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The 6% real estate commission that agents often earn on the sales price of a home has become so ubiquitous that many people think that number is standard across the board. It's true that 6% is a common commission, and here's why: Back in the 1950s, the National Association of Realtors, the nation's largest real estate industry for Realtors, suggested agents should charge 6%, and thus that 6% has become the norm. But there is no such thing as a standard commission percentage rate.
If all real estate commissions were the same, real estate brokers would be in violation of state and federal antitrust laws created to protect consumers from monopolistic practices. Agents, therefore, are to set their commissions based on market conditions. Many do charge 5% or 6%, which on a $300,000 home sale is $15,000 or $18,000 respectively. That 5% or 6% figure is an average real estate commission, but the rate can vary.
How a real estate commission works
Real estate agents typically do not charge their customers (homebuyers and home sellers) by the hour. Instead, to make money, real estate agents generally take a cut of the sales price of a home, and this cut becomes the real estate agent commission. Some agents will work for a flat fee instead of a commission, which usually saves the customer money. (More on that below.)
When you’re selling your home, you should find out how much the agent will be charging you. You can negotiate this fee, but the agent might not budge. In that case, you can accept that agent's rate or opt to not use that particular agent. Whatever you decide to do, the percentage you agree to pay is made when you sign a contract with your agent to list your home, a contract that typically lasts between 90 and 120 days, so be sure you know what you're signing.
Conditions that make an agent's commission high or low
Local custom usually dictates how much agents set as their real estate commission rate. The average commission rate is usually between 4% and 7%. But your particular home and the housing market both can influence an agent's commission.
Let's say your house is on the low end of the price range for homes, there's lots of competition, and your home is not in the best shape and probably won't show as well as other homes. In other words, this will not be a particularly easy or lucrative deal for an agent. In this case, to get an agent interested and willing to put in the effort it will likely take to sell your home, you’ll probably need to offer a higher percentage.
But if your home is on the high end of the price range, there is little competition for a home like yours in the real estate market for the area, and your home is in pristine condition, this will likely be an easy and lucrative sale. In this case, you’ll probably get lots of agents willing to represent you and for a lower percentage.
If you're a real estate investor, you also might be able to negotiate a lower percentage rate from your agent if you do repeat business with them.
Who pays a real estate agent's commission?
Technically, the seller pays the full agent commission. The seller's agent then usually splits the commission with the buyer's agent. So if the commission was $18,000, for example, each agent would typically get $9,000.
There are other splits regarding commissions. This depends on the agent and their brokerage. For example, there could be several players on any one deal who all get a piece of that commission: the listing agent, the listing agent's brokerage, the buyer's agent, and the buyer's agent's brokerage. Real estate agents work for real estate brokers. It is only the broker who is paid, and the real estate broker often takes a cut before paying their agents.
Because home sellers normally pay the agent commission, they often try to recoup that cost. Some sellers tack the agent's fee onto the sale price of their home. If that is the case with a home you're buying, then you, in essence, are paying the agent's fee in the form of a more expensive house.
About dual agency
A dual agency exists when one agent is representing both the seller and the buyer. Two agents from the same brokerage are sometimes considered dual agents and sometimes are not, depending on the state. In the case of dual agency, the real estate brokerage keeps the entire commission.
There is a problem with dual agency. Realistically, it's difficult for one person to represent the best interests of two opposing parties. Real estate agents hold a fiduciary duty to their clients, meaning they must represent the best interest of their client, so an agent who represents both sides will most likely not be able to do this. For this reason, some states don't allow dual agency. States that allow this practice typically require the agent to disclose the dual agency nature of the deal and get both parties to agree to this in writing.
An advantage of a dual agency situation is that the seller has some room for negotiation regarding the agent fee since the agent doesn't need to split the commission. The listing agent is normally prepared to split their commission with a buyer's agent, but if the listing agent doesn't need to split commission, they might be willing to take a smaller percentage of the overall commission -- earning 4% or 5% would be better than splitting a 6% commission, for example.
iBuyers and flat-fee brokers
There are discounted ways to sell your home that you might wish to consider.
One is to use an iBuyer (instant buyer), a real estate company that buys homes directly from the seller for cash. iBuyers make selling a home a more liquid real estate transaction, as sellers don't need to go through the time-consuming process of fixing up a home, marketing it, showing it, or paying a real estate agent salary. An iBuyer can give a customer an offer in as little as 24 hours. Of course, an iBuyer, if they will buy your home at all, will want to buy it at a discounted price. Here is where you, as a seller, would need to weigh how much you're willing to pay for the convenience of selling your home without using an agent. If the iBuyer is offering a fair price, your home needs a lot of work, or if you need to sell quickly, it might make sense to sell to an iBuyer.
The other discount available to sellers is to use a flat-fee brokerage where the seller pays a flat fee to an agent instead of a commission. The advantage is that this option is cheaper. The reason: You usually don't get full service from a flat-fee agent, but you do get your listing on the multiple listing service (MLS) where most people find homes for sale. You might be able to get some other services with a flat-fee broker. You just need to ask up front the services this agent will provide. You can think of a flat-fee brokerage as a sort of middle ground between a full-service agency and going it totally alone in a for-sale-by-owner scenario.
If you're a home seller and don't want to use a listing agent, you don't have to. You can sell your home yourself. This is called a for-sale-by-owner sale, or a FSBO sale. By listing your own home as a FSBO seller, you obviously wouldn't need to pay a listing agent. You might not even need to pay a commission to a buyer's agent, but you might want to be prepared to do that.
A buyer's agent will probably not be motivated to show your home if you're not offering an average commission. You might wish to offer 3% (or whatever the local custom is) to buyers' agents who can bring clients to your home, which can ultimately lead to a sale. It's probably a good idea to offer a buyer's agent commission for that reason, and if you do, you should probably put that information in your listing.
The bottom line
A real estate agent's commission rate can cost home sellers and buyers a lot of money. Whether the fee is worth it or not depends on a variety of factors. In some situations, a traditional real estate agent will be worth the fee they charge. In other cases, it might benefit consumers to look at all the options, including negotiating with their agent, and then pick the option that works best.
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