The seller usually pays the real estate commission
Most people who buy or sell a home do so with the help of a licensed real estate agent. These professionals know their local markets, have superior negotiating skills, and can generally make the entire buying and selling process easier. In exchange for their expertise, real estate agents earn a commission. Here's a look at how real estate commissions work and who pays these fees.
- Real estate commissions are always negotiable but are often between 4% and 6%.
- If two agents work on a real estate transaction—one for the buyer and one for the seller—the commission is usually split down the middle.
- The real estate brokerage takes a cut of the commission to help pay for things like advertising and office space.
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 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.
Imporatnt : 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 Much Is a Real Estate Commission?
Real estate commissions are always negotiable—otherwise, agents would be in violation of state and federal antitrust laws—so they vary. Though 6% has traditionally been regarded as the standard fee, commissions typically fall between 4% and 5% nowadays. The average real estate commission in 2019 (the most recent data available) was 4.96%, down from 5.03% in 2018, according to research firm Real Trends.
Keep in mind that the commission represents a percentage of the home's selling price—so the exact fee won't be known until an offer is accepted and the house is sold.
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).
Are Real Estate Commissions Worth It?
One of the biggest contentions about real estate fees is that they are too high, or that the service real estate agents deliver isn't worth the cost.
If a home sells on the first day it's listed, the seller's agent could make a tidy sum for relatively little work—such as taking photos, setting a listing price, and putting the home on the market. However, on the flip side, a home can also take weeks, months, or in the case of very unique or expensive houses, years to sell.
For the seller's agent, this can add up to many hours spent marketing the home, holding open houses, taking phone calls, and staying abreast of other listings and sales in the neighborhood. That agent will also bear the long-term cost of keeping the house on the market, including signage and advertising fees. If you look at it this way, not many sellers would want to take the risk of paying a real estate agent by the hour.
The same goes for buyers. Some will find a house immediately, while others will look at dozens of homes—over weeks or months—before settling on one. If buyers had to pay an agent by the hour, they would likely feel rushed into making a decision.
Flat-Fee Real Estate
Of course, there are listing agents who work for a flat fee—such as $100 or $500. This can obviously benefit sellers (and ultimately buyers) in terms of cost savings, but the drawback is that these agents may offer limited representation.
A traditional real estate agent will be your partner throughout the entire homebuying or selling process. A seller's agent will help you stage your home, take professional photos, get your home on the Multiple Listing Service, advertise, schedule and host open houses, and negotiate on your behalf.
Similarly, buyer's agents will help you determine your must-haves, find the right property, take you to showings, negotiate offers, and recommend other professionals (such as a home inspector).
Flat-fee or discount brokerages may cost less, but you could end up getting what you paid for. Still, there are full-service agents who work for a lower commission or flat fee. If you decide to go this route, be sure to find out ahead of time which services the agent offers to make sure that what you will get matches your expectations.
The Bottom Line
Most buyers and sellers work with real estate agents. In exchange for their work, agents receive a percentage of the sales price known as the commission. Though it's the seller who is usually on the hook for the commission, the cost is generally factored into the listing price of the home. In this way, the buyer ultimately bears the cost of any real estate fees.
Keep in mind that commissions are always negotiable. If you're concerned about high fees, two options to consider are using a flat-fee or discount broker or doing a for-sale-by-owner sale.
Source: www.investopedia.com
Also read: First-Time Homebuyer’s Guide - Everything you need to know
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