Clearing Up Real Estate Commissions: Answers to Your 8 FAQs

When you hire someone for a job, you expect transparency around what their services will cost. That’s why you ask a lawyer for their hourly rate and a contractor to provide you with quotes for a project. However, selling a home isn’t a task most people do very often, so real estate commission fees can feel like completely foreign territory. So how do real estate agents make a living and what do they usually charge? This guide answers the most common questions you likely have about how real estate commissions work, typical rates and what they include, and who pays who so you’re clear on where your money is going from the start.

1. What percentage do most real estate agents charge?

HomeLight’s Agent Commission tool, which pulls from thousands of home sales each year to illuminate commission trends at the national and local level, shows that the national average real estate commission is 5.8% of a home’s sale price. Since 2013, commission rates have held firm between a 5.5%-6.0% average rate across the country.

However, commission rates do vary by agent and locale. Here’s a round up of commission rates across a few major U.S. cities:

• Los Angeles real estate commissions: 4.96%
• San Francisco real estate commissions: 5.04%
• New York real estate commissions: 5.33%
• Miami real estate commissions: 5.95%
• Austin, Texas real estate commission: 6.0%

To get a sense for how much you would end up paying in real estate commissions, plug your home address into our Home Value Estimator for a preliminary home value estimate. From there, we’ll provide you with a breakdown of your estimated sale price, market preparation costs, closing costs, and agent commissions for an estimation of your net pay. When you officially hire an agent, you’ll sign a listing agreement outlining your agreed-upon commission rate and how long an agent has to sell your home in order to collect it.

2. Who pays the real estate commission?

The seller typically pays the approximate 6% real estate commission, which is then split 50/50 with the buyer’s agent as a reward for bringing a buyer to the sale. Then, each agent splits their cut (let’s call it 3% of the sale price) with their real estate broker based on a previously agreed-on ratio. These split rates can vary; however, it’s common for the listing agent to give their broker anywhere from 30%-50% of their commission (for a 50/50 or 70/30 split), depending on the market size and brokerage.

Although this describes the typical commission structure, keep in mind that it’s sometimes negotiated differently. Mario Avalos, a top Miami real estate agent with more than 12 years of experience, has seen scenarios where the buyer had to come up with more money out of pocket to help cover some of the commission as part of the deal. And even if the seller pays the full commission, those fees are typically rolled into the home’s listing price, so the buyer ends up shouldering some of them indirectly.

3. Why are commissions set up this way?

It’s worth noting that the U.S. is one of few countries that even has buyer’s agents! In other countries, it’s common for the listing agent to oversee the entire transaction — including advising the buyer, which many view as an inherent conflict of interest. In the U.S. the MLS is designed to encourage competitive cooperation, which is a unique way of doing business as agents are incentivized to share and frequently review data, which means greater exposure for your property. The commission structure also encourages the agent to help the seller fetch maximum value for their home. The more you make, the more they make, creating a team dynamic.

4. What does that commission cover?

That 5.8% might seem like a big bite out of your proceeds, but it covers a lot of valuable services critical to selling your home. A great real estate agent will:

• Run a comparative market analysis (CMA) of sales of similar properties in your area.
• Recommend an appropriate price, accounting for nuanced factors like the value of being on a cul-de-sac or in a great school district.
• Hire a professional photographer for your listing photos, which can cost up to $300 per listing.
• Offer additional digital marketing services such as virtual walkthroughs, 3-D tours, or a video listing.
• Stage the home for showings using their own expertise or the help of a local stager they trust. According to HomeLight’s research, 75% of top agents offer complimentary home staging services.
• Activate your home’s listing on the Multiple Listing Service (MLS) to give your listing the broadest possible exposure (MLS access can cost agents up to $600 per year).
• Connect you with a range of vetted industry professionals, including contractors who can help you with any pre-listing preparations or necessary repairs.
• Offer appropriate guidance on your state’s real estate disclosure form (though some states have rules on what agents can say with regard to disclosures).
• Coordinate showing schedules with buyers on your behalf.
• Providing regular updates about the status of the listing and convey feedback from buyer’s agents.
• Handle negotiations with buyer’s agents and help you field offers, employing strategies such as “Highest and Best” to get you the best deal.

Overall, a real estate agent acts as your trusted advisor throughout what’s often a stressful time. Their guidance and industry knowledge can help you avoid remodeling projects with low ROI, attract buyers by highlighting your home and neighborhood’s best selling features, and at the end of the day sell your home for more. Our data shows that the top 5% of agents in a market sell homes for as much as 10% more than their peers.

In some cases, the value an agent’s expertise adds to your home may more than offset their commission fees. A study from Collateral Analytics, now owned by leading real estate data source Black Knight, found that FSBO sales (those homes sold without a real estate agent) often sold for 5.5% less, and in some cases nearly 6% less, than agent-assisted sales.

5. Are real estate commissions negotiable?

Sellers are free to ask their real estate agent for a lower commission rate or for a buyer to help cover some of the commission costs. Agents can also negotiate and offer lower rates as a means of attracting more clients. That said, the top-performing agents are less likely to lower their commissions, as they know their worth and don’t want to devalue the importance of the services they provide.

If an agent does offer to reduce their commission for the sake of getting you to sign a contract, you run the risk of compromising on the quality of service. You might sacrifice professional photography for amateur iPhone shots, for example, or find yourself with someone who lacks the expertise to navigate landmines like tough inspection negotiations.

6. Are commissions bundled into closing costs?

Toward the end of your home sale, you’ll receive a settlement statement that itemizes all of your selling expenses, including any agent commission fees owed. In his transactions, Avalos always breaks out the commission costs separately from the closing costs. For most home sales, the seller pays the agent’s commission out of the sale price. When the deal closes and funds are disbursed from escrow, the commission fees are released to the broker, who takes their cut and then pays out the remainder to the listing agent and buyer’s agent.

7. My home didn’t sell. Do I still have to pay the commission?

Agents only earn commissions on closed sales. That means if your house doesn’t sell during the terms of your listing agreement, or if you have a change of heart and decide to take your house off the market, you’re likely not on the hook for paying commission to your real estate agent.

There is an exception if the listing contract included a “safety clause” or “protection clause.” This clause states that you must pay the agent a commission if you sell to a buyer whom the agent introduced to the property — even after the listing agreement expires.

8. What if my agent represents both the buyer and the seller?

If an agent handles both the buying and selling sides of a deal, that’s known as dual agency. In Avalos’ experience, this type of double-end deal is a rarity — he estimates that around 95% of his transactions involve another agent. In the 5% of deals when he’s working both ends, he is always upfront with the buyer that he is also the seller’s agent.

“The listing agreement specifies the percentage of the commission, and that it will only be split if the buyer has their own agent,” says Avalos.

Some argue that having the same agent representing both sides can pose a conflict of interest, and that it’s difficult for the dual agent to be a neutral party. However, there is the benefit of having a more streamlined transaction, as there’s no need to wait on back-and-forth between two agents. And because the agent doesn’t have to split the commission, there is also a better chance that they’ll offer a lower rate.

Real estate commissions: The price of expert guidance

A great real estate agent puts in a lot of work (up to 200 hours) to sell clients’ homes as quickly and profitably as possible, while minimizing stress and hassle for the seller. While real estate commissions can seem like an expensive pill to swallow, they are the price you pay for having an expert in your corner. Consider those fees an investment in selling your home with greater speed, profit, and peace of mind.

Header Image Source: (Douglas Bagg / Unsplash)