How Do Real Estate Commissions Work?

Real estate agents and brokers typically don't charge buyers and sellers by the hour. Instead, they take a cut of the sales price—in the form of a commission.

The contracts that buyers and sellers have with their agents determine the agents' commissions. The real estate fee is often split evenly between the buyer and seller agents, although a contract could stipulate that one agent receives more of the commission than the other.

The terms realtor, real estate agent, and broker are often used interchangeably, but they differ. Agents and brokers have different levels of licensing, and either can become a realtor by joining the National Association of Realtors.

The fee doesn't go straight to the real estate agents, however. It first goes to the listing and selling brokers. That's because real estate agents must work for and under the umbrella of a broker, and the brokers take a cut of the real estate fees to cover costs such as advertising, sign rentals, and office space.

Each broker then splits the amount with the agent, sometimes 50/50, but it could be any amount upon which the broker and agent have agreed. So, a 5% commission would break down as follows, assuming a 50/50 split across the board:

  • Listing broker: 1.25%
  • Selling broker: 1.25%
  • Seller's agent: 1.25%
  • Buyer's agent: 1.25%

On a $200,000 sale, each broker and agent would receive $2,500.

How and When Does the Money Change Hands?

Real estate commissions are paid like this:

  • The seller pays the listing brokerage.
  • The listing brokerage pays the listing agent.
  • The listing brokerage pays the buyer's brokerage.
  • The buyer's brokerage pays the buyer's agent.

The seller effectively pays your buyer's agent to negotiate on your behalf.

There are circumstances under which a buyer might pay a brokerage directly, such as when there’s no commission offered because the property is for sale by owner. The commission is typically paid by the seller to the listing brokerage. The listing brokerage divides the commission in some fashion with the broker of the agent who brings an offer.

Compensation is typically made at closing when it's deducted from the seller's proceeds from the sale.

Buyers don't have any say in how much commission is paid by the seller, and they don't have to worry about personally compensating their agents. Of course, they're free to do so if they want to sweeten an offer made on the home by offering to pay a portion of the seller's commission, but again, the buyer cannot pay their agent directly.

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Who pays real estate commission fees?

Typically commission fees are paid in full by the seller in the transaction. As explained by top real estate agent Rachel Moussa of Flower Mound, Texas, in most places, “the standard is for sellers to pay both the listing agent and the buyer’s agent’s commission. The listing agent puts on the MLS what percentage the seller has agreed to pay cooperating brokers.”

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Types of real estate agents

You may hear the terms ‘real estate agent,’ ‘Realtor,’ or ‘brroker’ used interchangeably. But there are some key differences between these professionals.

Real estate agent vs. Realtor

All Realtors are real estate agents or brokers. But not all real estate agents or brokers are Realtors.

Realtors are members of the National Association of Realtors (NAR). And the Realtor trademark is intended to stop agents who aren’t Realtors from claiming they are.

The NAR would say, with some justification, that its members have greater expertise (they have to pass additional exams) and are held to higher professional standards than other real estate agents.

Real estate agent vs. broker

A real estate agentis someone who has passed his or her state’s relevant exams and who’s been licensed to practice as an agent.

A real estate license is the lowest level of qualification for people to facilitate the buying and selling of homes.

Each state sets its own exam standards and continuing education requirements. It’s easier to get a licence in some states than others.

A real estate broker has gone the extra mile and taken additional exams. So he or she should — theoretically — have greater knowledge and expertise than an agent.

And a broker is more likely to have a senior post in a real estate brokerage, often managing other agents’ activities.

The Bureau of Labor Statistics reports the national median income of a real estate agent was $51,220 in 2020.

By contrast, the BLS also found real estate brokers tend to make about $10,000 a year more than sales agents.

What if the house doesn’t sell?

Real estate agents only get paid if and when your home sells successfully. Most real estate contracts are “exclusive right to sell” which provides the real estate agent the sole rights to market the property, list the property on MLS, and receive the commission if the sale closes in a determined time frame. If your house remains on the market beyond the time period outlined in the listing agreement, you are not obligated to pay your agent.

Keep in mind, though, that your listing agreement may contain a protection clause, also known as a “brokerage protection clause, “safety clause,” “extension clause,” or “tail provision.” The protection clause states that if a buyer who the listing agent introduced to the property purchases the property after the listing agreement expires, the seller still must pay the agent a commission.

Who Pays the Real Estate Commission?

Precisely who pays a real estate agent's commission is where things get a little tricky. Standard practice is that the seller pays the fee. However, the seller usually wraps the fee into the price of the home. So, the buyer ultimately ends up paying the fee, albeit indirectly.

Let’s say, for example, that a buyer and seller (each with a real estate agent) agree to a deal on a home for $200,000. Assuming the real estate commission is 5%, the fee would be $10,000 ($200,000 x 0.05). The fee comes out of the cost of the home—it is not added to the sale price. So, although the buyer would pay $200,000, the seller would receive $190,000 from the sale. (This is an overly simplified example as closing costs and other fees would apply.)

Methodology

Data on commission rates is based on a survey of 915 of our partner agents, in which we asked them to indicate the typical rates for both buyer's and seller's agents in their area.

The data featured on this page is not meant to imply that commission rates are fixed — commissions rates are always negotiable. These figures represent ballpark estimates of what home sellers can expect to pay in real estate agent fees when they sell their home.

In addition to data from our survey, we also utilized home value data from Zillow, which was current as of March 2022.[3]

How Do Agent Commission Splits Work in California?

