Have you ever really thought about how real estate agents get paid? Pretty much everyone understands that they work on commission, but do you know exactly whose pocket that commission comes from? If you don’t know, you’re not alone. In fact, according to a recent survey done by Clever Real Estate, almost half of the population has no idea who actually pays their agent’s commission. The good news is we’re here to clear up any confusion about how commission works in a real estate transaction, including who pays for it and how it gets disbursed.
How Commission Works
When a homeowner wants a real estate agent to help them sell their house, they’ll usually sign a listing agreement with the agent’s brokerage firm. This agreement stipulates details like the listing price and other information about the home as well as the percentage of the sales price that will be paid to the brokerage as a commission. That percentage is commonly in the neighborhood of 6%. That might seem like a lot, but that 6% actually gets divided among a few different parties. The listing brokerage offers a split of the commission—usually half, so 3% in this case—to the agent that finds a buyer for the home. Each agent will have a certain commission split with their respective brokerage as well. The amount the agent gets depends on their contract with their broker. Brand new agents may get as little as 40% or 50% of their agency’s share of the commission. More seasoned agents will have a higher commission split. Some might even get to keep 100% of their share and pay monthly fees to their brokerage. To be clear, the only person who can physically pay a real estate agent is his or her broker. Commission checks are made out to the brokerage firm, which then pays its agents their part of the commission.
Who Pays the Commission?
Since the listing agreement that spells out the agent’s commission is a contract between the seller and his or her broker, the seller is officially the one who is responsible for paying the commission. You might argue that since the commission comes out of the sales price of the home, the buyer is actually paying it. That may be true, but the money actually comes from the proceeds of the sale of the home. Plainly stated, it eats into the seller’s profit. That might not seem all that fair, but the seller will usually take the listing agent’s commission into consideration when they set the listing price for their home.
Can I Save Money By Not Using an Agent?
A report from Porch, a home-improvement networking site, said that a little over 35% of Millennials aren’t using real estate agents. When asked why, 60% of them said they thought it would help them save money. It may seem like we’re being biased when we say this, but it’s really not a good idea to buy or sell a home without the help of a licensed real estate agent. There are so many legalities and negotiation details involved that the general public doesn’t understand. If you try to do it on your own without an agent’s help, you might actually end up spending more in the long run. There’s really no reason a buyer shouldn’t enlist the help of an agent. If the seller is using one, they’re paying the commission no matter what, so the cost will already be built into the listing price. The only difference is they won’t have to share it with another brokerage firm.