How does a Real Estate Agent get paid?
Have you ever wondered how your Real Estate Agent gets paid? Does the buyer or seller cover the costs? What do their fees cover? Let’s break it down.
Brokers
First, it's important to understand that all Real Estate Agents have to work under a broker when they get their license. Your Agent may also be a Broker, which means they have both a real estate license AND a broker license. A Broker holds the licenses of all their Agents. This means that when a home is listed, even though you are sitting down with a Real Estate Agent, the listing is actually legally held by the Broker.
Selling Agent vs. Listing Agent
An Agent can represent either side of a real estate transaction. Selling Agents (Buyer's Agents) represent the buyer and Listing Agents represent the seller. When you hire an Agent to buy a home, you will sign a Buyer-Broker Agreement. And when you hire an Agent to sell your home, you will sign a Listing Agreement. These contracts outline the duties of both the Agent and the Buyer or Seller.
So, there are two sides of the transaction, but which side pays real estate commissions?
Real Estate Commissions
The seller typically pays the real estate commission for both the Listing Agent and the Selling Agent/Buyer’s Agent.
Technically, all real estate commissions are negotiable. However, in most markets around the US, the fees are usually in a similar range so check with your Agent to inquire as to the specific commission you would be charged as a Seller. For example, in many markets you might see that the seller is paying a commission of 6% of the purchase price of the home. In this example, 3% goes to the buy side and 3% goes to the sell side. Then, each split is further broken up between the Agent and their Broker. Brokerage splits vary and are outlined in the contract signed when the Agent first joined the brokerage. The split may be 60/40, 70/30, 50/50, etc.
The seller pays the Broker on each side of the transaction. Then after the Broker takes their percentage of the commission, they will pay the Agent's commission with the remaining amount.
This method of splitting commissions is the most commonly used pay structure, but there are other methods. Some brokerages may charge a flat fee for each transaction, but this is less common. Sometimes the Buyer-Broker Agreement will set a baseline fee. In this type of agreement, the buyer must pay the difference to the Selling Agent/Buyer’s Agent if the percentage of the purchase price doesn't reach that baseline amount. So be sure to read your paperwork carefully before you sign it.
Dual Agency
Occasionally the Listing Agent representing the Seller will also represent the Buyer in a dual agency with full disclosure. In this case, the Agent collects the full percentage commission of the sale.
Fees May Vary
Be aware that nothing is set in stone. Divisions vary between the buy and sell side and commission splits vary between Agents and Brokers. Sometimes a seller will even try to negotiate the percentage of the fee.
When Agents Receive Their Commission
Typically, Agents aren't paid until a deal closes. At closing, the Title Agent will send the payment paid by the seller to the Broker on each side, who will then pay the Agent their commission split.
Keep in mind that buying and selling a home takes time, and Agents put their time and money into making a transaction happen before they take any money home. Each Agent has their own set of duties that incur expenses out of their own pocket such as gas, marketing costs, insurance, MLS and association dues to name a few.
Remember, most Real Estate Agents are paid solely with 100% commission - not salaried at all - so all the service they provide to you only pans out financially for them if they help you successfully close on your home sale. And until a deal makes it to the closing table, a commission payment is never guaranteed for them.
We hope this has cleared up how Real Estate Agents are generally compensated. Please check with your Real Estate Agent to learn more!
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