How do real estate agent commissions work?

Source: Yahoo! Finance — 

In this do-it-yourself digital age, home sellers and buyers alike might well wonder if they need Realtors — or, more precisely, to pay Realtor fees. Just how crucial are these agents to a successful real estate transaction?

Well, a good agent is really pretty useful. It makes sense to work with one, especially if you’re buying a home: Agents have access to information you don’t, and it takes time and expertise to research properties, find the best ones for you and put in a strong offer. But sellers see many benefits, too, especially when figuring out the best asking price. Your home will still need to be staged, listed on the market and shown, too.

So, despite the pandemic shift toward virtual showings and even sight-unseen purchases, Realtors provide a wide variety of services to both sellers and buyers that are worth the commissions they charge. Let’s look at how their compensation works.

Only a very small portion of Realtors work on salary — the commission model is much more common. For years, the going rate was a firm 6 percent, split down the middle between the buyer’s agent and seller’s agent. But it began to fluctuate in the last few years, with the advent of discount brokers and the rise of online, publicly accessible listings. Nowadays, real estate commissions can be negotiated, and they typically run about 5 percent to 6 percent of a home’s sale price. The exact terms of an agent’s commission vary from sale to sale, and can depend on the region and which firm they work for.

Let’s look at an example. According to Redfin data, the median home sale price in Atlanta in December 2022 was $390,000. A 5 percent real estate commission on that price would come to $19,500. But in San Francisco, where the median was a much higher $1.28 million, a 5 percent commission would come to $64,000.

Here’s roughly what you can expect to pay, based on how much your home sells for:

Breakdown of seller vs. buyer commission

Sellers sign a listing agreement with a Realtor in which they agree to pay a commission fee after the transaction closes. If it’s an exclusive right to sell arrangement, they pay the fee even if they found the buyer on their own.

Commissions for both Realtors in the transaction are typically paid by the home seller: Both the buying and selling agents are paid with proceeds from the sale of the home. These two agents typically split the total commission — so for a 6 percent commission, the selling agent would receive 3 percent and the buying agent would receive the other 3 percent.

That changes in the case of dual agency, when one agent represents both the buyer and seller in a transaction. Laws about this vary by state; in some states, dual agency is not permitted. In this type of scenario, pay particular attention to the home appraisal to ensure you’re getting a fair price. While agents have a fiduciary duty to their clients, with dual agency, the lines can get blurred.

As Sam Fish, a Realtor with Wesely & Associates in Grass Valley, California, points out, agents are bound to act ethically in their client’s best interest. “It’s in our ethics; it’s in our contract,” says Fish. “If someone comes into my open house and they like the open house, but they don’t have an agent, at that point I can say, ‘let me get you an agent from my office’ so they feel like they’re being represented 100 percent as well.”

Still, buyers working directly with a listing agent may have more room for negotiation because the seller may agree to a lower selling price if the agent agrees to lower their fee. What happens if a seller already has a buyer? “We can come to the table and facilitate a contract with buyer and seller and negotiate terms, so maybe the seller isn’t paying as much in fees,” says Fish. “It just lends more creativeness to the transaction.”

If you’re working with a buyer’s agent, “you have to sign a buyer’s agency agreement,” explains Tim Noland, an agent with Great Mountain Properties in Murphy, North Carolina. “A true buyer’s agent works for the buyer. They protect the buyer’s investment, as opposed to the listing agent, who’s actually working for the seller.”

The broker’s cut

Real estate brokerages may get a cut of the commission as well. The brokerage RE/MAX, for example, has a split commission setup by which its agents receive 95 percent of the full commission from the sale, and 5 percent goes back to the company.

“The broker has to set the policy and oversee, monitor and supervise everything the agent does,” says Patrick Duffy, of Duffy Realty in Miami. “And if the agent does something fraudulent or unprofessional, the broker gets sued.”

How commissions have changed over the years

Since the early 1990s, Realtor commissions have seen a fairly steady decline. They did bump up in 2021 (for the first time since 2017), reaching an average national commission rate of 5.06 percent, according to research firm RealTrends. Overall though, that figure is down from more than 6 percent in 1991.

This isn’t to say the total amount Realtors earned decreased, however. In strong seller’s markets, home prices are high and sellers receive multiple offers. This allows more room for negotiation on the commission, so Realtors may accept a lower commission to earn a higher amount overall: Their piece of the pie may be smaller, but it’s a richer slice. Since the pandemic, the decline in commission rates has been offset to a large extent by rising home prices.