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Initiating a conversation about how your potential real estate agent will be compensated might initially feel awkward, especially amidst discussions about staging, marketing, and open houses. However, it's crucial to address before listing your home with any broker.

Real estate agents receive payment through various methods, depending on their employer, location, and services. However, the predominant model involves payment as a percentage of the sales price once a transaction is successfully concluded. According to the National Association of Realtors' 2022 Profile of Home Buyers and Sellers, 74% of sellers cover the agent's compensation.

Real estate agents spend a lot of time identifying the right buyer/seller, negotiating terms on behalf of their clients, taking care of administrative and legal aspects, attending inspections, etc. There is no fixed time within which a sale is closed. While it may take months in some cases, it may also be closed within days. 

Commissions are the rightful compensation for their efforts. This blog explains how real estate commissions work to help you understand it better.

What are real estate commissions?

Real estate agents act as intermediaries between buyers and sellers to facilitate a sale. In return, they earn compensation, which is called a real estate commission. Commissions are usually fixed as a percentage of the sale price during the commencement of the contract. All parties to the contract are bound by it, and there cannot be any denial after the sale is over.

Though commissions are calculated as a percentage of the sale price normally, several other methods of commission calculation are also followed.

What percent does a real estate agent receive in the USA?

In the context of residential home sales, the overall real estate commission paid by the seller typically falls within the range of 5% to 6% of the sale price. This sum is divided between the brokers or the firms that employ the agents representing both the buyer and the seller. 

Subsequently, each agent receives a share of the commission that the broker allocates.

In the case of brokerages such as Redfin, where agents receive a fixed salary, the total commission is generally lower, often ranging from 4% to 4.5% of the sale price. 

Redfin's new model indicates that this reduction is due to the company's practice of taking only 1% to 1.5% commission in most markets. The remaining 2.5% to 3% is designated for the buyer's agent and broker.

How do real estate commissions work?

Buyers and sellers use the services of a professional called a real estate agent. As a general practice, sellers pay commissions to agents for their services of identifying a trustworthy buyer. The buyer’s share of the commission is already loaded onto the sale price, though it may seem that they do not pay any commission. The commission paid to the agent may be fixed in any of these ways:

1. Percentage of sale price

Typically, real estate sales commissions are based on a percentage of the sale price of the property. 4 to 6 percent is the general norm, but again this also depends on various factors like location of the property, age of the property, etc. 

To understand this, we see that according to Redfin, the average sale price in Atlanta was $390,000 while it was $1.28 million in San Fransico in 2022. This indicates that location makes a huge difference in the sales commissions. 

2. Negotiable commission

In some real estate contracts, there is room for negotiation. The seller and the agent can negotiate and fix the rates instead of a standard rate. Here, the rates may be high or lower than the general norm due to certain circumstances. 

For example, if the seller wants the property disposed off soon, a higher rate may be quoted by the agent and the seller agrees due to the urgency involved. In some cases, where the property value is very high, the seller may negotiate a lower rate since it would fetch a higher value than other properties.

3. Split between buyer and seller’s agent

Agents may be from both the buyer's and the seller’s end. In such cases, the commission is split between the buyer and the seller’s agent. The buyer’s agent and the seller’s agent bring the parties together through their efforts. So both agents are entitled to a share in the commission.

Typically, the split is 50:50, but in some cases, they may agree upon a different percent too. The percentage of split is decided upon while entering into an agreement, and once the sale is completed, the agents get their share. 

4. Totally borne by the seller

In most cases, the seller is the one who pays the commission to the seller’s agent. But, it is argued that the buyer’s share is also added to the sale price and not revealed extrinsically.

For example, if the sale price of a property is $500,000 and the agent’s commission is fixed at 5 percent, the total amount of $25,000 is paid by the seller to the agent. 

5. Variable rates

Variable rates of commission are based on the location, type of property, and market conditions. The agent gets different commissions for properties sold in different locations, etc. 

Also, the market conditions play a great role in real estate commissions. In times of boom, a higher rate may be negotiated, since the seller stands to gain in such cases. 

6. Flat fees

This is in contrast to the other models of commission calculations that we saw above. Here a flat fee is charged for the services irrespective of the sale price. This fixed fee can be advantageous to the seller when the property value is high and to the agent when the value slumps. 

