Like any other service, when you enlist the services of a real estate broker or agent, there are real estate commission rates to discuss. In the real estate industry, this fee is known as the “commission.” Some real estate consumers don’t believe professionals are worth their fee so they attempt to sell their home themselves as For Sale By Owner (FSBO).
They typically end up losing more money on the sale than they would have paid for professional representation.
“FSBOs typically sell for less than the selling price of other homes; FSBO homes sold at a median of $225,000 last year [2022], significantly lower than the median of agent-assisted homes at $345,000.” (National Association of REALTORS® “Profile of Homebuyers and Sellers.”)
Paying for expert services, be it a plumber, an attorney or, yes, a real estate agent, saves you from losing money and gives you the security that the job will get done.
So, let’s dive into how real estate commission rates work.
Real Estate Commission Rates Are Negotiable
The answer to what the rate is depends on many facets.
First, it depends on whether you are the buyer or the seller. Buyers do pay closing costs just as sellers do, but the real estate commission is typically charged to the seller.
But this may change in the years to come after the jury voted again the National Association of Realtors (NAR) in November 2023. The class-action lawsuit was plaintiffs (homesellers) vs. the NAR and national real estate brokerages saying they conspired to inflate commission rates. You can google that, or here’s a brief to understand the case.
How much are real estate commission rates? It depends on where the seller lives. Brokers in different regions charge different fees, but real estate commission rates are generally between 5% and 6% of the sale price of the home (I’ve seen it lower over the years in some cases).
Here’s an example: Joe sells his home for $300,000. Let’s assume that the real estate fee (which the commission is generally called) is 5% of that price, which works out to be $15,000.
Yikes! Does my real estate agent make THAT much money from each sale?
No, there are others that need to be paid. The broker for the buyer’s agent gets a portion of the commission and seller’s broker gets another portion. It’s not always a 50-50 split as many folks think. For example, if the listing agent has a proven marketing that goes above and beyond, they may request 2.75% and provide the buyer agent 2.25% in a 5% commission agreement
Then, it is divvied up to the agents. How much the agent will get depends on his or her arrangement with the broker.
For instance, newer agents tend to make less of a percentage than seasoned agents, but each agent negotiates his or her cut of the broker’s fee, which generally ranges from 50% to 95%. According to most studies, the average commission split with their broker is 40/60. And some brokers offer 100% to their agent, in exchange for a flat fee they pay the broker.
If you still think this represents a big gob of money, consider this:
The “… median income for real estate agents and brokers was $48,770 annually in 2022, according to the U.S. Bureau of Labor Statistics,”
according to Kellye Guinan and Taylor Freitas, Bankrate.com.
With These these real estate commission rates What does the seller get?
The typical listing agent faces a hefty outlay of money for each listing he or she takes. Here are a few of the ways the commission money is spent:
- Lockboxes
- Online marketing
- MLS fees
- Direct mail marketing
- Photography
- Signage
- Fliers
- Broker’s open expenses
- Errors and Omissions (E&O) Insurance
- Brokerage fees
- Association fees
- Lead generation website to bring in buyers
That’s the shortlist. Depending on how challenging the market is or the attractiveness and condition of the home, the agent may spend thousands of dollars to help you sell your home.
So when an agent gets 2.5% of a $300k sale, here’s how it breaks down:
$300,000 X .025 = $7,500. Assuming they have a 75/25 split with their broker: $7,500 x .75 = $5,625. Now let’s include things like gas, NAR fees, E&O. Say this is another $400. The gross commission to the buyer agent is now $5,225… and that’s before paying federal or state income tax.
Perhaps this is a light bulb going off in your mind
And for that money what you get is a buyer for your home. Priceless, right?
Real estate commission rates should not be anything to hide when selling or buying real estate. The myth that agents make too much money is unfortunate. Perhaps this is a convo you bring up with your agent as you begin your process of transacting business.
Let me know your thoughts. I consult with all by home buying customers before we go see property together. In a 15-30 minute session we go over real estate commission rates, what I’ll do for you, and how I get paid. It’s a standard I set for my business and customers.
