The single biggest expense involved in the sale of a home is the payment to the real estate agents who help with the transaction. Realtor commission is typically 5–6% of the sale price, so it can be thousands or tens of thousands of dollars depending on the home.
Despite realtor commission being a massive cost, it’s something that many home sellers and buyers don’t fully understand. In a recent survey, approximately 45% of homeowners were unaware that the seller is usually responsible for paying the buyer’s agent commission.
In this article, we’ll demystify realtor commission and break down exactly how agents get paid!
- Real estate agents are paid a commission — typically a percentage of the sale price — when a house sells.
- The seller pays for both their agent and the buyer’s agent using proceeds from the sale.
- Agents work for brokers, who are paid first before splitting the commission with their agents.
Who pays the real estate agents?
While it’s true that the agents’ fees are paid out from the money the buyer brings to the table for the sale, neither the buyer nor the seller has to worry about writing a separate check for their agent at closing.
Why does the seller pay the buyer’s agent’s commission?
A competitive buyer’s commission is the carrot on the stick bringing agents and potential buyers to see your home. A typical commission is between 2 and 3%.
Sellers can make the buyer’s agent commission whatever they want, including zero. But a 0% commission isn’t going to motivate anyone to come see the house. Even if a buyer convinced their agent to see the home, the buyer would have to chip in to pay their agent’s commission if they ended up buying. Zero to low commission drives away buyers and their agents.
You can look at paying for the buyer’s agent as a marketing expense. Without it, you’ll have a much harder time scheduling showings.
Other pay models
While the split commission-based model is the most common arrangement between brokers and agents, there are other ways that agents earn a paycheck.
Agents are legally barred from collecting commission directly from a seller, so they must partner with a broker, who oversees all of their business with clients. Brokers also act as mentors to newer agents, making sure that they adhere to ethical standards of the industry.
But not all agents share commissions with their brokers. Some agents pay “desk rent” instead of commission to their broker in order to “hang their license” in a brokerage. The broker is still responsible for the agent’s actions, but they get 100% of their commission from the broker for each sale.
Other brokerages, such as Redfin, pay their agents a base salary but charge their clients — and pay their agents — a smaller commission on each sale.
How do agents actually get their money?
Agents are not paid until the sale closes. Once all of the documents are signed and the buyer’s funding goes through, the money is distributed by the bank handling the mortgage.
A title or escrow company handling the sale writes checks to each brokerage based on the agreed upon commission. Once each broker takes their commission, they cut a check for their agent.
How does commission work?
Real estate agents are paid a commission once the house sells. When a seller hires a listing agent, their rate is set down in an agreement signed by both parties.
Commission rates vary greatly depending on the location. For listing agents, those who represent the seller, the average national commission rate ranges from about 2.26%–3.17% (2.72% on average). Once you add the buyer’s agent’s fee, the total commission is about 5–6%.
That 5–6% cut is first split between the agents’ brokers, who oversee all of their transactions. From there, each broker distributes part of their cut to their agents.
A simple way to think about the breakdown is to imagine a house that sells for $200,000 with agents taking a total of 6% commission and everyone taking an equal share.
The total commission would be $12,000 and each person would get $3,000.
Commission isn’t always split 50-50 between brokers and agents. Less experienced listing agents might only get a 30-70 split in the broker’s favor. But successful agents with more experience might end up keeping nearly all of their commission.
Some listing agents with more training and a broker’s license are able to work independently as their own broker. These broker-agents don’t have to split anything. You can find out if your listing agent is acting as their own broker when you interview them initially.
More questions to ask your agent during a hiring interview: How to Choose a Realtor: What the Experts Say
Do agents ever get commission if the house doesn’t sell?
A typical listing agreement between the seller and their listing agent will specify a start and end date. If the house doesn’t sell within that time frame, the agent does not get paid.
The contract may also provide a window after the end date to allow extra time for closing. So if a buyer is actively negotiating with the seller when the contract expires, the agent still has some extra time to help the seller at closing and fulfill their obligations according to the agreement and get paid.
It’s only in rare cases that the client will be on the hook for a fee even if the sale doesn’t go through.
For example, if a buyer gets cold feet and breaks the contract after signing an agreement of sale, they likely still have to pay their agent according to the contract.
A seller may also be responsible for their listing agent’s fee if they don’t disclose material defects or environmental hazards and the sale falls through because of this.
Reasons the seller might pay realtor commission out of pocket
In most cases, sellers can take care of agent fees and other closing costs using the money from the sale of the house.
However, if the owner doesn’t have much equity in the home, all or most of the proceeds go to paying off their mortgage. To cover the closing costs, which, including commissions, run about 8 to 10% of the sale price of the home, they may need to bring cash to the table.
Aside from commission, the seller may also find themselves paying out of pocket before closing for repairs requested by the buyer. Any tax liens on the property will also need to be squared away before the final papers are signed.
How can you save on your listing commission?
When you’re selling your home, 6% is a lot whether you have a mortgage to pay off after the sale or not. There are plenty of reasons to look for less expensive alternatives.
Here are a few to consider.
For Sale By Owner (FSBO)
If you’re ready to put in the work, you can choose to sell your own home. You won’t have to pay any commission to a listing agent, potentially saving you thousands or tens of thousands of dollars.
But you’ll have to do all of the marketing yourself. And remember that you’ll need to offer a decent buyer’s commission between 1 and 3% to entice agents to show your home. A flat-fee MLS (FFMLS) service can get you on the listing database for as little as a few hundred dollars, depending on the state.
If you go the FSBO route, you’ll need to be prepared to do all of the paperwork yourself, too. A mistake here could mean legal trouble.
Some agents will list your home in exchange for only 1–2% listing commission. But there are drawbacks.
These agents might take on more clients than other agents to make up for the money they’re losing on commission. Agents at some brokerages work in a team model, so you might be speaking with a different agent each time you have a question.
Also note that with these services you’ll still likely have to offer a competitive buyer’s agent commission of 2–3%. So all in, your commission costs would amount to 3–5% of your home’s sale price.
While the total commission cost of choosing a discount agent is still significantly less than the cost of listing with a traditional agent (5–6%), you may not be saving as much as you think.
Agent matching services
These services screen agents willing to work for lower commission and then match them with clients. Some services even pre-negotiate commissions with their agents, so you don’t have to go through the hassle of negotiations yourself.
FAQs about how agents get paid
Who pays for real estate agents?
The seller of the home pays for both their own agent (the listing agent) as well as the buyer’s agent. Agents are paid once the house is sold.
How does commission work?
The average total real estate agent commission on a sale is about 5 to 6%. This is split between the buyer’s agent and their broker as well as the listing agent and their broker. The brokers get paid first, and then give the agents their cut.
Do agents get paid if the house doesn't sell?
Not usually. Most listing agreements specify a start date and an end date. If the house doesn't sell within that time frame, the agent doesn't collect commission.