If you’re buying or selling a home, you may wonder about additional costs beyond the price. The question many people ask is, “how do realtors get paid?” If you’re a homebuyer, you can relax, because buyers usually don’t pay realtor fees. It’s generally the responsibility of home sellers to pay realtor fees. So if you’re selling your home, keep reading to understand the process better.
Home sales: how do realtors get paid?
To understand how real estate agents are paid, it helps to know there are two types of realtors involved in a home sale. The two parties are the buyer’s agent and the seller’s agent.
Real estate agents are independent contractors who work for brokers. The law prohibits agents from receiving commissions directly from consumers. Real estate commissions are first paid to the listing agent, also called the seller’s agent. The listing agent’s broker then pays the buyer’s agent brokerage.
When a person lists their home for sale, they will typically use a seller’s agent,” says Toni Giddley, a real estate professional for over 15 years. “Realtor fees appear in the listing agreement. In most states, 3% of the money goes to the seller’s agent and 3% to the buyer’s agent.”
This percentage is part of the listing price of the home, but it’s also based on the purchase price, explains Giddley. “For example, if a home lists for $220,000, but sells for $200,000, the total commissions paid will be $12,000 at 6%. The seller’s agent receives $6,000. And the buyer’s agent fee is also $6,000.”
When are realtor commissions paid?
To answer the question, “how do realtors get paid,” it’s important to understand when they get paid first. Real estate agents get paid only after the home sale closing. “Commission payments are a line item on the closing statement. The brokerage disburses these fees once the sale records with the Registry of Deeds,” says Kate Ziegler, a Realtor with Arborview Realty in Boston.
“Sellers pay a percentage of the sale price as a commission split between the agents representing the buyer and the seller/listing agent,” says Ziegler. “No up-front payments or hourly fees exist. Agents receive payment when the deal is done.”
Why sellers pay commission costs
According to Ziegler, the intention of not having a buyers agent fee is to reduce the financial burden of buyers.
“Sellers pay all commissions in a residential sale. That way, buyers aren’t adding agent fees to their list of closing costs,” says Ziegler. “With down payments and closing costs, buyers already put up a large investment to buy. Sellers, in theory, expect some proceeds from the sale. And they can use those proceeds to pay commissions at closing.”
However, it’s essential to keep in mind that commissions come from a percentage of the home sale price. That means both the listing agent and their seller work for the best possible price for the property.
“If you’re the buyer and have a tight budget, think about working with your agent to get creative,” suggests Ziegler. “It’s possible to save money other ways, such as with a quicker closing timeline.”
Are realtor commissions negotiable?
Most people think the percentage of commissions is non-negotiable.
“It’s possible to negotiate how much commission you will pay to the seller and the buyer’s agent fee,” says Giddley. “However, keep in mind the seller’s agent does have upfront costs to ensure the home is sold. These include professional photos, staging professionals, flyers, and marketing costs.”
Boyd Rudy, owner and associate broker with Dwellings by Rudy & Hall, agrees.
“The most common misconception the public has about realtors is that they keep all of the commission,” says Rudy. “A good agent on the seller side invests around one-third of the commission into marketing the home. Additionally, as independent contractors, agents must invest in retirement and health insurance, as well as Errors and Omissions insurance.”
The real estate sales commission process
The commission process includes several basic steps:
- The home seller hires a real estate broker to market a house for sale.
- The house goes up for sale.
- The house sells.
- The seller pays the listing brokerage.
- The listing brokerage pays the listing agent.
- The listing agent pays the buyer’s brokerage.
- The buyer’s brokerage pays the buyer’s agent.
The following is a possible monetary breakdown from a sale from Kristin Geenty. She is president of The Geenty Group Commercial Realtors in Branford, Conn.
“If the commission paid by the seller is $12,000, it is split by the seller’s brokerage and the buyer’s brokerage. In this example, that’s $6,000 each,” she says. “The commission then goes to the brokerage. The money is split by the broker and the agent to cover the costs of doing business.
“The brokerage negotiates the percentage of the split when hiring agents. That means there is no easy rule of thumb as to how much it will be,” continues Geenty. “A top producer might keep 90% of a commission. A new agent might only earn 60%. Many variables exist within broker/agent relationships.”
How broker fees affect sellers and buyers
What a broker is paid affects the seller, according to Tyler Forte, CEO of the tech-focused real estate brokerage Felix Homes in Nashville. “The fee comes out of their hard-earned equity,” he says.
Forte gives an example.
“Let’s say you’re selling a $500,000 home. You decide to list it with a traditional agent charging a 6% commission, with 3% going to the listing agent and 3% going to the buyer’s agent. But when you receive an offer and the deal closes, you will pay $30,000 in realtor commissions. And the money is paid out of the equity of your home. The realtor fee makes an even greater impact if you don’t own 100% equity in your home.”
How to save money on realtor commissions
You now know the answer to the question, “how do realtors get paid?” But, how can you use that newfound knowledge to your advantage when selling a home?
Go with a non-traditional brokerage. Given the expenses incurred when listing with a traditional broker, it can save you a great deal of money to consider non-traditional listing brokers. Non-traditional brokerages can charge commissions as low as 1.5% to sell a home.
Negotiate the price. As mentioned above, real estate agent fees are negotiable. When shopping around for listing agents, let them know you’re comparing multiple agents and ask for a lower commission. You may be surprised by how many agents are open to negotiating. You certainly don’t lose anything by trying.
Julie Bawden-Davis is a widely published journalist specializing in personal finance and small business. She has written 10 books and more than 2,500 articles for a wide variety of national and international publications, including Parade.com, where she has a weekly column. In addition to contributing to SuperMoney, her work has appeared in publications such as American Express OPEN Forum, The Hartford and Forbes.