How Does Real Estate Commission Work in 2024?
Real estate commissions work as a percentage of the final sale price of a home or property. This fee (often 5-6%)* is negotiated on a case-by-case basis between the seller and the listing agent and legally agreed to in the listing contract. Typically, the seller pays the commission, along with other closing costs, at settlement.
For the majority of Americans, real estate is the most valuable asset they own. As such, buying or selling real estate is complicated and potentially risky. To help bring certainty to the process, homebuyers and sellers hire professional agents. These agents help ensure the efficient, secure transaction of real estate property often worth hundreds of thousands of dollars.
Naturally, real estate agents seek compensation for their efforts. Over time, the real estate commission has become standard practice for payment. A commission allows agents to receive compensation commensurate with the service they provide. In a real estate transaction worth $100,000, there is uncertainty and risk. In a real estate transaction worth $1 million, it’s fair to say that the risk is higher. By retaining a percentage of the final selling price, real estate agents are compensated more when the stakes are higher.
How many parties does a typical real estate transaction involve?
A typical real estate transaction involves six parties:
- buyer’s agent
- listing agent
- buyer’s broker
- listing broker
The buyer and the seller are, obviously, the two parties engaged in the exchange of property. The buyer’s agent represents the buyer and the listing agent represents the seller. The brokers are the individuals for whom the agents work. Sometimes the agent and the broker are the same person.
Each of these parties is involved in the real estate commission in one form or another. First, the seller and the listing agent decide upon the commission. There are no hard and fast rules for the commission. It’s based purely on the services the agent brings to the table and the amount the seller is willing to pay. Many commissions end up being between 5% and 6%, though there are certainly exceptions. The commission is completely dependent on the sale. If the agent is unable to sell the home, he or she does not collect the commission. If the seller agrees to sell the home for less than the asking price, the agent only earns commission on that final sale amount.
Once the sale goes through, the listing agent collects the commission from the seller, but does not keep the whole thing. No sale can be completed without a buyer, so the listing agent must compensate the buyer’s agent. As they say, “It takes two to tango.” The split is usually 50/50, but the precise figure is negotiated between the agents as they negotiate the final sale price on behalf of their clients.
Even this share is not held completely by the agents. Each agent must compensate his or her broker for the office, training, and technology they provide. This split can be 60/40, 70/30, etc., depending on the brokerage. Some brokerages grant the agents a 100% share, but require them to pay a regular fee.
You may be asking, what about the buyer? The buyer is not responsible for any part of the commission? In fact, the argument can be made that it is the buyer that pays the whole commission. While the commission comes from the seller’s pocket, a rational seller will include this cost in the price of the home thereby passing it on to the buyer.
*Please note a commission is negotiable and varies from transaction to transaction.
What are the commission for?
Many real estate buyers and sellers are wondering if the services of real estate agents are truly needed when selling or buying the property. Well here are only a few things real estate agents are doing to sell or purchase the property faster:
- Market research for identifying the proper home price
- Pricing the property
- Marketing the property on various channels: social media, MLS
- Preparing as well as distributing marketing materials
- Adding the property description, photos and price in the MLS database
- Showing the home
- Preparing the contract
- Negotiating, reviewing offers, and assisting in proceeding with the deal faster
- Following up to close the sale
These are only a few items that real estate agents do. To go back to the original question, you should decide if you have the time, energy, and knowledge needed to do this on your own.
How to Get a Higher Commission as a Real Estate Agent?
Whether or not you love your job, your main and foremost goal is to get paid well. Today, everything is about finances. Everyone needs to eat, dress, and pay taxes. A good salary is a huge incentive for an employee. It means that her hard work is appreciated. She may feel valued and motivated to do her job perfectly.
Here are some tips on how to get higher commissions as a real estate agent:
1. Make Sure That You’re Doing Your Best
First and foremost, it is very important to be committed to your work. You have to understand that higher commission means higher responsibility. You need to do your job well and build a reputation. Look back on your career. Look at the salaries of other employed people. Evaluate objectively how much you work compared to them. Imagine yourself in the role of your boss, would you increase the salary of an agent like you? If the answer is no, fix the problem, and try your best to work harder.
2. Define Your Worth
Determining your capabilities is very important. However, each person evaluates their own work differently. It is not necessary to be dissatisfied with your current income to want a bit more. Some people need high pay for incentives, some for new purchases, and some just think they deserve better. The role of agents in the real estate business is enormous. Be objective. Determine how much you are worth. Then go out and meet the criteria necessary to generate that worth.
3. Ask to Receive
If you think you really deserve a higher commission and you are ready to take on responsibilities, then ask. Don’t wait for the time to come for someone to offer. It may take too long, or it may not happen at all. Don’t be ashamed to reveal your own terms. Sincerity and purposefulness are usually highly valued. And you will not be an exception. Time is very important, so appreciate your abilities and believe that you deserve this.
4. Be Ready for Challenges
As I mentioned at the beginning, high income is not just about positive change. It means that you are willing to take on more responsibility to prove that what you are asking for really belongs to you. The competition between real estate agents is quite intense. Therefore, never forget that if you ask for something, your responsibilities will be doubled. Your clients will also be much more demanding of you, so be prepared for challenges. Don’t be afraid to take risks. Remember, you have to do something new, if you want to receive something you have not received yet.
Despite the fact that there are other forms of payment such as regular salaries, commissions are the most important source of income for agents. Understanding how they work is essential to an agent’s and their overall success. Make sure you always negotiate your commissions and you are paid your worth.