What is a Realtor’s Commission?
Real estate agents are a necessary part of the real estate industry. Not everyone has the skill, time, or motivation to sell a house on their own.
While people love when a real estate agent can help them out, there’s one thing homeowners are not too keen about – commission rates. An excellent realtor can earn thousands of dollars from a single transaction, and most people think that’s excessive.
But are the commission fees of realtors truly high and unreasonable? We'll dive right into the topic and discuss ways to reduce and even eliminate realtor commission fees.
Real Estate Agent Commission Explained
A real estate agent commission is the primary way an agent makes money. It represents the effort, knowledge, experience, and network used to help the homeowner sell the property.
The typical real estate commission is a percentage of the transaction’s sales price. However, a flat fee scheme is also standard. The fees that come from a sale of a house are paid not to the agents directly but through a broker.
Brokers are firms or individuals who handle real estate clients. They are allowed by law to hire agents under them, which are licensed salespeople who work on behalf of the broker.
When a potential seller works with a broker, they would usually agree on terms, including the commission rate. It's stipulated in a contract between them, called the listing agreement.
Once a sale is complete and the money is paid, the commission is then split among the parties involved in the transaction. This is normally divided between the seller's and the buyer's listing broker. Upon receiving the commission from a sale, the brokers then distribute the real estate agent fees to each agent involved in the transaction.
Commissions are a taxable form of income. Federal and state taxes often come into play to lower the amount that the agent receives.
What is a Real Estate Agent’s Commission Rate?
Realtors are often contractual workers who work on a performance basis. That means they only get paid when they deliver results (sell houses). This is represented with a commission, a percentage of the final sale price.
Rates vary depending on the housing market and brokerage firm, but the average real estate commission is around 5% - 6% of the sales price. For a house that’s priced at $500,000, for example, that amounts to $25,000 - $30,000 in commissions.
Note that this commission is a percentage of the total transaction. It will further split and be allocated to the agents of both the buyer’s and seller’s brokers. Also, the real estate agent’s fees are factored in, reducing the commission amount even more. These fees vary as they are determined by the broker that the realtor works with.
Most agents have a fixed commission split. Good brokerage firms will have an average real estate agent commission split scheme of 60/40 split in place. It means all sales agents involved will get 60% of the commission, while the brokerage receives 40%.
Let’s take the $500,000 property example previously mentioned. With a 6% commission rate, the total amount is $30,000. It's split equally into the two brokers, each receiving $15,000. If one of the brokers uses a 60/40 split scheme, the agent ultimately gets $9,000, minus taxes, and other fees.
A graduated commission split is also standard practice in many brokerages. It rewards high performers by giving them a higher commission percentage if they reach certain quotas in a month.
Some agents and brokerages operate on a fixed salary scheme, but this is very rare (only 1% of real estate agents report being under this arrangement).
Who Pays The Realtor Commission?
The seller usually pays the commission cost for the entire transaction in most states or situations. However, savvy sellers will often take the commission into account and price the property higher. In a deal like that, it’s the buyer who actually pays for the commission.
As a seller, you don’t need to shell out the money to pay for commissions. They are automatically deducted by the closing firm (or the one handling the closing of the deal) from the money paid by the buyer. You end up just having less profit overall coming into your pocket.
While this is standard practice, most sellers and buyers often negotiate who pays these realtor commission fees. It's commonly used as leverage to help either party get a better deal. For example, take a seller’s market where buyers compete with each other on limited properties. Buyers can sweeten the deal for the seller by offering to pay realtor commissions.
Even when sellers try to reduce their costs by selling a house on their own (in a process called for sale by owner or FSBO), they still need to pay the commissions of the buyer’s agent. Because of this practice, commissions are a regular part of a transaction that is rarely eliminated.
When is Commission Paid?
As explained earlier, a commission is a performance-based payment practice, which means it’s only paid out when a transaction closes successfully.
However, there are instances where you need to pay your broker and agent, even if the sale didn't push through. Most of these are stipulated in your contract, so it is best to review it carefully before signing the agreement.
One common exception is if you back out of a sale. When you accept an offer from a buyer, you're already bound to pay for the commissions of both agents involved. If you change your mind and cancel the deal, you still have to pay commissions.
Even if it was the buyer who got cold feet, you’re still responsible for commission payments! The upside is that you can file a complaint against the buyer for breach of contract and force them to compensate you.
There are other situations that count as "backing from the sale," including not being able to turn over the property in a reasonable amount of time due to any reason. Fraud is also a grounds for paying out commission even if the transaction isn’t closed.
One other thing – if your agent is the one who found the buyer, some contracts will require that you still pay the agent's commission. This is true even if the transaction failed or if you back out before an offer was made. This is partly to compensate for the agent’s effort in sourcing the buyer.
Are Commission Fees Negotiable?
The short answer is yes. You can negotiate commission fees with your realtor. In fact, realtors and brokers are prohibited by federal law from having a standard real estate commission in place.
Most realtors might agree to lower their commission rates if they’re representing you in more than one transaction. For example, the realtor can help you sell your current home AND scout for a new one you can move into. Another is if they are acting as one broker for both the buyer and seller in an arrangement called a dual agency.
However, be cautious of agents or brokers who are offering very cheap rates just to get your business. Some might be inexperienced agents who rely on lower rates to get hired. It's often more cost-effective to hire an agent with a higher commission, someone you know will get you the best deal or retain the maximum profit.
How to Avoid Real Estate Commission Fees
Commissions are an unavoidable aspect of working with real estate agents. If you want to eliminate (or reduce) them, you can choose to sell your house on your own.
However, unless you know what you're doing, you'll have a harder time selling your home. You might even end up having to shell out more money than real estate commission!
The best way is to use the services of House Buyers of America. We are an innovative, technology-driven real estate firm where we buy houses for cash. You’ll get your payment in a matter of days, not months!
We buy directly from homeowners who want to sell a house fast and hassle-free without the need for any realtor or broker to act as the costly middleman. By simplifying the process, you won’t need to pay for any commissions or hidden fees. That’s 5% - 6% more profit, which can translate to thousands of dollars coming into your pocket.
The process is as simple. Let us know that you're interested in selling your home, and we'll give you a fair cash offer for your property. We'll meet you at your house to explain our offer in-person and walk you through the paperwork. We buy your home as-is, meaning there's no need for you to spend time and money on repairs. Once you accept, you'll receive your cash payment in a matter of days. Best of all, it’s fast, convenient, and you don’t pay commissions or extra fees.
Want to get started and sell your house for cash without any commission rates or closing costs? Get in touch with House Buyers of America today via phone at 855-659-3289 or through our online form. You’ll receive your cash offer in as little as 10 minutes.
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