In a real estate transaction, both the buyer’s and seller’s agents collect a commission. The fee is typically 5% to 6% of the home’s purchase price. Who pays that? Usually the seller.
How do real estate commissions work exactly? And do agents get to keep their entire half of the commission pie?
If you plan to buy or sell a home, it’s important to understand where real estate commissions fit into the picture.
What Is a Real Estate Commission?
Real estate agents can perform a variety of services on behalf of their clients. If you’re buying a home, an agent can help you:
• Narrow your search to the most desirable properties for your budget
• View the homes in person or virtually
• Make an offer on a property
• Navigate the home inspection process
• Negotiate any contingencies you’d like to include in the home contract
• Prepare for closing
• Sell a home you already own, if necessary
Real estate agents typically aren’t paid a salary or an hourly wage for the services they provide. Instead, they earn a commission when the sale or purchase of a home is completed.
How Do Real Estate Commissions Work?
The average commission was 5.7% in 2019. At that rate, if you’re buying a home for $300,000, your agent and the seller’s agent would claim a share of $17,100 in commission.
It’s common for agents on each side of a real estate transaction to split the commission equally. Using the previous example, each agent would receive $8,550 from the transaction.
But if the agent works with a broker, either as an employee or an independent contractor, part of the commission they receive may go to the broker. If a buyer’s agent is due $8,550, the broker may be entitled to half of that, leaving the agent with a net commission of $4,275.
In reality, an agent on either side of the table may net a commission of 1.5% of the home’s purchase price.
Commissions are paid out once the transaction is complete. This typically happens once the buyer and seller have signed their closing paperwork. The seller will receive a check for any profits due to them from the sale, while each agent receives a check equal to their share of the commission.
Who Pays the Agents’ Commissions?
If you’ve never purchased a home before, you may be wondering who pays the real estate agents. The good news is that as a homebuyer, you’re typically not directly responsible for making sure your agent and the seller’s agent get paid.
Instead, the seller is usually responsible for paying a commission due to either agent from the proceeds of the home sale. So, say you purchase a home for $300,000 and the commission is 6%, or $18,000.
If the sellers owe $250,000 on the home, they’d be poised to pocket $50,000 in profit. But first they have to subtract $18,000 to cover both agents’ commission fees.
While sellers most often bear the responsibility for paying both real estate agents, that doesn’t mean that buyers don’t have any role to play. Some sellers increase the home’s listing price to offset the commissions.
So even though you aren’t paying the fees directly as a buyer, you may still have to cover them indirectly if it means paying more for the home of your dreams.
What Do Real Estate Commissions Cover?
Real estate commissions compensate agents for the work they put in helping you to buy or sell a home. What this specifically entails can depend on the agent you’re working with and your homebuying or selling needs. But again, this often involves researching listings, preparing comparative analyses, guiding home viewings, and helping to negotiate offers.
Commissions are unrelated to the costs paid at closing to finalize the purchase of a home. Closing costs can include:
• Attorney fees
• Title search and title insurance fees
• Credit check fees
• Upfront costs paid to cover homeowners insurance and/or property taxes
• Mortgage loan origination fees
• Mortgage points, if you choose to purchase them
• Recording fees
Closing costs typically run between 2% and 5% of the home’s purchase price. So if you’re buying a $300,000 home, you might pay anywhere from $6,000 to $15,000 at closing, not including the down payment.
Closing costs are usually the buyer’s responsibility, but it’s not unusual for buyers to persuade sellers to share some expenses that are paid in advance.
It’s worth noting that some costs may not be included in a real estate commission or at closing. If you’re selling a home, you may pay a separate fee for professional staging or photography to get it ready to list.
And if you’re buying a home, you’ll typically pay for the appraisal and inspection before closing.
Are Real Estate Commissions Negotiable?
Just like anything else, real estate commissions may be on the table for negotiations when buying or selling a home.
If you’re a seller, there are a couple of possibilities for reducing the fee. First, if you’re working with a dual agent, they may be willing to reduce the commission slightly. A dual agent represents both the buyer and the seller in a real estate transaction.
Since they don’t have to split their commission with another agent, they might be willing to cut you a break on the fee.
You may also be able to ask for a reduced commission if you’re working with an agent to sell multiple properties. They may be open to accepting a slightly lower fee per deal if there are multiple deals in play. This, of course, depends on how likely those properties are to sell at your desired price point.
As a buyer, there isn’t much you can do to negotiate commissions if the seller has worked out an agreement with their agent. But you can still negotiate other things, including the home’s purchase price and closing costs.
Why Even Involve Agents?
You could buy a house without a Realtor® but having a professional’s help can be invaluable, especially if you’re a first-time homebuyer.
A real estate agent or Realtor® can help you navigate the ins and outs of the homebuying process so that you can feel confident about your purchase.
Most real estate agents partake of ethics training throughout their careers. Realtors® are real estate licensees who are members of the country’s largest trade association, the National Association of Realtors®. They are to subscribe to a strict code of ethics.
Agents are legally obligated to put their clients’ best interests first. They are trained to negotiate price and contingencies, handle legally binding documents, prepare and show properties for sale, and market homes through the Multiple Listing Service.
And homes for sale by owner usually sell for less than agent-assisted sales. The typical FSBO home sold for about $218,000 in 2018, compared with $295,000 for agent-assisted homes.
Who pays the real estate commission to the buyer’s and seller’s agents? Usually the home seller, from the proceeds of the sale. Some sellers, though, bump up the listing price to cover the real estate commission, so in essence buyers are paying some or all of it.
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