How do real estate agent commissions work?

In this do-it-yourself digital age, home sellers and buyers alike might well wonder if they need Realtors — or, more precisely, to pay Realtor fees. Just how crucial are these agents to a successful real estate transaction?

Well, a good agent is really pretty useful. It makes sense to work with one, especially if you’re buying a home: Agents have access to information you don’t, and it takes time and expertise to research properties, find the best ones for you and put in a strong offer. But sellers see many benefits, too, especially when figuring out the best asking price. Your home will still need to be staged, listed on the market and shown, too.

So, despite the pandemic shift toward virtual showings and even sight-unseen purchases, Realtors provide a wide variety of services to both sellers and buyers that are worth the commissions they charge. Let’s look at how their compensation works.

How much commission do Realtors get in 2023?

Only a very small portion of Realtors work on salary — the commission model is much more common. For years, the going rate was a firm 6 percent, split down the middle between the buyer’s agent and seller’s agent. But it began to fluctuate in the last few years, with the advent of discount brokers and the rise of online, publicly accessible listings. Nowadays, real estate commissions can be negotiated, and they typically run about 5 percent to 6 percent of a home’s sale price. The exact terms of an agent’s commission vary from sale to sale, and can depend on the region and which firm they work for.

Let’s look at an example. According to Redfin data, the median home sale price in Atlanta in December 2022 was $390,000. A 5 percent real estate commission on that price would come to $19,500. But in San Francisco, where the median was a much higher $1.28 million, a 5 percent commission would come to $64,000.

Here’s roughly what you can expect to pay, based on how much your home sells for:

Breakdown of seller vs. buyer commission

Sellers sign a listing agreement with a Realtor in which they agree to pay a commission fee after the transaction closes. If it’s an exclusive right to sell arrangement, they pay the fee even if they found the buyer on their own.

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Commissions for both Realtors in the transaction are typically paid by the home seller: Both the buying and selling agents are paid with proceeds from the sale of the home. These two agents typically split the total commission — so for a 6 percent commission, the selling agent would receive 3 percent and the buying agent would receive the other 3 percent.

That changes in the case of dual agency, when one agent represents both the buyer and seller in a transaction. Laws about this vary by state; in some states, dual agency is not permitted. In this type of scenario, pay particular attention to the home appraisal to ensure you’re getting a fair price. While agents have a fiduciary duty to their clients, with dual agency, the lines can get blurred.

As Sam Fish, a Realtor with Wesely & Associates in Grass Valley, California, points out, agents are bound to act ethically in their client’s best interest. “It’s in our ethics; it’s in our contract,” says Fish. “If someone comes into my open house and they like the open house, but they don’t have an agent, at that point I can say, ‘let me get you an agent from my office’ so they feel like they’re being represented 100 percent as well.”

Still, buyers working directly with a listing agent may have more room for negotiation because the seller may agree to a lower selling price if the agent agrees to lower their fee. What happens if a seller already has a buyer? “We can come to the table and facilitate a contract with buyer and seller and negotiate terms, so maybe the seller isn’t paying as much in fees,” says Fish. “It just lends more creativeness to the transaction.”

If you’re working with a buyer’s agent, “you have to sign a buyer’s agency agreement,” explains Tim Noland, an agent with Great Mountain Properties in Murphy, North Carolina. “A true buyer’s agent works for the buyer. They protect the buyer’s investment, as opposed to the listing agent, who’s actually working for the seller.”

The broker’s cut

Real estate brokerages may get a cut of the commission as well. The brokerage RE/MAX, for example, has a split commission setup by which its agents receive 95 percent of the full commission from the sale, and 5 percent goes back to the company.

“The broker has to set the policy and oversee, monitor and supervise everything the agent does,” says Patrick Duffy, of Duffy Realty in Miami. “And if the agent does something fraudulent or unprofessional, the broker gets sued.”

How commissions have changed over the years

Since the early 1990s, Realtor commissions have seen a fairly steady decline. They did bump up in 2021 (for the first time since 2017), reaching an average national commission rate of 5.06 percent, according to research firm RealTrends. Overall though, that figure is down from more than 6 percent in 1991.

This isn’t to say the total amount Realtors earned decreased, however. In strong seller’s markets, home prices are high and sellers receive multiple offers. This allows more room for negotiation on the commission, so Realtors may accept a lower commission to earn a higher amount overall: Their piece of the pie may be smaller, but it’s a richer slice. Since the pandemic, the decline in commission rates has been offset to a large extent by rising home prices.

As the market slows down, Realtor commissions may rise again and become less negotiable. Even so, a seller with a high-priced listing may still be able to negotiate a lower commission more effectively.

What commissions cover for sellers and buyers

You might wonder, what services does this fee buy me? One of the biggest ways buyers benefit from working with a Realtor is gaining access to the multiple listing service (MLS), the database Realtors use to see and list properties for sale.

An agent is also able to utilize their contacts to negotiate, find properties and take you on tours of multiple homes. It also compensates the agent for time spent answering questions and helping you through the process.

The Realtor’s fee covers a wide range of costs for sellers as well, including marketing materials, staging and showing the property, coordinating open houses and contacting agents of potential buyers.

