent each receive a portion of the total agent commission, which is typically between 5 and 6 percent of the home's transaction price.

Commission for Buyers and Seller's Agents

Buyer's agents act as the buyer's advocate, assisting them in finding a home that meets their needs and budget, representing them throughout negotiations, and assisting them with the closing procedure.

Seller's agents, also known as listing agents, work on behalf of the homeowner, assisting with home pricing and marketing to draw in potential purchasers.

The buyer's agent and the listing agent divide the entire commission in a typical real estate transaction equally. This means that when they effectively assist a client in selling or purchasing a home, both agents typically get between 2.5 percent and 3 percent.

However, this does not always imply that the agent receives the full sum.

Real estate agents are required to work for licensed real estate brokers unless they have their own broker's license.Although further training is required to become a broker and have the freedom to work independently, real estate agents must also be licensed.

Actually, commission is given to the agents' brokers. In a transaction with a 6 percent commission, 3 percent goes to the broker of the selling agent, and the remaining 3 percent goes to the broker of the buyer's agent.

The commission will then be divided between each broker and their agent. Although a 50-50 split is typical, it might change and the agent may receive more or less. Using our 6 percent example again, this means that the broker would receive 1.5 percent of a commission of 3 percent, and the agent would receive the remaining 1.5 percent.

Commission Split Example

George is assisting his client in buying a home, and Jenny is the listing agent. Jenny is proposing a 6 percent commission to be split equally between her and the buyer's agent on the $300,000 price tag of the house.

Once the deal is completed, the commission will equal $18,000. Jenny's brokerage receives $9,000 of this money, while George's brokerage receives $9,000 of this commission.

Jenny's brokerage offers a 60-40 split of earned commissions to its agents. Accordingly, agents receive 60% of the commissions they receive, with the remaining 40% going to the brokerage. As a result, Jenny will have made $5,400 in total.

Half of the commission is given to the agent and half to the broker at George's brokerage. After the deal is done, George will have received $4,500 of the $18,000 in commissions.

Average Agent Commission

Although commissions for real estate agents or REALTORS? normally range from 5 to 6 percent of the sale price, there are a few circumstances in which this proportion can change.

-Aspects of location

In contrast, a 2019 survey by the Consumer Federation of America examined commission rates in 20 different urban regions throughout the nation and discovered that 70% of respondents stated they want a commission of 6%, split between both agents. The next-highest percentage, 19%, said they requested 5%.

This shows that regardless of location, commission rates are often consistent.

-Negotiation

Although it could be challenging, you can try to negotiate with your agent to see if they'd be prepared to cut their commission rate.

Only 27% of respondents to the Consumer Federation of America survey on real estate commissions said that they would be open to negotiating their commission.

Think about the commission split example from earlier. Despite the fact that commission is a significant cost, only a small portion goes to individual agents. They may not have much space for maneuvering once taxes and other costs are taken into account.

-Dual Agency

In a single transaction, an agent may occasionally function as both the buyer's agent and the seller's agent. Dual agency is the term for this.

Since they won't have to divide the fee with another agent, an agent may be more ready to reduce their commission under these circumstances.

Dual agency can provide a conflict of interest, making this practice unlawful in some places.

-Discount Brokerages

If you're trying to save money, low commission or cheap brokerages could sound enticing. These brokerages promise to sell your house for a commission of just 1% to 2%. Or on occasion, they will charge a set rate for their services.

This can be advantageous, but do your research and make sure you are aware of the services the brokerage will offer and any additional charges you might incur. For instance, even if a selling agency accepts a 1 percent charge, you can still owe the buyer's agent commission of 3 percent.

Does the commission figure in the buyer's closing expenses?

Does the seller foot the bill for the agents' services? Does the cost of purchase and sale get split?

REALTOR? Fees for Sellers. The proceeds from the sale of the home are often used to cover the agent commission. In addition to any other closing charges they may incur, they will also pay this.

Buyers: Do they pay REALTOR? fees? In most cases, buyers are not responsible for paying the brokers who worked on the deal. They will need to budget for additional fees and closing charges, though.

When a Deal Falls Through

Real estate agents typically aren't paid until the house is actually sold. But what if something goes wrong or someone suddenly changes their mind?

If you leave the procedure at a later point, you can still owe commission. They might still expect payment if you break your agreement with your agent or quit the game too late.

When the Seller Terminates the Sale

You don't have a lot of flexibility to cancel the sale of your property once it is under contract and scheduled to close.

Your agent may file a lawsuit against you for the commission you owe them if you cancel a sale after signing the purchase agreement. In addition, the buyer has the right to file a lawsuit against you for money damages or, in some circumstances, for "particular performance," which would result in a court ordering you to complete the sale.

If The Buyer Cancels The Deal

A buyer's contract will frequently contain contingencies that provide them the option to back out of the deal if specific conditions are met, such as a subpar home inspection or trouble obtaining financing.

However, after a buyer signs the purchase agreement, they are unable to back out of the purchase of a home barring certain stipulations. If they do, their agent may be able to bring a commission claim against them.

If you're unsure, consult your listing agreement or buyer's agency agreement to find out whether you would still be required to pay a commission even if the transaction didn't go through.

Is Commission Worth it?

If you're selling your house, you might be debating whether hiring a listing agent is worthwhile or whether selling it yourself (FSBO) would be more cost-effective.

Although selling without a real estate agent can result in higher profits, you will not have the advantage of having a professional handle the labor-intensive tasks of setting the price, marketing, and coordinating the sale of your home.

In fact, even after taking into account the money saved on commission, FSBO sellers frequently end up selling their houses for less than those who worked with an agent.

Additionally, keep in mind that even if you decide not to use a listing agency, you will still be responsible for paying the buyer's agent commission, which is normally equivalent to 3% of the transaction price.

With commission, you're paying for a valuable service.

The majority of us lack real estate expertise. It's not a terrible idea to have a professional working for you since selling a home can be difficult and time-consuming.