Real Estate Commissions

Real Estate Commissions Definition

Real estate commission is defined as a fee paid to real estate agents for the services they provide 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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Key Takeaways
  • Real estate commission is a fee paid to real estate agents for the services they provide 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 the demand and supply situation.
  • 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 Much is the Real Estate Commission?

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

  • In the context of 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 percentage that is mutually agreed upon) of the earned commission to the buyer’s broker, called buying broker.
  • Real estate commission varies widely based on the market, the property value, asset class, brokerage company, and the fees involved. Generally speaking, the commission is somewhere between 4%-6% of the purchase price. In 2017, in the United States, a sales real estate agent typically asked for 6% of the sales price, while in the UK, it hovered around 2-3%.
  • It is a known fact 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 agent 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 the fee involved.
  • Moreover, California continues to make news for being an extremely costly housing market due to reasons like the supply-demand gap, a booming market and regulatory restrictions.
  • The commission amount 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 that is 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 that we work for (let’s say Reality Estate Agency) will have to take their commission cut.
  • This 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).

Are Real Estate Commissions Negotiable?

The commission 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 commission rates if they are motivated to sell their property soon. 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 is selling 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 offer $5,000 as compensation, which equates to 10.2%.

At times, a listing broker may offer less than 50% of the total commission 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, then a listing broker may offer 60% of the commission to entice buying brokers to show the property to their clients.

Is Payment of Real Estate Commission to Brokers worth it?

People will often grumble that brokers make too much money off a single transaction and that brokers do not deliver a service value that matches the compensation amount. However, the entire marketing of a home is done out of 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 commission 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, then 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 regarding the property’s value, taxes, usual commission rates on similar properties in the neighborhood and the kind of services a broker is bringing in. Being armed with relevant information acts as a safety net and certainly helps with the negotiations.

This has been a guide to Real Estate Commissions and their Meaning. Here we discuss how much commission does a broker make and is it negotiable. You may also have a look at the following articles to learn more –