On average, real estate agents request a 5.8% fee on every sale they make, according to our Commission Calculator. Over the past three years, real estate agent commissions across the country have averaged 5.47%. You’ll hear this charge referred to as an “agent commission” or “Realtor® fee” (but note that to call themselves a Realtor®, agents must also be a member of the National Association of Realtors®).
In any case, for some sellers, that number seems daunting: on the median $313,500 sale, the seller’s agent makes $18,183. They see the number as excessive and resolve to negotiate the commission down by one or two percentage points.
Here’s the thing though, your real estate agent doesn’t get that $18,000 to put towards a Maserati or a Key West vacation home. The 5.8% percent that Realtors® earn goes towards giving you an incredible home selling experience.
Realtors® spend their fees on marketing your house: they contract out top of the line photographers for professional interior and exterior shots, they advertise your home online, they even get video footage taken so buyers can experience your home from their living room couch.
We wanted to know exactly where all of your hard earned cash goes, though, so we did extensive research and talked to a top real estate agent on the matter. We learned to trust the real estate agent when she says she needs a 5.8% cut because what you get from a low commission agent by comparison doesn’t compare. In addition, the portion of the commission that ends up in her pocket is well earned and goes toward your home’s marketing costs.
Is it worth paying the entire 5.8% real estate agent commission? You bet, and here’s why.
What is a Realtor® fee?
A Realtor® fee is the way a real estate agent makes money off of a home sale. If we round up that 5.8% for simplicity, real estate agents charge around 6% of the sales price as their commission. The 6% goes to the seller’s agent (also known as the listing agent), and the seller’s agent gives half of that 6% to the buyer’s agent.
Then, the sellers agent splits their 3% take 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.
So unfortunately, your amazing listing agent doesn’t get to keep her entire commission. Think about the Realtor® fee this way: if you paid any less than 6%, your agent would wind up with either no cash to advertise your place or no takeaway pay. Neither situation is ideal.
We created this handy image so that you can really visualize what the payout is for your agent:
Sale price: $313,500 (median sale price of a home as of Nov. 2020)
Realtor® fee: 6%
Seller pays: $18,810 in commissions
Listing agent receives: $4,702.50
Listing broker receives: $4,702.50
Buyer’s broker receives: $4,702.50
Buyer’s agent receives:$4,702.50
Your seller’s agent takes away 1.5% of the money your home sold for. The median price of a home sale in November 2020 was $313,500, according to the National Association of Realtors®, so that means your real estate agent gets $4,702.50 out of the average American home sale.
That’s not quite the $18,000 we originally thought.
Where does a Realtor’s® commission go?
We interviewed Elizabeth Weintraub, a listing agent who works with 70% more homes than the average agent in Sacramento, CA, to understand where the agent commission really goes. Out of the 1.5% of the sale the real estate agent is left with, Elizabeth uses 30% towards marketing costs for the property. At the end of the day, a big chunk of her real estate agent fee goes to marketing your house with only the best photographs, full color online and newspaper ads, or a creative email blast to generate activity at an open house.
That Realtor® fee makes your home look like the best, biggest chocolate cupcake in a box of 12 identical pastries. Every kid wants that cupcake. Your agent uses her 6% so that every buyer wants your house.
If we take the median home sale price for November 2020 ($313,500), here’s a breakdown in dollars of where the 6% most often goes.
Why should you care?
Discount brokers can’t afford to do the right kind of real estate marketing on that scale.
A discount broker could spend the same amount on marketing as Weintraub does, but what takes 30% of her commission would be 70% of theirs. Real estate brokers who charge a discounted rate might make you pay less, but your photos on the MLS could end up as dark, blurry, vertical iPhone shots. Are those the pictures you want on your open house flier?
Lower cost companies don’t always know what they’re doing
Elizabeth shared a story with us about a time when a client chose a low cost brokerage company over her because he would have to pay less of a Realtor® fee.
“He wanted me to discount my Realtor® fee to what this other company was going to charge him. And he said…they’re going to do everything that you’re going to do. And I said, ‘No they’re not…but I’ll tell you what. When you get into escrow and you get to the home inspection part, and you’ve got an old home — it was built in the 1920s — you’re not going to get out of it. And when you don’t get out of it, you can give me a call and I’ll come back and list the property.’”
“He hired that company, and sure enough, they got into escrow and the home inspection came around and the whole thing blew up…and he came back to me and said, I want you to list this and put this into escrow!”
The client’s house did not sell with the company that promised a lower commission rate. Was hiring a real estate agent purely for their low Realtor® fee worth it? Absolutely not.
Are discount real estate brokerages with low fees FSBO sales off the table?
The cash might seem like a lot, but the numbers show that you stand to make more with a real estate agent than if you were to sell your home by yourself. Though selling For Sale By Owner could lose you money, discount brokerages aren’t all bad.
According to Elizabeth, some clients don’t need the full service real estate agent experience. If you’re selling a cookie cutter condo with the same amenities, square footage, wear and tear, and price tag as six of the other properties in your neighborhood, you won’t need much pizazz put into your listing. A discount broker could be great for a client looking for a quick and dirty, straightforward sale where they know that their place will sell for the same as other comps, and nothing more.
What about selling for cash — can I avoid fees that way?
You can also sell directly to a cash buyer — although you won’t net quite as much as you would using a top agent. HomeLight’s Simple Sale platform gathers offers from our vetted network of buyers and compares them to what you would make on the open market with a top real estate agent. There’s no obligation to accept an offer and you’ll get the results in 48 hours or less.
Are Realtor® Fees Negotiable?
Sure, but do your research first. That 6% breaks down differently in every city across the U.S. because homes sell for different median rates across the country. In some cities the commission breaks out into just over $10 an hour, while in California the daily rate can reach upwards of $224. Cutting an agent’s commission reduces the great work they can do to market your property, and in some cities negotiating down could cut it out all together.
Why Realtor ® Fees Are Worth It
An agent charges a 6% Realtor® fee so that they can market your home and negotiate a killer deal. At the end of the day you should pick an agent because they are compatible with your personality, your schedule, and the stats on their profile show that they are going to do amazing work. As Elizabeth showed us, choosing an agent based on a low fee can backfire.
The real estate agent commission pays for the marketing that gets your home sold. Professional interior and aerial photography, ads in newspapers and online, email campaigns, and open house flyers all come out of pocket for your agent. Pay the Realtor® fee they need to ensure that you get the best real estate marketing experience possible.
Thought the real estate agent commission was all for the agent? In reality, a big portion of it goes right back to you.
Header Image Source: (Ján Jakub Naništa / Unsplash)