What is a real estate commission? If you plan on buying or selling a home with the help of a real estate agent, you should understand that they earn a fee called a commission on the sale.
Paying the commission is mostly the seller’s concern, but it can represent a substantial portion of the sale price of the home. A real estate agent’s expertise is well worth the cost, but before you agree to accept their help, it’s essential to answer a few questions.
How much is the real estate agent commission?
In recent years, commissions on home sales have averaged just over 5 percent of the home’s sale price. In most cases the amount is split between the buyer’s real estate agent and the seller’s agent to cover the time and resources each party devoted to making the sale happen. If you’re buying, you can roll closing costs like commissions into your mortgage.
However, commissions can run higher or lower than average depending on the region, the type of property being sold and other factors—and some realtors charge a flat fee instead of a commission. Discount realtors that charge low commissions or flat fees tend to offer more limited services.
The details covering the commission should be laid out in a listing agreement, which is a contract that a seller signs with an agent. The listing agreement should state the terms of the commission and it should describe the services the agent will provide to facilitate the sale. It’s possible to negotiate the terms in a listing agreement, including the size of the commission. Not all agents will be open to negotiation, but in some cases agents will be willing to take a lower commission to win your business.
Who pays the commission?
It’s most common for the seller to pay the commission at closing, when the sale is finalized. The commission is taken directly from the sale proceeds, so most sellers factor that cost into the list price of the property.
It’s possible for the buyer and the seller to negotiate a different arrangement for paying the commission. In some cases, for example, the buyer might offer to pay some or all of the commission in order to make their offer on a home more competitive with other bids.
The commission is usually paid directly to the real estate brokerages that employ the buyer’s and seller’s agents. These brokerages pay each agent a share of the commission while keeping the remainder. In most cases, if no sale occurs, no commission is paid.
What do you get for the commission?
When you sign an agreement to work with an agent you should know what you’re getting in exchange for the commission you’re agreeing to pay. Agents often invest significant time and resources into completing a sale, but the mix of services offered varies.
An agent may arrange open houses, take photographs of the property, create online listings, post signs and flyers, coordinate inspections, negotiate the contract and engage in many other tasks aimed at helping you sell or buy a home. If you don’t help in some areas—say you’ve already found potential buyers, for instance, and don’t need much help marketing—you can consider negotiating a lower commission.
An agent who knows your specific market and has ample experience navigating the complexities of the homebuying process can help you finalize a sale as quickly as possible for the best deal possible. However, you’ll be even more likely to get a good deal if you fully understand how your real estate agent is compensated and what services they will provide.