Who Pays the Commission to the Real Estate Agent?
Many home buyers and sellers don't understand exactly who pays the real estate agent involved in the transaction. To understand who pays real estate commissions—whether it's sellers or buyers or both—take a look at how real estate agents are paid and how they share cooperating commissions.
How Real Estate Commissions Work
A real estate commission is the amount agents or brokers are paid for the work they do in buying or selling your home. Real estate agents work for a real estate broker. A real estate broker typically has more training than an agent. Brokers can work independently or start a brokerage, while real estate agents are required to work for a broker.
All fees paid to a real estate agent must first pass through a broker. Only a real estate broker can pay a real estate commission and sign a listing agreement with a seller.
How Brokers Compensate Real Estate Agents
Commission divisions vary. New agents can receive as little as 30% to 40% of the total commission received by the brokerage. Other fees may be deducted from that amount such as advertising, sign rentals, or office expenses. Top-producing agents might receive 100% and pay the broker a desk fee. Everybody else falls somewhere in between.
Listing Agent Fees
The most common type of listing agreement between a seller and their agent gives the agent's broker the right to exclusively market the home. In return for bringing a buyer to the table, the seller agrees to pay a commission to the broker. Typically, this fee is represented as a percentage of the sales price and is shared between the listing broker and the broker who brings the buyer.
Divisions of fees among brokers are not always fair or equal. In a buyer's market, sellers might want to consider asking the broker to give a larger percentage to the buyer's broker. In a seller's market, the buyer's broker might receive less, and no set formula exists.
Most divisions of commission are locally based. In some parts of the country, it is very common for a listing agent to make more than the buyer's agent. Be sure to ask about the customs in your area.
Who Pays the Real Estate Agent?
It can be argued that the buyer always pays the commission. Why? Because it's typically part of the sales price. If you are a buyer, you can combine closing costs like commissions into your mortgage.
Here are ways commissions are typically structured.
The Seller Pays the Buyer's Commission
Under a buyer's broker arrangement, the named brokerage and agent represent the buyer. The fee paid to the broker is most commonly paid by the seller.
Some buyer broker agreements contain clauses that will compensate the brokerage for the fee it is due less the amount paid by the seller. For example, a cooperating listing might offer to pay a broker a smaller portion of the sales price, but the brokerage charges fees that are a higher percentage. The difference could be paid by the buyer if the broker chooses not to waive the difference.
Buyer Pays the Commission Directly
The seller is not obligated under most listing agreements to compensate the listing broker for more than the listing side's portion of the commission. Often, sales prices are reduced to reflect the amount the buyer is paying. Sellers can also credit the buyer the commission and the buyer, in turn, credits the brokerage.
It is considered insulting to call an agent to list your home and immediately ask if the agent will discount their commission.
The Bottom Line
Agents cannot be solely judged on commissions. For example, top agents often charge more than newer agents.
If you are a buyer, you do not directly pay the commission, so a discount would not affect you. There are a few agencies who offer to pay buyers to lure their business, but that's unusual.
In some cases, agents are seeing a reduction in the amount of commission paid to buyer's agents. The commission is often not split 50/50 between listing and selling agents, and many listing agents make more than the buyer's agents.
Ultimately, whether you're buying or selling a home, make sure you're clear on your agent's commissions and how they work. In most cases, the seller pays the commissions out of the home's sales price, but that can vary. It's best to ask if you're uncertain.