Content of the material
- How real estate agents get paid, and who really pays them
- How to avoid paying Realtor fees
- Who pays real estate commission fees?
- Find an Agent Worth Their Commission
- Avoiding “Dual Agency”
- Standard Commission
- Alternatives to using a real estate agent or Realtor
- What do real estate agents and Realtors do?
- What is a ‘fair’ real estate commission?
- Who Pays the Real Estate Commission?
- How commissions have changed over the years
- What about discount and flat fee MLS companies?
- Flat-Fee Real Estate
- Do California Real Estate Agents Pay Their Own Taxes?
How real estate agents get paid, and who really pays them
The agents who represent the seller and buyer split a commission fee (typically 5-6% of the purchase price of the home according to Forbes) at the close of escrow. The concept of who pays the commission can be a tricky one to explain, which is why it’s no surprise some agents attempt to simplify things by telling the buyer that the seller covers the fees. That, however, isn’t entirely true.
While the payment is technically disbursed by the seller, the funds come from the money the buyer pays to the seller. It’s actually not uncommon for sellers to account for paying these commissions by factoring them into the initial listing price. Buyers essentially foot the bill for these fees when it comes time to close.
According to agent Elizabeth Weintraub, “It can be argued, quite rightfully so, that the buyer always pays the commission. Why? Because it’s typically part of the sales price. If the seller did not sign an agreement to pay a commission, the sales price might have been lowered.”
How to avoid paying Realtor fees
In 2019, just 11 percent of home sales were sold by owners without the help of an agent, according to the National Association of Realtors (NAR). In addition, NAR says, for-sale-by-owner homes (FSBOs) typically sell for less money than homes sold by Realtors. In many instances, FSBO sellers already know the buyers who end up purchasing their homes. Buying without a Realtor is also doable, but the jury is out about whether it’s a wise move — especially in this market.
When you shop around for Realtors, ask them from the outset what their commission is and compare the terms of each person you talk to. If you think the fee is too high, talk to them about lowering it.
“In certain situations where there’s a competitive environment for a prime or trophy listing, Realtors sometimes will negotiate the commission upfront,” Duffy says. “For example, if I’m listing a $4 million home at 6 percent, that’s a lot of money. In a situation like that there is greater flexibility to negotiate the commission — if you get $100,000 or $80,000 instead of $120,000, it’s still a good payday.” If the transaction is being handled on both sides by agents from the same brokerage, you might have more leverage as well.
Who pays real estate commission fees?
Typically commission fees are paid in full by the seller in the transaction. As explained by top real estate agent Rachel Moussa of Flower Mound, Texas, in most places, “the standard is for sellers to pay both the listing agent and the buyer’s agent’s commission. The listing agent puts on the MLS what percentage the seller has agreed to pay cooperating brokers.”
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Avoiding “Dual Agency”
Dual agency is a situation in which the same agent is representing both the buyer and the seller. In this case, one agent would receive all of the commission from the sale. While this might sound like a good thing, it’s actually a scenario that most people and agents want to avoid.
In many states, dual agency is illegal due to the likelihood that it will spark conflict. Real estate agents promise to represent their clients to the best of their abilities and always act in their best interests, and dual agency more often than not prevents this from happening. If one agent is representing both parties, it’s virtually impossible for them to maintain adequate, fair, and honest representation on both sides of the transaction.
Buyers’ agents endeavor to show their clients the full range of available homes in their target area, which includes broker-listed and FSBO properties. If a buyer’s agent, who has entered into a buyer-agency contract with her client, shows your home to a fully qualified buyer and the buyer wishes to put a contract on it, you may have to pay the agent’s commission, usually around 3 percent of the final negotiated home price in a one-sided transaction. In exchange for the standard commission, the agent facilitates contract negotiations and coordinates most aspects of the closing. This approach works well when you and the buyer have some experience buying and selling homes but may not be comfortable negotiating the various complications of real estate transactions.
Alternatives to using a real estate agent or Realtor
Many sellers think real estate agents’ commissions as too high and try to avoid them.There are three main ways of selling a home without such high costs:
- For sale by owner — At its most basic, this might involve putting up a yard sign, printing and distributing some flyers, and telling everyone you know your home’s for sale. It’s cheap and sometimes works, especially in hot real estate markets. But the risk of undervaluing or overvaluing your home is high
- Flat-fee MLS listing by owner — The MLS is the Multiple Listing Service. It’s the online resource that real estate agents use to let other agents and buyers know that a home is available. Owners can add their listings (which may appear on Realtor.com and Zillow, too) by paying a flat fee — or a smaller flat fee with a success charge on sale
- Trimmed-down services — Some agents offer lower commissions for a more basic service. You might get a menu — from MLS alone through increasingly complete levels of service — from which you choose what you want and how much you’re willing to pay
Are these better ways to sell? That will depend on many factors, including:
- How strong your local property market is
- How good you are at appraising your own home’s value
- How much effort you’re prepared to put into finding a buyer
- How confident you are in your ability to shepherd your sale through to closing
If you’re sure you can handle all those as well as an agent, feel free to sell without enlisting one.
