What is a Realtor® Commission?
A Realtor’s commission is how most real estate agents make a living. It is highly unusual for an agent in real estate to be paid a salary. Real Estate is a commission-based business. Yearly commission for Realtors can be highly erratic.
One of the most popular questions among consumers is how much the Realtor commission is. Realtors’ commissions are negotiable. There is no set fee. The real estate commission can vary by location, the company you choose, the listing agent, and specific situations.
Realtor commission is one of the most significant transaction costs for home sellers. Unfortunately, many sellers don’t know how the commission is calculated, what services the commission is paying for, or even how much the commission is. Of course, these are things you should know when contemplating selling your home.
When you are done reading, you will be well versed in everything you need to know about Realtor® commission fees.
How Realtor® Commissions Work
Commission on a home sale is typically 5% to 6%. In most cases, the agent representing the buyer receives 2.5%–3% in commission, while the agent representing the seller receives 2.5%-3%.
The Realtor® representing the seller can be referred to as the listing agent or seller’s agent. The Realtor® representing the buyer can be referred to as the buyer’s agent or selling agent. See listing agent vs. selling agent.
It is possible that Realtor’s commissions are not divided equally among real estate firms, but it’s less common. It’s also worth noting there is a difference between a Realtor® and a real estate agent. A Realtor must follow a code of ethics and be a National Association of Realtors member.
You may want to remember this when choosing an agent. The agreed-upon real estate agent commissions will be spelled out in the listing agreement. The total commission will be listed along with any listing fees.
What is The Average Realtor® Commission?
What percentages do Realtors make?
The average commission for a Realtor comes in around 5.5%. In some areas of the country, a 6 percent commission is typical, while in others, it’s 5 percent. When I first entered the business thirty-six years ago, a 6 percent commission was more common in my area of Massachusetts.
Over the years, the Realtor® commission percentage started to drop until 5% became more commonplace. A significant percentage of all real estate listings now have a 5% total fee paid by the seller.
Average Realtor® commissions have dropped due to online competition, the internet, and flat fee real estate brokerages. Even though the average real estate commission has gone down, a Realtor’s earnings are not due to the average home’s sales price increasing.
What is a Realtor Commission Split?
A Realtor® does not collect the full commission when selling a home. It is split between the real estate brokerage that employs them. A Realtor’s commission split for new agents is typically 50/50. An experienced agent will have a higher split.
Gradually as a Realtor® increases their production, their split with the brokerage increases. Some top-producing Realtors may have negotiated splits as high as 80-90 percent.
Keep in mind the Realtor® fees are gross commissions earned. They do not account for all of the overhead and expenses a Realtor® has. Their net income on each transaction is much lower than you think.
A stigma for the real estate industry is that all Realtors are getting rich. That’s not the case.
Who Pays Realtor® Commission?
In real estate sales, the seller often pays the Realtor® commission in a transaction. When a Realtor® meets with a home seller, they will discuss the commission percentage they charge.
Sellers should understand precisely what they get for their money before signing an exclusive right-to-sell listing contract. It is essential to understand that Realtors do different things as part of their marketing plan.
You should ensure you get the biggest bang for your buck as a seller. Understanding what a Realtor® will be doing to earn their commission is essential.
It is possible a buyer could pay a Realtor® commission in certain circumstances.
For example, if a Realtor® sells a client a for sale by owner property and the owner is not offering a buyer’s agent fee, the buyer would need to pay their agent a commission.
Circumstances such as these should be negotiated ahead of time. A savvy buyer’s agent will have a buyer’s agent agreement that will spell out what happens when they find an off-market home to purchase.
Example of Average Realtor® Commission Rate
To understand real estate commission rates, let’s look at specific examples of a Realtor® commission.
- A home’s sale price of $200,000 with a 5% commission = $10,000
- A home’s sale price of $400,000 with a 5% commission = $20,000
- A home’s sale price of $500,000 with a 5% commission = $25,000
- A home’s sale price of $750,000 with a 5% commission = $37,500
- A home’s sale price of $1,000,000 with a 5% commission = $50,000
When a home sells, a Real Estate professional would collect this at closing.
Can Realtor® Commission Fees Be Negotiated?
There is nothing wrong with consumers trying to negotiate a realtor’s commission from a sale. Certain Realtors may have no problems negotiating their fees, while others may be more rigid.
There is usually nothing preventing a Realtor® from negotiating commission rates other than possibly the owner of the real estate brokerage. Some real estate brokers may have minimum fees they will accept.
Real Estate commissions are negotiable because of the Sherman Antitrust Act, which prohibits businesses from price fixing.
There are specific circumstances that may warrant attempting to negotiate a commission. One of the most common is when you agree to list your home for sale with an agent and purchase another home with them.
In that case, you will do two transactions with one agent. A Realtor® who is not somewhat flexible in that circumstance probably doesn’t have the best business acumen. By saying not saying yes to a slightly lower commission schedule, they could end up with nothing. That would be a terrible business decision.