As with most of the other expenses related to homeownership, a Realtor’s fee isn’t paid until the sale closes. You’ll encounter plenty of other closing costs, too, from taxes to legal fees, so it will blend into the landscape of checks you’re writing.

Average real estate commissions by state

Overall, the national average Realtor commission in 2022 was 5.37 percent, according to data from Clever, an online real estate agent network. In most states, the commission ranged between 5 and 6 percent. But in states like California and Massachusetts, where expensive properties abound, the commission was typically under 5 percent.

SOURCE: Clever

*Due to insufficient data, commission rates in these states were inferred from regional averages.

Are Realtors overpaid?

The median income for real estate agents and brokers was $48,770 annually in 2021, according to the U.S. Bureau of Labor Statistics. Median income represents the middle of the scale, meaning half of all Realtors made more and half made less.

Though home sellers may feel that Realtor fees are too high, Duffy actually argues they’re not high enough. After all, a lot goes into listing a home, such as:

• Performing a comparative market analysis to establish a competitive price

• Arranging for photo shoots, sometimes including aerial shots via drone

• Writing descriptive listing copy to attract interest from other Realtors and potential buyers

• Providing staging guidance

• Showing the property multiple times to prospective buyers

• Hosting open houses on weekends

• Providing yard signage

• Making sure listings are populated on all major property search websites

• Helping the seller review and negotiate buyer offers

When an offer comes in, the listing agent negotiates on behalf of the seller, often presenting one or more counteroffers. And with the volatility of the current market and record low levels of inventory, Realtors frequently deal with multiple potential buyers to help you get the most out of your property.

How to avoid paying Realtor fees

In 2021, just 10 percent of home sales were sold by owners without the help of an agent, according to the National Association of Realtors (NAR). In addition, NAR reports that for-sale-by-owner homes (FSBOs) typically sell for less money than homes sold via Realtors, especially if they sell to online iBuyers. In many instances, FSBO sellers already know the buyers who end up purchasing their homes. Buying without a Realtor is also doable, but it might not be a wise move, especially in a seller’s market.

When you shop around for Realtors, ask them from the outset what their commission is and compare the terms of each person you talk to. If you think the fee is too high, talk to them about lowering it.

“In certain situations where there’s a competitive environment for a prime or trophy listing, Realtors sometimes will negotiate the commission upfront,” Duffy says. “For example, if I’m listing a $4 million home at 6 percent, that’s a lot of money. In a situation like that there is greater flexibility to negotiate the commission — if you get $100,000 or $80,000 instead of $120,000, it’s still a good payday.”

If the transaction is being handled on both sides by agents from the same brokerage, you might have more leverage as well.

Alternatively, you could consider working with a low-commission real estate agent, who will likely charge less than a traditional agent would (usually 1 to 1.5 percent of your home’s sale price). However, since they’re receiving a smaller commission on each property, these agents are typically focused on volume. As a result, you might not receive as much personal attention as you would with a traditional Realtor.

There are also brokerages and agents who work on a flat-fee basis. In other words, no matter how much your home sells for, they’ll receive a set amount rather than a percentage of the sale price.

If you want to avoid Realtor fees and sell your house quickly (perhaps to buy a new house while selling the current one), another option could be selling to an iBuyer or a company that buys houses for cash. Both options will allow you to finalize your home sale fast, without paying any agent commissions. But be aware that the offers from these buyers will be less than you’d fetch in a traditional sale, and some charge service fees that are equivalent to what you’d pay in commission anyway.

Finally, remember that even if you’re not paying Realtor fees, there are still plenty of other closing costs associated with selling your home. For instance, you may be on the hook for things like title transfer fees, attorney fees, property taxes and more.

Bottom line

Realtor fees can cost quite a bit, it’s true — but working with a professional local real estate agent is probably worth it. Going it alone is possible, but the services an experienced agent provides are valuable, especially in a fast-paced or shifting market. Even in quiet markets, it’s tough to DIY when you’re already juggling other everyday responsibilities. And don’t forget, since Realtors don’t get paid until your home sells, they’re highly motivated to make sure your property brings in the best possible price it can.

FAQ

• What percent commission do most real estate agents charge?

  The traditional standard commission is 6 percent of a home’s purchase price, which is split evenly (3 percent each) between the buyer’s agent and the seller’s agent. However, the typical percentage has been lowering over the years, and the average Realtor commission is 5.37 percent according to Clever. Commissions are often negotiable and can vary from sale to sale and by state.

• What is the typical commission split between a seller’s and buyer’s agent?

  In most home sales, the overall commission is split equally between the seller’s real estate agent and the buyer’s real estate agent. For example, in a transaction with a 5 percent commission, each agent would receive 2.5 percent.

• Do sellers or buyers pay fees to the real estate agent?

  Typically, sellers are the ones who cover real estate agent commissions — both for their own agent and for the buyer’s.

• How much commission do you pay on a $500,000 home?

  It depends on the specific terms of your agent’s commission. Most commissions range between 5 and 6 percent of the home’s purchase price — on a $500,000 home, 5 percent comes out to $25,000 and 6 percent comes to $30,000.