Real Estate Commission, Explained

It’s one of the first questions asked by buyers and sellers as they begin their journey: How does the commission work? Let’s start with the basics

What is real estate commission?

Real estate commission is the fee paid to a real estate agent or broker for their services in the sale or purchase of a property. It is typically a percentage of the final sale price of the property, and is usually paid by the seller at the time of closing.

Who decides how much the commission should be?

When a property is listed for sale, the seller will typically enter into a listing agreement with a real estate agent or broker. This agreement will specify the commission rate, how it is paid, how much would be paid to the buyer’s agent, and any other terms of the arrangement.

In most cases, the seller also agrees to pay the buyer’s agent too, as an additional incentive to sell the home more quickly. If the seller does not offer a commission to the buyer’s agent, then the buyer would be responsible for compensating any agent representing them.

Is there a standard commission rate?

Commission is always negotiable, however the most common commission rate for real estate transactions is around 5-6% of the final sale price, which is then split between the listing agent and the buyer’s agent. How that commission is split can vary, but it is usually split equally among the two agents.

In addition to this traditional “full-service” commission structure, some brokerages (like Hera Realty) also offer “a la carte” services where sellers can pay only the services they need, as well as flat-fee options that are not based on the final sale price.

So how do agents get paid?

Unless an upfront fee-for-service arrangement is made, real estate agents typically collect their commission at closing. In this case, the agreed commission fees are deducted from the sale price of the home, and dispersed to the agents at the closing table. This means that the commission is “baked into” the sale price, and neither the seller nor the buyer have to write an additional check to cover their agent’s commission.

So for example, if a home sells for $500,000 and the agreed commission is 5%, the total commission of $25,000 would be deducted from the $500,000 sale price. The listing agent and buyer agent would then each receive $12,500 closing.

It is important to note that all agent commissions must be paid to their brokerage first, who then split it again before paying the agent.

In summary

Real estate commissions are determined by the seller in their listing agreements before listing their home, and are usually a percentage of the final sale price. Commissions for both seller and buyer agents are deducted from the proceeds of the sale, and disbursed at closing. While this structure has been traditionally accepted for over a century, some brokerages (like Hera Realty) also offer alternative commission options like a flat-fee or a la carte services.



Leave a Reply

Compare listings

%d bloggers like this: