Real Estate Commissions

Updated on May 21, 2024
Edited byAaron Crowe
Reviewed byDheeraj Vaidya, CFA, FRM

What Are Real Estate Commissions?

Real estate commission is defined as a fee paid to real estate agents for their services to buyers and sellers of property. This fee is usually a percentage of the total sale price. It is customary, though not legally mandatory, for the seller to pay the commission.

Real Estate Commissions

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These commissions are paid based on the selling price of the real estatae and taken as a percentage of it. It is a fee for the services the agents give home buyers. This fee is usually divided between the broker and the agent who works with the broker. If both are the same, the agent or broker gets the fee.

Key Takeaways

  • A real estate commission is the fee paid to real estate agents for their services to buyers and property sellers.
  • Average real estate commission rates are usually between 4%-6% of the total purchase price. It is split in half between the listing broker and the buyer’s broker.
  • The entire commission structure is negotiable and based on demand and supply.
  • The commission is the only payment brokers receive in return for the hard work, time, and money they invest in the hope that they can sell the property quickly.

How Do Real Estate Commissions Work?

Real estate commissions are the fees that are charged by the real estate brokers and agents for the services they give to investors or home buyers. They charge it as a percentage of the sale price or at a flat rate and is an income for them. The money is divided among the broker ans agent in case both the parties are different. But if both the job is handled by the same individual, them that person gets the entire fees.

Typically, buyers and sellers of real estate property avail the services of real estate agents or brokers to facilitate the transaction. Those who hire a broker’s services are the clients (i.e., sellers and buyers), and those hired for rendering such services are the agents (i.e., brokers).

The average real estate commissions is typically split in half between the listing broker and the buyer’s broker. Let’s say we are the listing broker for a home sold for $400,000, and the seller gave us a commission of 5%. The total commission is $20,000. As a listing broker, we will give 50% to the buying broker, which leaves us with $10,000. The brokerage company we work for (let’s say Reality Estate Agency) will have to take their commission cut.

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Standard Rates

 The relationship between the client and a broker is a contractual one.

  • In real estate, the broker represents the client in a property transaction. In exchange, brokers receive compensation for rendering their services. Usually, the seller’s broker, called the listing broker, will give 50% (or a mutually agreed-upon percentage) of the earned commission to the buyer’s broker, called buying broker.
  • The average real estate commissions vary widely based on the market, property value, asset class, brokerage company, and fees. Generally speaking, the commission is between 4%-6% of the purchase price. In 2017, a sales real estate agent typically asked for 6% of the sales price in the United States, while it hovered around 2-3% in the UK.
  • It is known that location, real estate laws, and present market trends play a critical role in setting a property’s value and the subsequent commission asked on it. Real estate commissions can be estimated from a Forbes 2019 report, where sales agents in a year typically earned $68,860 in California and $57,520 in Florida. The earnings depended on several factors, such as the total number of transactions and fees.
  • Moreover, California continues to make news for being an extremely expensive housing market due to reasons like the supply-demand gap, a booming market, and regulatory restrictions.
  • It can be anywhere from 5%-40% of the listing broker’s commission (this is negotiable based on experience and total homes sold). Let’s say the brokerage company takes 20% in our case, and then we are only left with $8,000 (before taxes).

Examples

Let us asume that Max wants to buy a property and the seller, John is the seller who wants to sell a property worth $600000. Now, in order to sell the property, John will have to pay a commission of 6% to his agent. The amount will be $36000. This $36000 will be shared among both the buyer agent and seller agent. Thus, both the agents of John and Max will get $18000 each.  However, in this case if we assume that the broker and agent is same, the there is no further split.

But if the agents work for brokers, they will have to pay a certain part of this amount to their brokers too. If the share is equal, then each agent will give their broker an equal amount of $9000 each. In case the broker and agent have a good relationship, understanding, or negotiation between themselves, then the amount can be different.

Negotiating Real Estate Commissions

The typical real estate commissions amount offered by the seller to the listing broker is negotiable. The commission that the listing broker pays to the buyer’s broker is also negotiable. Typically, sellers will pay 4%-6% of the sale price to the listing broker.

Property sellers may offer higher real estate commission fee if they are motivated to sell their property soon. Conversely, they may offer a lower commission if the property price is high (i.e., 5% on a $100 million home is $5,000,000, which, as an absolute amount, might be too high). On the contrary, if the property sells for a meager dollar amount, the seller or broker may offer a higher commission. For example, if a property is sold for $49,000, the seller may contribute $5,000 as compensation, equating to 10.2%.

At times, a listing broker may offer less than 50% of the total real estate commission fee to the buyer’s broker. For example, if a property has much traffic with many buyers competing for the same home, the listing broker may offer only 40% of the commission since the demand is so high. On the other hand, if a property has not seen any offers or interest in 90 days, a listing broker may offer 60% of the typical real estate commissions to entice buying brokers to show the property to their clients.

Importance

People will often grumble that brokers make too much money off a single transaction and do not deliver a service value that matches the compensation amount. However, the entire marketing is done at the broker’s own expense.

The time and money spent to market a property include the conduct of diligent inquiries, making the property listing, posting flyers, getting professional photos of the home, calling buyers and other brokers to discuss the listing, attending open houses, maintaining websites, paid advertisements, and other marketing costs. Some property deals may be closed within 24 hours, and others may take a dozen showings over months at a time. Regardless, brokers are still expected to deliver the same work quality and receive the same commercial real estate commissions amount.

Buying brokers could be spending months showing buyers different homes, explaining the advantages of different neighborhoods, taking the buyer to showings, putting in offers, finding recommendations for home inspectors, lenders, or other involved parties. If a buyer decides they are no longer interested in buying a home, the broker earns nothing.

Both buying and listing brokers also work during the closing process and negotiate on their client’s behalf, answer any attorney questions, attend inspections and go for closing formalities. The roles of brokers and agents cannot be undermined. However, it is essential to have a thorough knowledge of the property’s value, taxes, usual commercial real estate commissions rates on similar properties in the neighborhood, and the kind of services a broker brings. Being armed with relevant information acts as a safety net and certainly helps with the negotiations.

Frequently Asked Questions (FAQs)

1. What is a real estate commission agreement?

A real estate commission agreement is a legally binding contract between a real estate agent or broker and a seller or buyer of the property. It outlines the terms and conditions under which the agent or broker will earn a commission for their services in facilitating the sale or purchase of the property. This agreement typically includes details such as the commission amount, payment terms, duration, and scope of services to be provided by the agent or broker in the real estate transaction.

 2. Is it possible to deduct real estate commissions from capital gains?

Real estate commissions are generally not deductible from capital gains for tax purposes. Moreover, capital gains are calculated based on the property’s sale price minus the original cost basis, and commissions paid to real estate agents or brokers are considered part of the sale price, not deductible expenses.

3. What is a commercial real estate commission?

A commercial real estate commission is the fee paid to a real estate agent or broker for their services in facilitating the sale, lease, or purchase of commercial properties, such as office buildings, retail spaces, industrial properties, and other non-residential properties. 

This has been a guide to what are Real Estate Commissions. We explain its standard rates, negotiating them along with examples and their importance. You may also have a look at the following articles to learn more –