How Real Estate Commission Works

How Real Estate Commission Works

by The CE Shop Team

What Is Real Estate Commission?

Those of you interested in becoming a real estate agent need to know what a commission is as commissions are a crucial part of a real estate agent’s take-home earnings. A commission is the fee paid when someone buys or sells a house.

As much as many wish they could keep the real estate agent commission all to themselves, it does not work that way. Commissions are generally split multiple ways since brokerages have different people involved in the selling or purchasing of a house.

The average real estate commission is usually 5-6%, though that figure varies based on the agent’s real estate experience. Then the agent divides that figure with their broker as outlined in their listing agreement.

It only makes sense that brokers get a cut of the commission since they own the brokerage and invest money into keeping the business running. However, the real estate agent commission could increase over time. With more experience, they could end up taking a larger cut of the commission later.

Additionally, standard real estate commissions differ between selling agents and buying agents. When a commission is paid out, it is split between the buyer and seller agents with the less experienced agent usually getting the lesser cut.

Who Pays the Real Estate Commission?

Some agents work strictly with standard real estate commissions as their main income. Helping someone buy or sell a home can take a lot of time, meaning the average real estate commission is perhaps not seen for weeks or months.

For this reason, some agents also take a small salary from their brokerage. Nevertheless, the commission comes usually from the seller of the home. They agree to a contract before any work is done to indicate that they will pay a certain commission percentage to both their buyer agent and the selling agent.

As you work toward becoming an agent, you’ll decide what type of real estate agent you want to be. Remember, you should not expect a huge percentage of the first commission you receive as a beginner. It is always exciting to get your first commission, but it could take time to start getting substantial payments.

Then again, much of this depends on where you work as an agent. Working in wealthier communities could mean you’re selling more expensive homes. In this scenario, it might mean getting larger commissions earlier and watching those standard real estate commissions grow substantially larger as you gain more experience.

The broker for whom you work is still going to take a cut of the commission. A broker has a greater depth of knowledge regarding real estate matters in comparison to a real estate agent. They’re responsible for running the brokerage and ensuring that their agents are fair and ethical in their roles. The broker’s commission might vary, depending on the listing agreement. A listing agreement is a legal contract between the seller and the listing broker which outlines the conditions of the listing.

Three types of listing agreements exist:

  • Open listing
  • Exclusive agency listing
  • Exclusive right to sell listing

In an open listing situation, a seller may employ numerous brokers to help sell their home. Only the broker who manages to sell the home first receives the commission.

Exclusive agency listings occur when a seller makes an agreement with a sole broker who earns the commission only if they sell the home. Regardless, the seller holds the right to sell their property on their own.

Exclusive right to sell listings are similar to exclusive agency listings. The difference is the broker gets the commission, no matter who the person is selling the property.

How Is the Commission Divided?

Figuring who gets what cut of each real estate commission can sometimes get complicated. Again, much of the split depends on experience and how much work each real estate professional puts into the home sale.

Commissions are generally shared four ways, though not always, depending on who is involved. Typically, the standard real estate commission will be split between the buying agent, the selling agent, and their respective brokers.

After buying/selling a moderately priced home, the standard real estate commission might look smaller after taxes. When working on listing and selling larger homes, though, these commissions become more substantial.

For example, let’s say an agent takes a listing on a $300,000 home at a 6% commission rate. The house sells according to plan and the listing broker (along with the buyer’s broker) each receive half of the commission. Those brokers would then split the commission with their agents. The most common split between agent and broker is 60/40, though this ratio is not always set in stone and could vary between listing agreements.

In this case, the brokers would receive $9,000 each ({$300,000 * 0.06}/2) to split with their respective agents. If the listing agreement declares the commission split to be 60/40, then each agent will receive $5,400 ($9,000*.6) while each broker takes home $3,600 ($9,000*.4).

In some situations, commissions are split among fewer parties, leading to the potential for a bigger payout per person. A broker may get a larger share of the commission if no listing agent was involved. Other times agents perform more than one role in the transaction process, allowing them a larger take.

Can Real Estate Commissions be Negotiated?

Absolutely. No federal or state laws exist to set specific real estate agent commission rates, which is why your real estate commission varies based on the state where you practice real estate. Equally, the lack of laws specifying real estate agent commission rates allows those commissions to be negotiated.

How this negotiation works is occasionally complicated, despite sellers having freedom to work with agents on negotiating commissions. Negotiations are a legal affair since no one has the right to set a commission at a specific percentage, though as we mentioned earlier, the average real estate commission is about 5-6%.

Did You Know?

Commissions are often higher when selling land because selling a vacant lot takes more time and marketing dollars.

Dual Agency

Perhaps you have heard the term "dual agency" in the real estate industry and never understood what it meant. Dual agency means an agent performs double duty while acting as the agent for both a buyer and a seller during a house transaction. While a rare occurrence, dual agency sometimes occurs by happenstance.

In smaller markets, dual agency is more likely to occur. With that said, dual agency is a little risky because it is illegal in some states. As of now, Alaska, Colorado, Florida, Kansas, Maryland, Oklahoma, Texas, and Vermont determined that the practice of dual agency is illegal.

These states are big real estate regions, so this might sound disconcerting. Still, at only seven states, you have 43 other states where you can practice dual agency.

A major pro to being a dual agent is a seller can better negotiate with the agent on commission, bringing a larger portion. As a downside, problems can arise if an agent has to relay something personal about a home being sold. For instance, what if the agent found out something about the people living in the home that could make the home sell at a lower price? A dual agent would never be able to impart personal information to the buyer or seller if they’re representing both parties.

To make the practice of dual agency ethical in the states where it’s permitted, agents have to let both parties know that they are acting as a dual agent.