What Are Real Estate Commissions?
Real estate commissions are a percentage of the money made from a home sale taken by real estate agents. Because commissions are a percentage, agents make more money selling an expensive home than selling a cheaper property. This is why it is in an agent’s best interest to sell a property for the highest amount possible. But don’t worry, if you’re a buyer they still need to stay in your comfort zone while keeping you happy, it is a referral based business after all.
And good news, if you’re a seller or a buyer you have options to lower the agent’s fees or avoid them altogether. And that is what we cover below.
Let’s start by looking at who gets the fees and when. Surprisingly enough the real estate commissions don’t just go to the two real estate agents.
Who Gets the Real Estate Agent Commissions?
Real estate commissions are paid to four parties including the listing agent, the buyer’s agent and both of their brokerages. The brokerages get a percentage of the real estate agent commissions because licensed agents are required by law to work for a brokerage, and this is how the brokerage makes money.
Commissions are usually split between buying and listing agents 50/50, and then each agent splits that 50/50 with their brokerage.
So, let’s find out just how much money those percentages represent.
How Much are Real Estate Commissions?
Typical real estate commissions are 4-6% of a house’s selling price. If your house sells for $500,000 with 6% being paid in commissions, you would be paying $30,000 dollars in real estate commissions or $7,500 to each of the four parties mentioned above.
Remember that these numbers are just typical real estate commissions, and depending on the agent you work with or your situation the split may be different. If you’re desperate to sell, your listing agent and their brokerage may only take 4% of the commissions if you agree to let them do what they feel will move your property fastest and easiest.
And this leads us to the question, who is responsible for paying the commission.
Who Pays Real Estate Commissions?
Real estate commissions are technically paid by both buyer and seller. With that said, both agents’ commissions are deducted from the seller’s proceeds of the sale. This means the seller actively pays real estate commission, but it is from the money the buyer used to pay for the property.
Pro-tip: As a seller you have the power to negotiate the real estate commission, but you have to do it before you list your home.
You can also try to get the real estate agent commission lowered by:
- Offering to pay for some of the marketing
- Guarantee they can help you buy your new home earning them a second commission
- Giving them more free-time by hosting your own open houses (if your agent feels that is wise).
Once you’ve reached an agreement on how much to pay in real estate commissions, you don’t have to worry again until the house is sold. And you don’t have any extra work as the commission comes from the company that manages the closing.
This amount is rolled in with the other closing costs which can add an additional 2-4% to your bill. If your agent agrees to a 4% commission and your closing costs are 3%, you’re now responsible for 7% of the total sales price. If it is a 6% commission and 4% closing cost, you need to pay 10%.
At this point you’re likely wondering if you can avoid having to pay some of these fees. The answer is yes!
How to Avoid Paying Real Estate Commissions
You can avoid paying real estate agent commissions by:
- Using a licensed discount agent. They provide fewer services than others and may not list your home in an MLS or conduct open houses, but they’ll charge you less out of pocket.
- Flat-fee agents are another option, but it may be harder to find and they won’t have an incentive to sell your house at a higher price.
- Listing your house as an FSBO (For Sale By Owner) enables you to act as your own agent so you don’t have to pay any of the traditional seller fees. If your buyer has an agent, you will likely still have to pay their commission, but you’re still saving.
- Selling your house for cash to a real estate investor like us.
Now you know all about real estate commissions including what you should expect to pay and how to reduce the amount. And if you think they cost a little too much, now you know the best way to reduce or even avoid real estate commissions.
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