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, the real estate professionals collect their payment in the form of commission, which is paid only when the property under consideration is sold. The commission that is paid out is a certain percentage of the property’s selling price outlined in the listing agreement. Basically, the real estate commission acknowledges the efforts put in by the real estate professionals (agents and brokers) to facilitate the sales transaction.
The responsibilities of the seller’s agent and the buyer’s agent 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 their 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, respectively, depending on the region in which they operate (as shown below).
|Seller’s agent commissions||
Buyer’s agent commissions
How are Real Estate Commission Rates determined?
The percentage rate of a real estate agent commission is determined based on the location of the property sale and the real agents. These commission rates are negotiable and primarily fall in the range of 5% to 6% of the selling price. Some of the real estate agents may even charge flat fees for their services, but that is very rare. Nevertheless, it is divided among the seller’s and buyer’s agents and brokers once the payment is received.
In the US, the percentage rate of commission varies from one state to another. Overall, 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.
|District of Columbia||5.25%|
Issues with Real State Commission
Traditionally, consumer advocates allege and criticize real estate commissions to be confusing and too high. The real estate commission is a huge cost in any sales transaction, making many wonders why it is so expensive and does it really make sense to pay such high fees. Many believe that the methods used for charging these commissions are anticompetitive. 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.
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 commission usually fall in the range of 5%-6% of the total purchase price.
- The real estate commissions are negotiable and are determined based on the demand and supply situation.
- 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.
It is true that real estate commissions can 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 find it difficult to juggle between everyday responsibilities and the property purchase. So, the final decision of whether to avail of the services of a real estate agent or not resides with the parties involved in the transaction.
This is a guide to Real Estate Commission. Here we also discuss the definition, working, and how it is determined along with the issues. You may also have a look at the following articles to learn more –