Homes are among the priciest items most of us ever buy. A significant slice of the purchase goes into paying the real estate professionals. Clients should know what they’re paying.
Listing agents throughout the United States charge sellers 5-6% of the home’s sale price. In cold, hard, dollar terms: a commission of 5% on a $200,000 house is $10,000. Even after seller concessions, that original figure is in your agreement and it is binding.
Buyers and sellers alike should know how the fees are structured, and that these fees are negotiable in the initial agreement stage. While many buyers assume the seller covers agents’ fees, at the end of the day, the buyer pays for the asset. In effect, the buyer pays all fees, as the seller prices these costs into the home sale.
Where the Money Goes
The listing agent usually splits the commission down the middle with the buyer’s broker. Then, the commission might be divided again, between agents and their brokerage firms. Firms rely on revenue from fees to provide office space, equipment, insurance and continuing professional education to their affiliated agents.
After the splitting is done, an agent may end up with somewhere between 1.5% and 3%, depending on the policies of the brokerage firm.
There are still more questions to ask. Some brokers charge additional fees related to deed processing, over and above commissions. These added costs can add up — sometimes to hundreds of dollars. And some of the charges might be for redundant services — things already included in the standard procedures of the buyer’s title company.
This is another reason why sellers and buyers should ask their agents for breakdowns of costs. It’s important to know where the money is going. This knowledge helps clients negotiate. If clients can negotiate lower broker costs, the price of the overall transaction can be reduced without the seller losing any money.
The Agent’s Perspective
When a state’s real estate commission licenses brokers, it thereby deems them capable of doing business in a way that safeguards the public interest. Reputable real estate agents take their duties seriously. They help the parties come to fair, well-informed agreements.
And they work hard for their clients. Many agents put evening and weekend hours into the success of each transaction, and do not hesitate to advance out-of-pocket costs.
For the seller, a good real estate agent is a marketing wizard, one who actively uses the most effective available sales tools in addition to the listing services. For a buyer, the agent is an informed local guide, an adviser and a negotiator.
☛ Fiduciary duties make your agent into your advocate. Read about the real estate agent’s fiduciary duties here.
Agents carefully guide home shoppers through the appraisals, inspections, and numerous back-and-forth conversations. Sometimes, all that work doesn’t lead to a deal. If there’s no commission without a closing, they shoulder considerable risk.
Agents do have some protection through legal agreements with clients, but these contracts have time limits. This means buyers who go through with their purchases are the ones paying realtors for the time and work they spend on all their clients. Some contracts compel clients to pay broker fees even if they don’t buy in certain situations. For an example maybe the parties didn’t close on a deal, yet they do come to an agreement later, after the agent’s contract expires.
In short, agents who take their duties seriously are assets to their clients. And vice versa. Buyers should be conscious of the value their purchase creates for their agents.
Online Brokers Push for Commission Transparency
The real estate industry has been slow to share fee information with its clients, and many people know little about their choices in levels of service, ranging from the full-service to the discount tiers. But the internet is making a lot of this information easier to find, and the industry is changing.
The Pacific Northwest Multiple Listing Service was an early adopter of commission split details for buyers. In 2019, listings on Seattle-based Redfin’s website started displaying the buyer agents’ cuts. Seattle’s agent commissions slightly declined once fees became public, Redfin says. Then, the burning question was whether other Multiple Listing Services would also allow publication. Notably, the Department of Justice backed fee publication, while a major real estate association opposed the practice.
Redfin says buyers’ agents net, on average, 2.7%. The company refunds a slice of the agent’s fee to the buyer at closing. Pushing for rebates, as Redfin has done, encourages price competition. Also among the wave of brokers pressing for fee transparency is Houwzer. The company pays its own agents. It charges $5,000 for its services, plus 2.5% to the buyer’s agent at closing.
These companies believe that commission-based fees can sway agents to prioritize certain houses and areas. They say invisible business incentives shouldn’t be limiting the customer’s options.
Commissions Versus Flat Fees
Flat fees and rebates may be the way of the future. First, this system is transparent and easy to anticipate. Home buyers can get a better deal with the arrangement, depending on what level of service comes with it. A flat fee is not antithetical to full service. An agent can handle everything for a client from renovation advice to staging to closing, and do well with flat fees if they work with a high-volume company.
Agents’ opinions will vary, with some seeing value in the flat-fee structure. Remember, agents with traditional brokerages depend on a few serious buyers and get nothing from the rest. The flat fee could fix that problem, relieving both the agent and the serious buyer of an unfair burden. But today, commission-based transactions are still the norm, and rebates are only gradually being accepted by states.
In short, a client should understand the fee structure, the level of service, and where the money will go. This is the case no matter if the client selects a company with a flat fee and rebate, a traditional 5-6% commission split structure, or a discounted commission framework.
Knowledge Is Power
The more you know, the better negotiator you can be. If you’re selling your home, it’s wise to check the fees as you choose your real estate company. Find out if the agents are able and willing to negotiate. You might ask what actions on your end could make the agent’s job easier in return for a half percentage off, for example. Or you might choose the same agent to buy your next home — negotiating a concession can be easy in situations like this.
The overarching point? No fee system is written in stone. The fee you pay is the fee you and your real estate agent put into that listing agreement you both sign!
If you’re a buyer, understand how a given agent’s fee system could potentially influence the areas and homes you’ll see. Discussing this with your agent is entirely fair and reasonable. Know that clients have the right to choose third-party services such as mortgage specialists, title insurers, and settlement agents. Clients do not need to go along with every recommendation made by a brokerage firm or real estate agent — unless that’s what they want to do.
We hope this article inspires and informs. It is, of course, for our readers’ general information only, and not financial advice. If you have concerns about financial strategies that suit your particular situation, or need guidance with listing or purchase agreements, consult with a financial adviser or a local real estate lawyer who has experience in the type of transaction you’re doing.
Best wishes for a smooth and fair transaction!
Houwzer: Reports Expose How the Brokerage Industry Is Ripping Off Home Sellers (Jan. 2020).
Redfin: How Real Estate Commission Works.