For most real estate agents, commissions are the lifeblood of their business and their primary source of income. But how exactly does the real estate commission structure work? This guide will provide a comprehensive overview of real estate agent commissions, including how they are calculated, what the typical commission rates are, how commissions are split, and what costs come out of an agent’s share.
What Are Real Estate Commissions?
A real estate commission refers to the fee or percentage of the sale price that a brokerage and agent receive for their services in facilitating a property transaction. This commission is paid by the seller to the listing agent and brokerage when the property sale closes.
The listing agent then shares a portion of this total commission with the buyer’s agent and brokerage. Real estate commissions provide compensation for agents to market properties, show homes, negotiate deals, and guide buyers and sellers through the transaction process.
How Are Real Estate Commissions Calculated?
In the vast majority of real estate deals in the U.S., the total commission is calculated as a percentage of the final sale price of the home. This commission percentage is determined upfront when the seller signs a listing agreement with their agent and brokerage.
A typical commission rate ranges from 5% to 6% of the sales price, though commissions can be as low as 1% or as high as 10%, depending on market conditions and negotiations. For a $500,000 home sale with a 5% commission rate, the total commission amount would be $25,000.
While commissions are nearly always paid by the seller at closing, the seller’s listing price factors in the amount they will need to pay out in commissions. So the buyer also indirectly contributes money toward the commission through the purchase price.
READ ALSO: How to Become a Licensed Real Estate Agent: The Complete Guide
What Is the Typical Real Estate Commission Split?
Once the total dollar amount of the commission is determined based on the sales price, it must then be split between the real estate agents and brokerages involved.
Here is how a standard commission split works:
- Total Commission – For example, 5% of $500,000 sale = $25,000
- Listing Agent & Brokerage – Typically receive 50% or $12,500
- Buyer’s Agent & Brokerage – Receive the other 50% or $12,500
Then, the agents and brokerages split their portion:
- Listing Agent – Might receive 60% or $7,500
- Listing Brokerage – Receives 40% or $5,000
- Buyer’s Agent – Could also get 60% or $7,500
- Buyer’s Brokerage – Gets 40% or $5,000
These percentages are negotiable and may vary based on individual brokerage commission split policies. But the listing and buyer’s brokers typically receive equal portions of the total commission.
What Are the Typical Real Estate Commission Rates?
While commissions are flexible based on factors like market conditions, property type, and services rendered, there are some typical commission rates seen nationwide:
- 5-6% – This full-service commission rate is the most common for single-family homes, condos, and townhomes. A 5-6% rate would be split between the listing and buyer’s agents.
- 3-3.5% – Some discount brokerages like Redfin charge lower total commissions, with a listing portion around 1.5% and buyer’s portion at 2%.
- 2-2.5% – For very high-end luxury properties over $1 million, commissions around 2% for each agent side are more common.
- 10% – For inexpensive properties under $100,000, commissions tend to be higher at 8-10% to make up for lower dollar amounts.
As you can see, 5-6% is the standard, though rates can fluctuate to account for home prices and services provided.
READ ALSO: The 2024 Real Estate Market: Trends, Forecasts and Insights for Buyers and Sellers
How Much Do Real Estate Agents Get to Keep?
While an agent may earn a commission of 2-3% of the purchase price, their actual take-home pay is significantly reduced by costs and brokerage splits.
For example, on a $300,000 sale with a 6% commission ($18,000 total), the listing agent may receive 1.8%, or $5,400, as their share. From this amount, typical costs are deducted, including:
- Brokerage Split – If the brokerage takes a 40% cut, this is $2,160.
- Taxes – Income and self-employment taxes can take 25-30%, equaling $1,350-$1,620.
- MLS Fees – Multiple listing service dues may be 1% or $180.
- Marketing – Advertising, signs, flyers, etc. may cost 5-10% or $270-$540.
After these and other expenses, the listing agent may only net $900-$1,500 from a $300,000 sale. Top producers can earn over $100,000 annually, but new agents often struggle to earn livable incomes.
