Approximately 90% of individuals who engage in the purchase or sale of a residential property enlist the services of a duly licensed real estate agent. These seasoned professionals possess extensive knowledge of their respective local markets, exhibit exceptional negotiation skill, and contribute significantly in simplifying the entire buying and selling journey. As compensation for their invaluable expertise, real estate agents receive a commission. Let’s discuss the intricacies of how real estate commissions operate and who assumes the responsibility of payment for these fees.
The Basics:
The negotiation of real estate commissions is possible; however, the average commission rate in 2022 was approximately 5.5%.
If there are two agents involved in a real estate transaction, one representing the buyer and the other representing the seller, it is customary to have the commission shared between them.
The real estate brokerage receives a percentage of the commission in order to fund various expenses such as advertising, insurances and office rentals.
How Do Real Estate Commissions Work?
Real estate agents and brokers do not charge buyers and sellers based on an hourly rate. Instead, their compensation is received at the closing of the transaction, in the form of a commission.
The compensation of agents is determined by the contractual agreements between buyers, sellers, and their respective agents. The commission earned from real estate transactions is typically distributed between the buyer’s agent and the seller’s agent. However, it is common for contracts to specify that one agent receives a larger share of the commission than the other.
The terms “realtor,” “real estate agent,” and “broker” are frequently used interchangeably, but they do have distinct meanings. Brokers have a greater level of responsibility to the state, which necessitates more advanced licensing. On the other hand, individuals can become realtors by joining the National Association of Realtors.
The fee does not directly go to the real estate agents. Instead, it is initially directed towards the listing and selling brokers. This is due to the fact that real estate agents are required to operate under the supervision of a broker. The brokers, in turn, deduct a portion of the real estate fees to cover various expenses such as advertising, sign rentals, insurances and office space.
Each broker subsequently divides the sum with the agent, typically in a 50/50 proportion, although the specific amount may vary based on the mutual agreement between the broker and the agent. Consequently, if a 6% commission is involved, the breakdown would be as follows, assuming an equal division across all parties involved:
Listing broker: 1.5%
Selling broker: 1.5%
Seller’s agent: 1.5%
Buyer’s agent: 1.5%
On a sale worth $200,000, each broker and agent would be entitled to a commission of $3,000.
How Much Is a Real Estate Commission?
Real estate commissions vary, as agents must adhere to state and federal antitrust laws. While the standard fee has traditionally been 6%, there are now discount services available with rates ranging between 4% and 5%. As of 2022, the average real estate commission stands at 5.46%.
Please keep in mind that the commission constitutes a percentage of the selling price of the property. Therefore, the precise fee will only be determined once an offer is accepted and the house is successfully sold.
Who Pays the Real Estate Commission?
The matter of who pays the cost of a real estate agent’s commission is rather intricate. It is customary for the seller to assume this expense. Nevertheless, the seller typically incorporates the commission into the overall price of the property. Consequently, it is the buyer who ultimately incurs the cost, albeit indirectly.
Let’s consider a hypothetical scenario where a buyer and seller, each with their respective real estate agents, come to an agreement on the purchase of a home for $200,000. Assuming a standard real estate commission rate of 6%, the total commission fee would amount to $12,000 ($200,000 x 0.06). It is important to note that this fee is deducted from the cost of the home and is not added to the sale price. Consequently, while the buyer would pay the full $200,000, the seller would receive a net amount of $188,000 from the sale. However, this example oversimplifies the actual transaction process, as additional expenses such as closing costs and various fees also come into play.
Are Real Estate Commissions Worth It?
One of the primary concerns regarding real estate fees is their perceived high cost in relation to the value of the services provided by real estate agents.
If a residential property is sold on the first day of its listing, the seller’s agent has the opportunity to earn a substantial commission with relatively little effort. This would typically involve tasks such as taking photographs, determining an appropriate listing price, and making the property available on the market. However, in certain cases, a property can remain unsold for weeks, months, or even years, especially if it is a distinctive or high-value home.
For the agent representing the seller, this can amount to numerous hours dedicated to promoting the property, hosting open houses, fielding phone calls, and staying up-to-date with other listings and recent sales in the area. Additionally, the agent will incur ongoing expenses for keeping the house on the market, such as signage and advertising fees. When viewed from this perspective, it is understandable that few sellers would be inclined to assume the risk of compensating a real estate agent on an hourly basis.
The same applies to prospective buyers. Some individuals will find a dwelling promptly, while others will assess numerous properties—over the course of weeks or even months—before ultimately choosing one. If buyers were compelled to compensate an agent on an hourly basis, they would probably sense a pressing need to arrive at a decision hastily.
Flat-Fee Real Estate
Of course, there are real estate agents who offer their services for a fixed fee, which can range. This pricing structure can undoubtedly provide sellers (and buyers in the end) with cost savings. However, it is important to consider the potential drawback of working with such agents, as they may lead to a significantly lower sale price.
A traditional real estate agent acts as your ally throughout the complete process of buying or selling a home. A seller’s agent assists you in preparing your property, capturing professional photographs, listing your home on multiple listing services, promoting it, coordinating and conducting showings, and skillfully negotiating on your behalf. Most importantly, an experienced agent will save you from falling into common traps, delays and problems. You do not want any suprises or hesitations at the closing.
Similarly, buyer’s agents will assist you in identifying your essential requirements, locating the appropriate property, accompanying you to viewings, facilitating offer negotiations, and providing recommendations for other professionals, such as a home inspector.
Flat-fee or discount brokerages may offer lower costs, but there is a possibility that the quality of service may be compromised. Nonetheless, there are so-called full-service agents available who are willing to work at a reduced commission or flat fee. In the event you choose to pursue this option, it is advisable to reach out to a few references within your local area to ensure that the level of service provided aligns with your expectations.
The Bottom Line
Most buyers and sellers prefer to work with real estate agents. These agents receive a percentage of the sales price, known as the commission, in return for their services. Although it is typically the seller who covers the commission, the cost is generally incorporated into the listing price of the property. Consequently, it is the buyer who ultimately bears the expense of any real estate fees. Buyers assume this cost due to their pivotal role in keeping agents in business. They have a preference for professionally listed homes and expect to pay a fair price when dealing with such properties. Conversely, when dealing with an owner or discount agent, buyers anticipate the opportunity to benefit from a reduced cost.
Keep in mind that certain agents may offer commission discounts. If you are worried about elevated fees, there are two options you can consider. Firstly, you may opt for a flat-fee or discount broker. Alternatively, you could pursue a for-sale-by-owner transaction. Additionally, some real estate websites provide the possibility for potential buyers to search for properties without involving a real estate agent. However, it’s important to exercise caution when dealing with individuals who have not been thoroughly screened by a professional. These prospects may be more qualified to steal your identity than to buy your home.
Prime Time Real Estate Inc. 