Updated June 21, 2023
What is a Real Estate Commission?
The term “real estate commissions” refers to the portion of a property’s selling price that is paid to the real estate brokers and agents in exchange for their services, i.e., facilitating the sales transaction between the buyer and the seller of the property. Typically, real estate agents make money through these commissions. However, they don’t get paid unless the subject property is sold. After the property sale, the seller’s agent (also known as the listing agent) and the buyer’s agent, along with their respective brokers, split the real estate commission among themselves.
How does Real Estate Commission work?
Now, let us briefly overview real estate commission and understand how it works in a real-life setup.
Real estate professionals get paid in the form of a commission.
Instead of hourly charges, real estate professionals collect their payment in commission, which is paid only when the property under consideration is sold. The commission paid out is a certain percentage of the property’s selling price outlined in the listing agreement. The real estate commission acknowledges the efforts made by the real estate professionals (agents and brokers) to facilitate the sales transaction.
The responsibilities of the seller’s and buyer’s agents are quite different.
The seller’s agent is responsible for various things, such as staging the house, setting up open houses, marketing it, and listing it on a multiple listing service. On the other hand, the buyer’s agent gets involved in scouting properties, setting up inspections, coordinating with the real estate lawyers, and negotiating the property price.
The agents and the brokers split the real estate commission.
Once the property is sold, the real estate commission gets evenly split between the seller’s agent, the buyer’s agent, and respective brokers. Typically, the commission is paid out of the property’s selling price. In the US, the commission split ranges from 49%-51% to 52-48% for the seller’s and buyer’s agent, depending on the region in which they operate (as shown below).
|
Region |
Seller’s Agent Commissions |
Buyer’s Agent Commissions |
| Rocky Mountains | 49% | 51% |
| Southwest | 49% | 51% |
| Pacific | 50% | 50% |
| Southeast | 51% | 49% |
| National Average | 51% | 49% |
| Midwest | 52% | 48% |
| Northeast | 53% | 47% |
Source: Clever
How are Real Estate Commission Rates determined?
The percentage rate of a real estate agent’s commission is determined based on the location of the property sale and the real agents. These commission rates are negotiable and primarily fall from 5% to 6% of the selling price. Some real estate agents may even charge flat fees for their services, which is rare. Nevertheless, once the payment is received, it is divided among the seller’s and buyer’s agents and brokers.
In the US, the commission percentage rate varies from state to state. The national average real estate commission in 2021 was 5.5 %, as shown below. However, the commission was marginally below 5% in states like California and New Hampshire because of its typically expensive property prices.
|
State |
Rates |
| New Mexico | 6.21% |
| Kansas | 6.00% |
| North Dakota | 6.00% |
| Vermont | 6.00% |
| Michigan | 5.98% |
| Wisconsin | 5.93% |
| Missouri | 5.92% |
| Arkansas | 5.91% |
| Iowa | 5.90% |
| Oklahoma | 5.89% |
| Georgia | 5.87% |
| Indiana | 5.87% |
| Ohio | 5.84% |
| South Carolina | 5.83% |
| Texas | 5.78% |
| Delaware | 5.75% |
| Kentucky | 5.73% |
| Minnesota | 5.68% |
| Alabama | 5.61% |
| Pennsylvania | 5.60% |
| Tennessee | 5.56% |
| Idaho | 5.55% |
| Mississippi | 5.54% |
| West Virginia | 5.54% |
| Colorado | 5.50% |
| Montana | 5.50% |
| National Average | 5.50% |
| Wyoming | 5.48% |
| Maine | 5.45% |
| North Carolina | 5.45% |
| Connecticut | 5.41% |
| Florida | 5.38% |
| Arizona | 5.36% |
| Nebraska | 5.29% |
| Alaska | 5.25% |
| District of Columbia | 5.25% |
| Hawaii | 5.25% |
| Illinois | 5.21% |
| Louisiana | 5.19% |
| Oregon | 5.19% |
| New Jersey | 5.18% |
| Utah | 5.17% |
| Washington | 5.17% |
| Rhode Island | 5.15% |
| Virginia | 5.15% |
| New York | 5.11% |
| Maryland | 5.08% |
| Nevada | 5.00% |
| South Dakota | 5.00% |
| Massachusetts | 4.97% |
| California | 4.92% |
| New Hampshire | 4.83% |
Source: Clever
Issues with Real State Commission
Traditionally, consumer advocates allege and criticize real estate commissions as confusing and too high. The real estate commission is a huge cost in any sales transaction, doing many wonders why it is so expensive and whether paying such high fees makes sense. Many believe that the methods used for charging these commissions are anti-competitive. These real estate commissions are coming under increasing legal pressure in many places.
Who pays Real Estate Commission?
Although the sellers are responsible for paying the entire real estate commissions, the sellers very often include the commissions in the final selling price. It means that eventually, the buyers indirectly become responsible for paying the commissions. Besides, the buyers also incur closing costs, appraisal expenses, and other fees related to the sales transactions.
Key Takeaways
Some of the key takeaways of the article are:
- Real estate commission refers to the fees paid out of the selling price to the real estate agents and brokers in exchange for their services of facilitating the property sales transaction.
- In the US, the average percentage rates for real estate commissions usually fall 5%-6% of the total purchase price.
- The real estate commissions are negotiable and determined based on demand and supply.
- Typically, the commission is evenly split between the seller’s and buyer’s agents and brokers.
- Although a seller is responsible for paying the real estate commission, the buyer indirectly becomes responsible as the commission is often included in the final selling price.
Conclusion
Real estate commissions can indeed cost quite a bit. However, the services of a seasoned realtor can be valuable, especially in a hot and fast-paced market where a buyer may struggle to juggle everyday responsibilities and property purchases. So, the final decision of whether to avail of a real estate agent’s services resides with the parties involved in the transaction.
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