Real Estate Commission: Explained, Revealed and Compared
Image courtesy of Flickr, Hallenser
Real estate agents receive commissions from home buyers and sellers, collectively earning over $50 Billion per year. Learn how commission amounts are set, who pays them, and how they work in this article.
Most real estate agents, or Realtors, do not receive a salary and they generally do not get reimbursed for the expenses incurred while working with buyers and sellers. These expenses include but are not limited to the following:
- Advertising sellers' houses in home magazines and papers
- Gas used while showing buyers houses for sale
- Work space at a real estate agency
- Licensing Fees
- Association Fees
- MLS fees
Real estate commissions are an agent's primary source of income and way of covering their cost of doing business.
What is a Real Estate Commission?
A real estate commission is a certain percent of the sale price of a house paid to the real estate agents involved in the transaction. In traditional home sales, the commission can be anywhere between 1 - 6 percent and split between the buying and selling agents. The commission is paid out of the proceeds of the sale.
- You hire ABC realty to list your house.
- You agree to pay a 6 percent real estate commission once your house is sold.
- Your real estate agent finds a buyer to pay the $250,000 asking price.
- The commission is $250,000 x 6% = $15,000.
- Since the commission comes out of the proceeds of the sale, assuming you have no liens or mortgage, you will receive $235,000 ($250,000 - $15,000) instead of the full $250,000.
How is the Real Estate Commission Determined?
The homeowner and the real estate agent selling the house negotiate the commission at the time of the listing. The anticipated sales price determines the amount of the commission. The rate for traditional single-family homes valued at under $1 million is 5 - 6 percent. For property over $1 million, the commission may be between 4 - 5 percent. The real estate agent proposes the commission, but the seller can negotiate the percentage.
Is the Real Estate Commission Negotiable?
The real estate commission is negotiable until the home seller signs a listing agreement with the agent. The listing agreement is a contract between the seller and the real estate brokerage firm for which the real estate agent works. It details the rights and responsibilities of both the seller and brokerage firm including the commission amount, who pays it, and when it's paid.
Signing a Contract to List Your Home
When you choose to hire an agent to represent you in selling your property, you will have to sign a document called aListing Agreement . There are three different types of listing agreements you can sign with your agent:
1. Exclusive Right-to-Sell Listing
The listing agent acts as your representative and you agree to pay a commission to them regardless of whether the property is sold through their efforts, another agent's or anyone else's efforts.
During the signing of this agreement, you are able to name one or more individuals or entities as an exemption. If anyone on this exempt list helps to sell your home, you are not obligated to pay a commission to the listing agent you initially signed with. This contract will stand for a set period of time which is negotiated into the agreement.
2. Exclusive Agency Listing
The listing agent acts as your representative and you agree to pay a commission to them for selling the property through the efforts of any real estate agent for a certain period of time (such as a 6 month listing agreement).
The one exception is that if the sale of your house is a direct result of your own efforts (such as having your friend or family member buy your house) then you do not have to pay a commission to the listing agent. This contract will stand for a set period of time which is negotiated into the agreement.
3. Open Listing
The listing agent acts as your representative and you agree to pay a commission to them for selling the property only if it is a direct result of their efforts. Under this type of listing agreement, you are free to use other agents to list and sell your property as well. Whichever agent is the first to find a buyer and sell your property is the one who gets the commission.
Tip: The most common listing agreement in use is the Exclusive Agency Listing. The Open Listing and the Exclusive Right-to-Sell Listing are known to be the least common.
According to the National Association of Realtors (NAR), in a 2014 survey, they found that 88 percent of homeowners used a real estate agent to help list and sell their homes. For sale by owners (FSBO) accounted for 9 percent of sales according to the same survey.
Who Pays the Real Estate Commission?
Traditionally the seller pays the real estate commission. However, the buyer and seller can negotiate a split or the buyer can pay the entire commission. The splitting of the commission can be negotiated into the offer between the buyer's agent and the seller's agent.
One notable exception is with home sales at auctions. If a house is sold at auction, the buyer usually pays the commission, which is known as a "premium." The standard premium rate is 5 percent of the price at which the property is sold.
How Are Commissions Split Between Brokers and Agents?
After a house is sold, the commission is paid to the real estate brokers for which the buying and selling agents work. The broker in turn pays the agent the commission after taking a broker fee and/or broker commission.
The amount the broker pays the agent varies based on a predetermined agreement. New agents may receive as little as 40 percent of the total commission paid by the seller.
- After selling the house, you agree to pay $15,000 in commission to your agent.
- $15,000 is split between your agent and the agent of the buyer ($7,500 each).
- If your agent gets a 40 percent commission split, they receive a $3,000 check from their broker ($7,500 x 40%).
- The remainder, $4,500, will stay with your agent's broker.
Top selling agents may pay a desk fee to the broker and receive 100 percent of the commissions on the homes they sell. The desk fee is usually a flat fee the agent pays for operating in the broker's office or under the broker's license.
Most brokers start agents at a certain commission rate and increase it in 5 percent increments based on productivity.
Total Commission Paid By Home Sellers to Real Estate Agents from 2010 - 2014
We conducted investigative research and pieced together statistical data from various reputable sources to be able to calculate and create the charts below.
Let's begin by taking a look at what the mean (average) sales price has been for existing homes in the U.S. from 2010 to 2014. Existing homes are single-family homes, condos, townhomes or co-op buildings that are not newly built.