How much do California real estate agents take home after each close? There are a few commission splits to consider.

First is the total commission paid by the seller. In California, it ranges anywhere from 1-6% of the sales price. The standard is 5-6%, but for high-priced properties (i.e. $1+ million) the commission may be more like 4-5%. The amount is negotiated between the seller and listing agent before a contract is signed.

Next comes the commission split between the listing and buyer agent. Typically, the commission is split 50/50. Every now and then you may see a listing that offers the buyer agent a higher split in hopes of attracting more leads. The opposite can also be true. The listing agent may take 3.5% to offset the expenses of selling the property and offer just 2.5% to the buyer agent.

Dual agency is another possibility. If the listing agent ends up finding the buyer and representing both then they receive the full commission.

Finally, the commission split between agent and broker. The broker will receive the proceeds from a sale, then pay the agent their cut. The agreed upon commission split can differ from agent to agent even within the same brokerage. New agents may receive a 50/50 split while seasoned agents can get upwards of 70/30 or 80/20.

There are also two other possible commission scenarios. You may pay a monthly broker fee and keep 100% of the commission. The broker may also offer a sliding scale commission split. In this case, the commission starts low around 40/50 or 50/50 and becomes more advantageous the more you sell.

Be aware there could also be additional broker fees per sale, month or year.

What do these fees cover?

While many of today’s buyers often prefer to house hunt on their own, others decide to work with an agent to find a home. For those who choose to work with a traditional buying agent, they’ll find that their agents spend most of their time pulling home listings, driving to tour homes and doing pricing analysis to help them make strong offers.

Once the buyer’s offer is accepted and enters escrow, the agent will spend their time helping coordinate inspections and appraisals, negotiating repairs costs, handling all of the closing paperwork and some light accounting (the agent is responsible for maintaining the financial account used to pay inspectors and appraisers).

Factors that influence commission rates

In addition to regional trends, there are a number of factors that influence how much you end up paying in realtor fees when you sell your home.

Most of the factors that affect how much an agent might charge for a given home sale stems from the fact that realtor fees are negotiable. Agents will lower or raise the amount they charge depending on:

  • The home
  • The client
  • The current state of the real estate market

Based on our research,working with repeat clients is the most common reason that real estate agents agree to accept lower rates.

Here's a full breakdown of the most common factors that cause agents to lower their commission rates:

Conversely, our survey showed that the most common reason that listing agents negotiate for higher rates was that home sellers requested expensive marketing.

Below, we've included the full breakdown of all of the factors:

How home value affects average real estate commission rates by state

Typically, realtors will be more willing to accept lower commission rates for homes that have high values.

Our study of commission rates found that in real estate markets where home values were high, realtor fees were typically lower than the national average. For example, commission rates averaged 5.12% across the states with the highest median home values — which is markedly less than the national average of 5.49%.

Based on our survey's findings, homeowners in the five states with the highest property values would pay 11% less in realtor fees when they sell their home than residents in the states with the five lowest home values — as a percentage relative to their home's sale price.

So why would high home values cause agents to lower their rates? Mainly, it's because the work that agents have to do to sell homes is not significantly different for high and low value homes.

Agent's earn commission based on the home's selling price, so they stand to earn a lot more money selling higher value homes — relative to their effort and time investment — than lower value homes.

Furthermore, even if they have to spend more time or money marketing a high cost home, it may be worth it for that agent.

Consider the following example, where the listing agent earns 57% more per hour selling a $500,000 home than they would selling a $250,000 home, even after factoring in the marketing costs and time commitment:

Home sale price $250,000 $500,000 Time to sell 10 weeks 12 weeks Out of pocket marketing cost $500 $1,000 Time spent actively selling (eg showing, marketing, etc.) the home 30 hours 34 hours Commission earned $4,500 $9,000 Net commission earned per hour of time actively marketing/showing the home $150 $235

» MORE: How to negotiate realtor commissions with your agent

Why realtors lower their fees for repeat clients

Having steady business is valuable for real estate agents — home sellers can use this fact to negotiate lower commission rates.

For real estate agents, having consistent streams of clients is crucial to their livelihood. After all, real estate agents typically only process around 12 real estate transactions per year— meaning that gaining a deal has a large impact on their income.[1]

To agents, there is more value in having reliable repeat business, than there is in maximizing their commission they earn on any single deal. Because of this, agents often lower rates to attract clients that are likely to use them for future transactions.

What If a Home is Listed As For Sale by Owner?

Sometimes, people list their property as For Sale by Owner in order to reduce the costs of listing fees or paying an agent. However, if a buyer who is represented by an agent purchases the property, the seller is still generally expected to pay the buyer’s agent commission. In this instance, sellers will often include a clause that determines the amount they will pay the buyer’s agent upon the sale of the home. This amount is usually in the range of 2%-4%, but as mentioned above, buyer’s agents should be diligent in ensuring their commission is covered in writing. 

It’s important to remember that real estate agents do plenty of hard work in order to guarantee the satisfaction of their clients and act in their best interests. They deserve the commission that they make, so due diligence should be taken when navigating the payment of commissions to ensure that no conflicts arise. 

While there are multiple costs included in a real estate transaction, agent fees tend to be the single largest expense. Because of this, it’s important to have an understanding of who is expected to pay what. Although the money for the buyer’s agent commission is technically coming from the seller, this cost is nearly always factored into the price of the home, which means that contrary to popular opinion, the buyer usually ends up being the one footing the bill. 

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