What You’ll Learn
How commission works in real estate transactions for buyers and sellers
What the average price of commission is and who ends up shouldering that cost
Why Better Real Estate agents are paid a salary instead of commission
If you’re buying or selling a home, you’ll probably work with a local real estate agent to coordinate the transaction. Agents provide valuable expertise during the homebuying process and can be a tremendous asset to both parties. Licensed real estate agents, brokers, and realtors are typically paid a real estate commission for their work, and that fee is based on a percentage of the property’s selling price. This cost (which can be a hefty sum) is paid by the seller, but it could also be bad news for buyers. Here’s why you shouldn’t accept commission fees as the cost of doing business.
What is commission and how does real estate agent commission work?
Commission is a type of earning structure, and it’s how most brokers in the real estate industry pay their agents. Unlike a salary, which guarantees employees a set amount of income regardless of hours worked or sales made, commission is dependent on performance and can therefore vary based on activity. In real estate transactions, commission payments are made directly to real estate brokers for services rendered in the sale of a property and then distributed to agents.
Here’s how the process goes when selling a home—sellers will interview agents until they find the one they want to work with and sign a listing agreement to seal the deal. That agreement commits the seller to their agent and outlines the commission fee they’ll pay once the home is sold. From there, the seller’s agent lists the home in the Multiple Listing Service (MLS) national database and coordinates with other agents to find a buyer in the area. For buyers, the agent’s role is somewhat similar with a few key differences—buyers will connect with an agent in their local area, share their search criteria, and rely on that agent to find relevant properties, book home tours, and ultimately coordinate their offer with the seller’s agent.
Throughout the transaction, both agents represent the interests of their respective clients. (In some instances, one agent may represent both the buyer and seller—known as dual agency—but the laws around this vary state by state.) Commissions are calculated as a percentage of a home’s purchase price, and that amount is withdrawn from the proceeds of the sale at closing and split between both agents when everything is finalized.
How much does real estate commission cost?
There’s a little wiggle room to negotiate the final number, but the typical cost of real estate agent commission ranges between 5%-6% of the home’s sale price. Here’s how that shakes out for homes in different price brackets:
|Home sale price||6% real estate commission|
This payment is then divided between the seller’s agent and buyer’s agent. For example, in the sale of a $500,000 home, 2.5%-3% of the sale price would go to the seller’s agent (known as listing agent commission) and 2.5%-3% would go to the buyer’s agent (buyer’s agent commission.) Better Real Estate Agents take 0% commission from real estate transactions.*
How commission impacts a transaction
As you can see, commission costs can represent a significant amount of money. This number goes up as the sale price of the home increases, even though brokerage costs largely stay the same for each home the brokerage takes on. In other words, seller’s may charge more money even though it’s not more expensive for an agent to sell a home with a higher listing price. What’s worse, this price spike can impact all parties involved in a real estate transaction to varying degrees.
The seller is the one responsible for paying commission costs—and again, this fee covers the seller’s agent (also known as the listing agent) and the buyer’s agent. You might think that as a buyer, you’re getting off scot-free. But because the seller knows they have to cover that cost, they’ll typically bake that additional fee into the listing price of the home. By upping the price tag of the house to recoup their losses, they actually pass on the cost to the buyer.
Although the buyer isn’t responsible for agent commission directly, they do pay to purchase the home which is priced to include the cost of commission. This means the buyer is ultimately paying more for the home and the seller is actually netting less than the final sale price of their property.
Look at it this way: if a home is priced at $500,000, the seller receives $470,000 for the sale of the home ($500,000 minus the 6% commission fee) and the buyer pays the full $500,000 to purchase the home. If the seller didn’t have to pay that 6% commission fee, they might list their home for $470,000 since they wouldn’t have to make up for lost cash. In this scenario, the seller would still make the same amount of money, but the buyer will pay $30,000 less for the house.
How do real estate agents get paid at Better Real Estate?
Most real estate agents make commissions by helping clients buy and sell homes, which means the more transactions that go through the more money they make. Agent commission costs have stayed about the same for a century, even though modern technology lets buyers and sellers do a lot of the work on their own. Plus, rather than being motivated by the best interests of the people they represent, traditional real estate agent commission structure incentivizes agents to pursue the paycheck at all costs.
There are a lot of potential pitfalls to this system across the board, which is why things are structured differently at Better Real Estate. Local Better Real Estate Agents are paid a competitive base salary that allows them to focus 100% of their attention on helping buyers and sellers successfully navigate transactions. Because our agents aren’t chasing their next client and paycheck, they can be true advocates for their customers and help them stand out in competitive markets. This payment structure also allows sellers to take home more money when they sell their home, and protects buyers from inflated listing prices.
Interested in working with our team to buy or sell a home? Better Real Estate’s 0% commission structure is currently available in 7 states and counting: AZ, CO, FL, GA, NC, TX, WA, and NJ*.
*In certain states, a 1.5% fee (compared to 3% standard industry fee) is charged to list homes with Better Real Estate but this cost is not an agent commission. See Better Real Estate listing discount terms and conditions.