Dual Agency Isn’t Worth Lower Rates
The other circumstance where a home seller may ask for a commission break is when a buyer goes directly to the listing agent. In this circumstance, the agent will have both sides of the transaction. When a buyer goes directly to your agent, you should be concerned about dual agency.
You’ll want to make sure your agent doesn’t practice it. In dual agency, your agent would become a neutral party, no longer able to represent your interests or give you advice.
It should be perfectly clear that a buyer can go directly to your agent without becoming a dual agent. They can work with the buyer and remain as the seller’s agent. Dual agency in real estate is illegal in some states due to the fact that consumers are harmed by it.
Sometimes lowering your agent’s fees isn’t always the brightest move. Part of your Realtor’s commission goes towards your house’s marketing budget and other business expenses.
A lower budget could mean your agent can’t or won’t market your home as best as possible. While a Realtor’s fees are an essential part of your business decision, so is the value you will be getting from the agent.
What Do Realtor® Commissions Cover?
A Realtor’s commission will typically cover all of the services that will be provided in the sale. Some of the most common include the following:
- Providing a comparative market analysis to set a proper list price for the home.
- Taking care of all the paperwork necessary to get the home listed in the multiple listing service.
- Hiring a photographer to provide professional photography of the inside and outside of the home.
- Providing use of the agent’s real estate websites to market the home.
- Getting the home listed on the best websites for home buyers and making enhancements to ensure the property stands out.
- Offers suggestions on how to maximum all of the viewings of the house.
- Providing color brochures for potential buyers to be used as marketing material.
- Possibly providing open houses if the client wants them.
- Providing a showing and feedback system, so the seller is constantly in touch with activity.
- Negotiating the contract with the buyer’s agent.
- Attending the home inspection and real estate appraisal.
- Regularly communicating with the seller throughout the process.
- Providing the seller with recommendations for any needed vendors, including references for real estate attorneys, contractors, or movers.
- Constant communication with the buyer’s agent and mortgage company ensures a smooth transaction.
See a more detailed list of everything a Realtor® does for you. Real Estate agent commission covers many things in the process of selling a home.
Do You Have to Pay a Commission if You Don’t Sell Your Home?
Most of the time, you do not have to pay any real estate commission fees when a real estate agent does not get the job done. Real Estate is a risk-reward business. Real Estate agents spend quite a bit of money, and sometimes it doesn’t work out.
Unless your contract specifies otherwise, you must not pay real estate agent fees if the contract expires and your home does not sell. A good agent would never charge.
However, it’s possible there could be some exceptions that will be spelled out in the contract.
Some real estate agreements state that commissions are still owed after the contract period ends if your buyer was a prospect during the time of your real estate agent’s contract.
Another potential instance where you might have to pay a Realtor’s commission is you back out of the sale after contracts have been signed.
Do You Pay A Realtor’s Commission if You Don’t Buy a House?
The seller typically pays the agent’s commission when you buy a home. However, if you’re buying a home that is a FSBO, you may have to pay a Realtor’s commission.
Agents are paid at the end of the home buying process, so if you tour homes with a real estate agent and don’t buy, they won’t be paid for their time.
It may be challenging if you decide to break up with your buyer’s agent because the contract you signed binds you to work with that agent.
Before signing a contract, be sure to ask questions about any unclear terms. You may want to consult an attorney if there are any concerns about the contract’s validity.
What Commission Does a Realtor® Make?
One of the popular questions people always ask is how much a Realtor® makes. Realtor® incomes can vary tremendously. A newly licensed agent will not make nearly as much as someone who has been practicing for many years.
A realtor’s income depends on several factors, including the time and effort put into the business. The average sales price of homes in the agent’s area also comes into play.
It goes without saying that if the average sales price of homes is $400,000, it may be more challenging to earn a higher income than another agent working in an area where the average home price is $800,000.
The average Realtor commission rate for the area will also come into play. A higher commission split will also generate more significant revenue for the agent. Whether it is a hot market or a buyer’s market could also impact net earnings.
Commission for Realtors is a moving target every year.
Concluding Thoughts
Commission for Realtors typically runs between 5-6%, although it could be more or less. As with most things, you should get what you pay for. Make sure you know exactly what you’re getting for your money.
You should now better understand how Realtor commission rates work and how much a Realtor® makes in a real estate transaction. Commission fees will be the single most considerable expense contributing to a seller’s closing costs.
Realtor fees do vary in different parts of the country. What’s essential to remember is that being competitive with the competition is vital. Don’t be the person who thinks lower commission rates will put more money in your pocket. It will likely be less if all the Realtors want to avoid selling your home.
The real estate agent commission rate should be discussed upfront, so there are no surprises. Someone with years of experience with full service will be money well spent.
About the Author: The above Real Estate information on what to know about commission for Realtors is provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for 36+ Years.
Are you thinking of selling your home? I am passionate about real estate and love sharing my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.
