If you are thinking about buying or selling your home, partnering with a real estate agent is often the route that most people choose. Understanding how a real estate agent commission works is extremely helpful whether you are the buyer or seller. Here are important things you should know.
What Is a Real Estate Agent Commission?
Most real estate agents are paid via commission, which is a direct payment disbursed to the real estate broker for services in either the sale or purchase of a property. Typically, the commission is split in several ways among agents and brokers.
The Commission Breakdown
To better understand how a commission is shared, the roles of a real estate agent broker and agent must be defined. Real estate agents can be seen as field workers who are employed by real estate brokers. Agents are not allowed to work independently and cannot accept a commission directly from their clients.
On the other hand, real estate brokers have the freedom to work independently and hire real estate agents. Real estate agent commissions are paid directly to the broker, and this person is responsible for dividing the commission to the agents of the property transaction.
These four parties can be involved in the buying and selling of your home.
- Listing Broker – Employs the listing agent
- Listing Agent – Works with the seller to list the property
- Buyer’s Broker – Employs the buyer’s agent
- Buyer’s Agent – Works with the buyer to find properties
A Commission Calculation Example
Across the country, the typical commission ranges between 4% to 6%. This rate may change depending on the current market forecast. The real estate agent commission is a portion or percentage of the broker’s commission earned on the property sale.
If a listing agent finalizes a listing on a $500,000 house with a commission rate of 5%, the total commission would equal $25,000. If the property is sold for the listing price, the listing broker and buyer’s broker each receive $12,500. The brokers will then split their commissions with their agents.
A common commission division between agent and broker is a 60/40 split, in which the real estate agent commission is 60% of the total commission, and the broker’s commission is 40%. In this example, the listing agent and buyer’s agent would each receive $7,500 while the brokers would keep $5,000. Commissions can also be split 50/50, 70/30, or whatever approved ratio between agent and broker.
In certain cases, the total commission could be split among fewer parties. For example, if an agent acts as both the listing and buying agent for the buyer and seller of a property, then the broker receives the whole commission on the sale. In the above example, the broker would receive the entire 5% commission of $25,000 and then proceed to split this amount with his or her agent.
Other Commission Factors
While it would be nice to do a clean split from the total commission, the commission for a real estate agent is often shaved down by taxes and other business expenses. There are federal, state, and often self-employed taxes that are imposed on commission amounts. Business costs can include agent dues, fees, insurance, Multiple Listing Service fees, and marketing.
Who Pays the Real Estate Agent Commission?
The seller of a property is responsible for dishing out the commission unless there has been a contractual agreement between the buyer and seller to split the cost. Often, sellers will include the commission in the selling price of a property. In this case, the buyer pays for some of the commission.
Using our figures from the previous example, the $25,000 commission fee would be deducted from the cost of the home. While the buyer pays $500,000 for the house, the seller receives $475,000. Note that closing costs and fees would also be factored into this transaction.
Commission parameters are typically outlined in the listing agreement, which is a contract between the seller and listing broker that specifies all the conditions of a listing. The rate of commission is negotiable. It is actually a federal violation of antitrust laws if members of a profession attempt to mandate uniform commission rates.
What Are the Benefits of Commission-Based Agents?
Depending on the desired sale price of a house, real estate agent commission can seem pretty hefty. Some sellers opt to go down the “For Sale By Owner” route or even choose a flat-fee listing agent to help carve out commission costs. However, there are several benefits to choosing real estate agents who depend on commission.
These agents tend to go the extra mile for their clients. Experienced listing agents perform market analysis and are able to predict the best listing price for sellers. They may even go as far as hiring a staging crew to help make your house more attractive to buyers. Experienced buyer agents will organize all the complicated paperwork that buyers have to navigate when closing on a house. They can find properties, take clients to open houses, and negotiate the offer with the seller. They even educate their clients on the necessary steps that should be done prior, during, and after the property purchase.
Before opting for a flat-fee agent, find out all the guaranteed services that they will perform for you. Flat-fee agents are not recommended if you are a new buyer or seller, and should be considered only if you are experienced in the real estate arena.
How Can You Choose the Best Agent for Your Real Estate Needs?
The real estate market can be an intimidating place. You may have heard horror stories about unfair contracts or even shady brokers. Whether you are buying or selling your home, our team at Fast Expert strives to partner you with the best real estate agent. We find the agents who are worth their real estate agent commission so that you can experience a seamless property transaction. If you need real estate advice or have any concerns, we are here to help. Contact us today.
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