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Selling a home can be a tricky process to navigate. But thankfully, there’s someone you can lean on every step of the way. One of the most important people you’ll recruit for your team is a real estate agent. Think of your agent as your coach, cheerleader and quarterback all rolled into one!
The right real estate agent can help you come up with a game plan to score the best possible deal. Of course, recruiting the best quarterback in the league does come at a cost – and so will partnering with a licensed, professional real estate agent.
Understanding what a real estate agent commission is, what it covers and how it’s calculated can help you seamlessly execute your home buying or selling strategy and lead you to victory.
What Is a Real Estate Commission?
Real estate agents aren’t paid on an hourly basis. Agents make their money from the real estate commission. The commission, which is normally paid by the seller, is a percentage of the home’s selling price (think: 5% – 6%), but it can also be a flat fee.
What Does a Real Estate Commission Cover?
A good real estate agent provides a variety of services that are all covered under the commission. For sellers, some of the services include:
- Guidance: If you’re unsure about how to price your property or have other questions throughout the process, have your agent advise you.
- Access to the multiple listing service (MLS): The MLS is a database created by real estate brokers. It includes hundreds of property listings, which agents can use to connect home buyers to sellers. If you choose to sell your home without an agent, you’ll have to come out of pocket to access the database, and you’ll be charged for each property you want to sell.
- Marketing: Besides the MLS, agents can use additional online and offline marketing platforms to attract buyers.
- Planning: If you’re not much of a planner, your agent can coordinate, schedule and organize open houses and home buyer visits.
- Their presence: Since you probably have enough going on in your life, you may not always be available to attend every meeting or inspection. Your agent, however, can be present for home inspections and appraisals to make sure everything goes smoothly.
- Negotiating skills: You can work with your agent to set expectations and rely on them to negotiate any real estate transaction details.
Real estate agent vs. broker vs. REALTOR®
A real estate agent, a broker and a REALTOR® aren’t the same things. Knowing the difference can help you understand how they’re all compensated.
- Real estate agent: Real estate agents are essentially salespeople who are licensed to work under the umbrella of a real estate broker. Agents can’t work by themselves, and they aren’t allowed to take a commission directly from a client. Commissions are paid to the broker, and then it’s split with any agents who were part of the deal.
- Broker: Real estate brokers are real estate agents with additional training and state-level licensing. Brokers can work for other brokers, hire real estate agents or run their own real estate agency. They can work with buyers and sellers independently. And they review and validate offers made by agents to make sure that everything’s been done correctly.
- REALTOR®: REALTORS® are agents and brokers who are also licensed members of the National Association of REALTORS® (NAR), a broad network of real estate professionals. Agents and brokers who are REALTORS® aren’t paid differently than those who aren’t members of NAR.
How Do Real Estate Agents Get Paid?
Once a seller selects an agent, they will sign a listing agreement with them. A section of that agreement will handle the commission fee (which can be negotiated).
Next, the agent will list the home on the MLS to attract potential buyers.
It’s common for a real estate agent to partner with local agents and brokers to help them find buyers. If the other agent or broker finds a buyer, the original agent (aka the listing broker) will pay half of their commission to the buyer’s agent.
What happens when one agent represents two parties?
In most cases, a home buyer and seller will each have their own real estate agent. But, in some instances, an agent can represent both parties at the same time.
This practice, known as dual agency, isn’t legal in every state. It can create conflicts of interest since a real estate agent is required to act in the best interest of their client. In the states where dual agency is legal, it’s only legal if the agent provides full disclosure to both the seller and the buyer.
How Is a Real Estate Agent Commission Calculated?
In most cases, the real estate commission will be 5% – 6% of the property’s sale price. Both the buyer’s agent and seller’s agent (aka the listing agent) will each get a percentage of the commission. And the way it gets split up depends on what the agents have agreed to, the property’s location and how long the agents have been working.
To calculate the real estate agent commission, you multiply the home’s purchase price by a commission percentage to get the total amount of the commission. Then, the commission gets split between agents according to their predetermined percentage split.
For you visual learners out there, we’ve included an example with a fictional house that’s selling for $300,000.
Commission = commission percentage / purchase price X 100
|Home Sale Price||Commission Percentage||Total Commission Payment||Commission for Two Agents|
|$300,000||5%||$15,000||$7,500(In this case, the agents split it equally.)|
Are Commission Rates Negotiable?
A broker’s real estate commission rates are negotiable. It’s actually a violation of federal antitrust laws for real estate professionals to attempt to charge, let alone implement, uniform commission rates.
When Is the Real Estate Agent Commission Paid?
The commission fee is paid after the sale closes. Now, to be clear, the fee (aka an agent fee) isn’t included in your closing costs. Closing costs are the fees you pay at closing to finalize the sale of the house (think: taxes, title insurance, appraisal, lender fees, etc.).
The way closing costs will be divided between a seller and buyer is commonly negotiated at the beginning of a home sale.
What if the house doesn’t sell?
Real estate agents are only paid if they successfully sell a home. If your home doesn’t get sold, you likely will not have to pay a commission.
Pro tip: Read the fine print of the agent’s contract. Sometimes, there are exceptions, like:
- Your real estate agent found a buyer: Some real estate contracts state that you have to pay your agent a commission – even after the contract has expired – if they found a potential buyer during the contract’s term.
- If you back out of the sale: Some contracts will require that you pay the commission ASAP once you’ve accepted an offer. If you decide to back out of the sale after you’ve accepted an offer, you’ll still be on the hook for the commission.
If a buyer backs out after you’ve accepted their offer, you may still have to pay the commission. If that happens, you can sue the buyer for breach of contract.
Alternatives To Paying Real Estate Commissions
When you’re selling your home, it’s understandable that you’d want the biggest return on your investment. Sometimes homeowners opt to sell their home without an agent for this reason.
If you prefer to sell your home without the guidance of an agent to avoid paying agent fees, there are two ways of handling this:
For Sale By Owner (FSBO)
You can be your own agent. This method is best for the highly motivated among us. If you take this route, you’ll need lots of patience and the drive to prepare your home for sale, market it, handle all of the negotiating and figuring out a lot of the legal and financial implications of selling on your own.
Selling a home can get complicated. It would be wise to hire an attorney to review any paperwork.
Sell your home to a cash buyer
If there’s a cash buyer, like an investor or a company that buys houses, they can buy your home directly.
Final Thoughts on Real Estate Commissions
At first glance, recruiting a real estate agent to help you sell your home might seem expensive. But it’s typically a worthwhile investment most sellers thank themselves for later on.
While there’s a lot of peace of mind that comes with having a professional real estate agent on your team, remember: You’re still the head coach – and you need to keep your head in the game.
Take the time to review your real estate contract, read all of the important documents and check in with your agent to make sure they’re hustling for your interests and goals.
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National Association of REALTORS®. “Legal.” Retrieved December 2021 from https://www.nar.realtor/legal-13