How Does the Commission Structure Benefit Home Sellers?
Some sellers balk at the sizeable chunk of their home’s sale price that goes toward real estate agent commissions. But the commission structure offers important benefits for those selling properties:
- Aligns Incentives – Agents are motivated to achieve the highest possible sale price and sell quickly since their pay depends on the end commission amount.
- Rewards Effort – More work from the agent in marketing, showings, and negotiations merits higher commissions from larger sale prices.
- Attracts Experience – Top agents are attracted to the potentially lucrative commissions a sale can generate.
- No Upfront Fees – Home sellers don’t pay anything until closing, so they incur no listing costs if the home doesn’t sell.
- Flexibility – Commission rates and splits are negotiable based on factors like sale difficulty, market conditions, and agent/brokerage relationships.
For sellers, the commission structure places much of the risk and cost burden on the agent while incentivizing them to maximize the final sale price.
What Are Some Alternatives to the Traditional Commission Model?
While the percentage-based commission is still the dominant real estate compensation method, some alternative models exist:
- Flat Fee – The agent charges a flat upfront listing fee rather than a percentage commission. This saves on high-end listings but earns less on inexpensive homes.
- Hourly – More common for commercial real estate brokers, agents charge an hourly rate for their services. This avoids uncertainty, but clients must closely monitor hours.
- Salary – Some agents work as direct employees of brokerages and earn salaries rather than commissions. Performance bonuses reward top producers.
- Fee for Service – A la carte pricing for specific tasks like listing in the MLS, hosting open houses, or negotiating offers. Clients pay only for the services they want.
- Hybrid – Combination of flat and percentage-based fees, such as 1% listing fee plus 3% commission on sale price. Provides cost savings while still rewarding agents for sales.
While alternatives exist, none have displaced the percentage-based commission structure’s dominance in the industry. But increased transparency and consumer demand for lower fees have placed pressure on some agents to consider alternative compensation options.
To Recap: Understanding Real Estate Agent Commissions
While real estate agent commissions may seem inflated to uninformed home buyers and sellers, this compensation structure is deeply entrenched for good reasons. The percentage-based commission model properly incentivizes agents to deliver maximum value while aligning their interests with clients.
However, in an increasingly transparent digital age, pressure for discounts off traditionally high commission rates has risen. Savvy real estate consumers should research local market norms, typical rates, and alternatives to make informed decisions.
And agents must be prepared to demonstrate the value of their services and realistically price themselves according to market forces. With knowledge and reasonable expectations on both sides, buyers and sellers can pay fair commission rates that provide desired services at competitive prices.
Frequently Asked Questions About Real Estate Commissions
How are commission rates determined?
Commission rates are largely influenced by market forces, competition, and industry norms. Sellers who wish to list below the typical local rate may struggle to find an interested agent. Buyers with agents offering discounted commissions often have less leverage in negotiations.
Who gets more – buyer’s or seller’s agent?
In most cases, the total commission amount is split 50/50 between the listing agent and buyer’s agent. This equal split ensures agents are incentivized to show and sell the listing, while also bringing qualified buyers.
Do you have to pay buyer’s agent commission if they aren’t in MLS?
If a seller finds a buyer directly without their home being listed in the MLS, they may not have to pay the buyer agent’s portion of the commission. However, a buyer’s agent will nearly always require this payment.
Can I negotiate real estate commissions?
Yes, real estate commissions are negotiable. As a listing seller, you can attempt to negotiate down the total commission percentage you pay. As a buyer, you may be able to seek out buyer’s agents who charge lower commissions.
How much are Redfin agent commissions?
Redfin agent commissions are lower than traditional brokerages. Redfin charges sellers a 1-1.5% listing fee. On the buyer’s side, they offer 2-2.5% commissions, which are split between the agent and brokerage.
In another related article, Exploring the Top High Yield Real Estate Investment Trusts (REITs) For 2023
