How Real Estate Commission Fees Work

    How Real Estate Commission Fees Work

    Nov 29, 2018

    Most agents earn their income by commissions from a completed home sale. First, let’s review the roles of those involved in the financial aspects of a real estate transaction.  

    Seller: The person who’s decided to put their home on the market.

    Listing Agent: An individual who’s been hired by the seller to market the home and negotiate on their behalf.

    Listing Broker: This can be the listing agent themselves or another individual for whom the listing agent works for or whose company the listing agent works under.  

    Buyer: The person who’s decided to buy the home.

    Buyer’s agent: The person who the buyer has hired to help them find their new home and negotiate on their behalf.

    Buyer’s agent’s broker: This can be the agent themselves or another person for or under whom the buyer’s agent works for.

    A real estate commission is typically one fee — usually a percentage of the home’s sale price — that is split between these four entities: Buyer’s Agent/Broker, Listing Agent/Broker. This percentage is typically between 5 and 6 percent of the sale price. The percentage is determined when the seller signs the listing contract with their agent.  This commission covers the buyer/listing agents’ paychecks, but it’s important to note that part of the commission will go toward covering marketing and paperwork costs and fees and the payments to brokers.

    Commission Breakdown

    First, the overall commission percentage is divided between the two brokerages (real estate companies). Then, each real estate agent is paid via a predetermined agreement they’ve made with their broker. In most cases, the agent is given a portion of the split, while the broker keeps the remainder to cover office expenses. In others, the agent is paid a flat-fee per each sale. Sometimes, the agent is given 100% of their commission and then charged a recurring bill by their broker to cover overhead costs.

    Once an offer has been received on a home, the listing agent and buyer’s agent will negotiate amongst themselves to determine how to split the percentage of commission between them. In most cases, it will be split right down the middle. However, if there are mitigating circumstances, a different agreement may be reached.

    Who Pays The Commission Fees?

    Typically, the seller is responsible for paying the commission fees and they are taken care of at settlement. This doesn’t mean that the buyer gets these services for free, as the Seller will usually account for these fees by asking for a higher sale price. However, they do not have to come up with cash at settlement because it is rolled into the house price, which means they will have more cash to use as a down payment.

    Coming Soon: Roles of Other Professionals Involved in a Real Estate Transaction