Now that we are aware of what the average sales price of existing homes have been, we need to take a look at how many existing homes were actually listed and sold. This next table displays the number of units of existing homes sold within the U.S. from 2010-2014:
|Year||Number of Units Sold|
A 2014 survey by the National Association of Realtors (NAR) states that approximately 88 percent of all homeowners listed and sold their homes using a real estate agent.
If we use this same 88 percent average and apply it to the number of units sold for years 2010-2014, we see that the following figures represent how many of these existing homes were sold by a real estate agent each year:
|Year||Number of Units Sold Using Agents|
The following graph shows total sales volume in dollars by taking the number of existing homes sold by a real estate agent multiplied by the average sales
price of existing homes for the years 2010-2014. Take notice that the years 2013 and 2014 went above the $1 Trillion mark.
A typical seller can expect to pay approximately 4 percent to 6 percent in commission to their listing agents and broker. For our calculation, we will assume that the existing home seller paid a 5 percent commission.
Considering these figures, the following graph displays an approximation of how much in sales commissions were paid by home sellers to real estate agents from 2010-2014. Take notice that the years 2013 and 2014 were above the $50 Billion mark.
According to the accumulated data and calculations, homeowners of existing homes paid real estate agents approximately $237.36 Billion to list and sell their homes from 2010-2014.
Now that we have approximated how much commission existing home sellers have paid agents from 2010-2014, let’s have some fun with this data and see a side by side comparison of how real estate commissions earned by agents in the year 2014 compare to other industries related to real estate.
You can see a stark difference between agent commissions and the revenues for loan brokers at $10 Billion in 2014. These loan brokers have originated many of the purchase loans for the very buyers of these existing homes.
For good measure, in the graph below, we will compare the commissions earned by real estate agents against other industries outside of the realm of real estate for the year 2014.
Agent commissions earned were more than the extremely popular coffee shops, such as Starbucks, Coffee Bean, Dunkin' and many others combined. You can clearly see that the agents' commissions in 2014 earn well beyond many other notable and lucrative industries.
It's important to take note that our calculations for agent commissions only take into consideration existing homes. We have not taken into account the sale of new homes, residential apartments or commercial real estate sales. Combining these with that of existing homes would put the commission earned by agents well above the $55.49 Billion mark in the year 2014, likely making them one of the top earners among industries in the U.S.
Is There a Minimum and Maximum Real Estate Commission Fee?
Neither federal nor state laws regulate the minimum or maximum real estate commission fee that can be charged. Whatever the home seller and broker agree to is allowed. Some experts recommend buyers pay more to get more. Real estate agents getting paid higher commission are more likely to hold open houses, help buyers stage their homes for sale, and spend more on advertising than those agents earning a much smaller commission.
How Do Flat Fee and Low Fee Commissions Work? Are These Brokers Reputable?
Some home sellers don't want or can't afford to pay 6 percent or more of the sale proceeds to a broker. This is especially true today when many buyers find their homes online and only use an agent to close the deal. As a result, the number of flat fee or low fee commission brokers is growing.
These brokerage firms help you list the home and may provide limited marketing services. Since they don't provide the full range of services that a traditional broker does, they charge a flat fee or low commission that is much less expensive than a traditional real estate commission. Fees will vary based on the market your home is in.
These flat fee and low commission brokerage firms are indeed reputable. However, it's important that you fully understand exactly what you're getting for the fee. Inexperienced home sellers who are unfamiliar with the inspection and closing processes and other legal aspects of home selling need to be especially careful when using these brokers.
Do You Have to Pay a Commission if You Sell Your Own Home?
If you list, market and sell your home without assistance from a listing agent then you don't have to pay a sales commission. If you manage to find a buyer interested in your home on your own, and this buyer is not represented by an agent, then you don't have to pay a commission either. However, if the buyer does have a real estate agent, then you will have to negotiate to pay a commission or finder's fee to the agent representing the buyer.
One of the downsides to listing your home for sale by owner is that you will not be able to list your home on the Multiple Listing Service (MLS) without additional fees to listing service companies associated with the MLS. The MLS is a database that all agents can access to view a list of homes for sale and the property specifications. Without listing it on the MLS, it would be difficult to have buyers represented by agents find your home.
Are Real Estate Commission Fees Tax Deductible?
Yes, the real estate commission you pay as a seller, along with most of the costs associated with selling your home are tax deductible. The I.R.S. determines the sale basis of the property by taking the sales amount, minus any expenses you paid to sell the home, such as a real estate commissions.
If you sell your home for $250,000 and pay $15,000 in commission to your agent, then the "sale basis" for your home is $235,000. This is the amount your accountant and the I.R.S. will use when determining whether or not you made a profit, and how much you will owe in taxes.
The following is a list of expenses the I.R.S. will accept for selling your home:
- Sales commissions (for example, a real estate agent's sales commission)
- Fees for a service that helped you sell your home without a broker
- Advertising fees
- Legal fees
- Mortgage points or other loan charges you paid that would normally have been the buyer's responsibility
The Many Layers of Real Estate Transactions
There are many layers and processes involved in a real estate transaction. Multiple people are involved and dozens of contracts need to be drafted and signed. Quite simply, real estate processes can be complicated.
When you pay a real estate commission fee, you are not only paying a real estate agent to represent you and use the tools at their disposal to sell your property quickly, but also paying them to make sure you avoid potential pitfalls which may be a liability to you, can delay the closing process, or cause you to lose out on a deal entirely.
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