But for many people, working with a real estate agent, broker, or Realtor gives them peace of mind they’re getting the best price on their home from the most qualified buyer.
What do real estate agents and Realtors do?
Whether acting on behalf of sellers or buyers, the duty of a real estate professional is to maximize the benefits his or her client gets from the home transaction.
Agents do this by having:
- An intimate knowledge of the local housing market, including expertise in appraisal
- Negotiating skills to secure the best or optimum price for the client
- Local contacts in the marketplace who can help with the rapid acquisition or sale of a home
- A close knowledge of the legal and mortgage processes involved
- Troubleshooting skills that keep a transaction on track when issues arise
- Interpersonal skills that allow clients to feel comfortable and in control throughout the process
If you pick a good one, your agent can be highly valuable.
Ideally, your agent will have several years of experience in your local real estate market. But new agents can offer a lot of skills and insights, too.
What is a ‘fair’ real estate commission?
A commission rate between 5%-6% is standard for most markets to hire a full service real estate agent. This rate should translate as having an agent who is dedicated to selling your home for the best possible price, who is available and communicative, and who is willing to quarterback the transaction from start to finish. If an agent isn’t willing to offer all or the majority of services listed above, you should interview some more candidates.
Who Pays the Real Estate Commission?
Precisely who pays a real estate agent's commission is where things get a little tricky. Standard practice is that the seller pays the fee. However, the seller usually wraps the fee into the price of the home. So, the buyer ultimately ends up paying the fee, albeit indirectly.
Let’s say, for example, that a buyer and seller (each with a real estate agent) agree to a deal on a home for $200,000. Assuming the real estate commission is 5%, the fee would be $10,000 ($200,000 x 0.05). The fee comes out of the cost of the home—it is not added to the sale price. So, although the buyer would pay $200,000, the seller would receive $190,000 from the sale. (This is an overly simplified example as closing costs and other fees would apply.)
How commissions have changed over the years
Since the early 1990s, Realtor commissions have seen a fairly steady decline. In 2021, the average commission was 5.5 percent — down from more than 6 percent in 1991.
This isn’t to say the total amount Realtors earned decreased, however. In strong selling markets, home prices are high and sellers receive multiple offers. This allows more room for negotiation on the commission, so Realtors may accept a lower commission to earn a higher amount overall.
As the market slows down, Realtor commissions may rise again and become less negotiable. Even so, a seller with a high-priced listing may still be able to negotiate a lower commission more effectively.
What about discount and flat fee MLS companies?
You could use a “discount” or flat fee MLS company instead of a “traditional” company (actually, since commissions are not regulated, there really is no such thing as a discount company).
But unless you are willing to do a lot of work yourself (being present at showings, inspections and/or other appointments), the extra that you pay the listing agent over the flat fee company may actually be worth it — and you may even net more money by having a dedicated agent to negotiate for you at all times.
Selling via flat fee MLS is growing rapidly in slower markets. Many resort to this alternative selling method as it is the most economical and flexible way to sell.
Most real estate fees are negotiable. Generally speaking, you should place information about the commissions or fees you are willing to pay a buyer’s agent in your property’s printed brochure. This eliminates surprises on both ends and lets interested parties know how to approach negotiations up front. If you are on the premises when a buyer and his agent come to view your home, steer clear of discussions about prices, commissions and fees to avoid misunderstandings down the road.
Flat-Fee Real Estate
Of course, there are listing agents who work for a flat fee—such as $100 or $500. This can obviously benefit sellers (and ultimately buyers) in terms of cost savings, but the drawback is that these agents may offer limited representation.
A traditional real estate agent will be your partner throughout the entire homebuying or selling process. A seller’s agent will help you stage your home, take professional photos, get your home on a multiple listing service, advertise, schedule and host open houses, and negotiate on your behalf.
Similarly, buyer’s agents will help you determine your must-haves, find the right property, take you to showings, negotiate offers, and recommend other professionals (such as a home inspector).
Flat-fee or discount brokerages may cost less, but you could end up getting what you paid for. Still, there are full-service agents who work for a lower commission or flat fee. If you decide to go this route, be sure to find out ahead of time which services the agent offers to make sure that what you will get matches your expectations.
Do California Real Estate Agents Pay Their Own Taxes?
Last but not least is the tax factor. California is notorious for having high taxes, and the broker isn’t deducting anything when they pay an agent their share of the commission. That means the agent must subtract taxes each time they receive a commission check.
As an independent contractor, real estate agents must pay the IRS estimated taxes every quarter. The estimated taxes include income tax and the self-employment tax, which covers Medicare and Social Security taxes. You’ll need to reference the latest tax brackets to determine how much should be paid each quarter.
California also has a state income tax. California has 10 income tax brackets – the most in the country. Unfortunately, the state is also known for having the highest state income tax bracket at 13.3%. But that only applies to income over $1 million. California agents and brokers will pay anywhere between 0-9.3%.
At the end of the day, real estate is a profession where your salary isn’t set in stone. Set your sights high and you could be one of the best-paid agents in the country.