For example, we can compare a scenario where the agent fee is fixed at $10,000 and when it is 5 percent of the sale price. If the sale price is $100,000, then at 5 percent, the commission would be $5,000 only, and the agent gains in such a case. 

7. Additional costs

In addition to the commission, a seller may also bear the escrow charges for closing, surrender charges, insurance fees, administrative expenses, etc. This is paid for the additional services the agent undertakes. When the buyer has a separate agent, similar costs will be incurred by the buyer.

Example of a real estate commission

Consider an agent who secures a listing for a $200,000 house with a commission rate of 6%. This results in a total commission of $12,000. 

If the house sells at the asking price, both the listing broker and the buyer's agent's broker receive 50% of the commission, amounting to $6,000 each ($200,000 sales price x 0.06 commission ÷ 2). Subsequently, the brokers distribute their shares to their respective agents.

While a typical commission split allocates 60% to the agent and 40% to the broker, this ratio can vary based on the agreement between the agent and the broker. More seasoned and high-performing agents often negotiate a higher percentage of the commission.

In a 60/40 split, using our example, each agent would receive $3,600 ($6,000 X 0.6), and each broker retains $2,400 ($6,000 X 0.4). The final breakdown is as follows:

  • Listing agent: $3,600
  • Listing broker: $2,400
  • Buyer's agent: $3,600
  • Buyer's agent's broker: $2,400

There are instances where commissions are shared among fewer parties. 

For instance, if a broker both lists a property and finds a buyer, they keep the entire 6% commission. Similarly, if a listing agent represents both the seller and the buyer in the sale, they would split the full commission with their sponsoring broker.

Using the $12,000 commission example, the broker retains $4,800, and the agent receives $7,200 (assuming the same 60/40 split).

It's important to note that, like in other professions, an agent's earnings are impacted by taxes and business expenses. Federal, state, and self-employment taxes, along with various business costs such as insurance, dues, MLS fees, and advertising, significantly reduce the agent's net income from commissions.

What happens when a sale is not closed?

Sometimes, a seller will be liable to pay the agreed commission to the agent even if the sale is not closed. For example:

  • The agent identifies a prospective buyer, but the seller refuses to sell as they have no intention to sell now
  • The seller has uncorrected errors in the title
  • The co-owners of the property do not agree to sell
  • The seller brings in new terms not listed in the contract
  • The buyer and seller bypass the agent and have a mutual contract

Other than these, a commission is paid only when a sale is effected, and the agent cannot force otherwise. 

Conclusion

These were the various methods by which commissions are calculated. Meanwhile, the seller and buyer should be aware of regulations governing the commission payments, the market value of the property, taxes, etc.

This helps in negotiating with the agent while fixing the commissions. While choosing an agent, you can also hire the services of agencies that analyze various real estate agencies and provide you with a list of top performers.

FAQs

How much is the usual real estate sales commission?

The standard real estate sales commission is often around 5% to 6% of the home's sale price, typically split between the buyer's agent and the seller's agent.

Who pays the real estate sales commission?

The seller is typically responsible for paying the real estate sales commission. This fee is deducted from the sale proceeds before the seller receives their net profit.

How much do real estate agents make?

In 2022, Indeed.com listed the annual pay for real estate agents in the $85,597 to $112,309 range, depending on years of experience.6 The median annual salary was $48,770 in 2021, according to the most recent data available from the U.S. Bureau of Labor Statistics.7 For brokers, the mean annual salary was $86,490.8

Of course, real estate agents and brokers can make much more than that. The highest 10% of agents earned more than $102,170 in 2021, while the top 10% of brokers made $176,080.89

How is the commission split between the buyer's and seller's agents?

The commission is usually divided equally between the buyer's agent and the seller's agent, but this split can be negotiated. In some cases, one agent may receive a higher percentage based on the agreement between the agents and their respective brokers.

When is the real estate sales commission paid?

The commission is paid at the closing of the real estate transaction. It is typically handled by the closing agent or escrow officer and is deducted from the proceeds of the sale.

What services are included in the real estate sales commission?

The commission covers a range of services, including marketing the property, conducting showings, negotiating offers, handling paperwork, and guiding clients through the closing process.

Are there alternative commission structures?

Some agents may offer alternative commission structures, such as flat fees or tiered commissions based on the sale price. Discuss these options with your agent to find the arrangement that best suits your needs.

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