Real estate agent commissions can get a little tricky. Typically, there is quite a bit of mystery around who actually pays and how much agents make. We took a dive into this topic and discuss how real estate commissions work, who pays, and typically how much do agents earn.
Typically, the seller pays the commissions. This is because buyer and seller agent fees are included in the purchase price of the property. Suppose, for instance, that a buyer and seller agreed on the price of the home at $500,000. In this scenario, the buyer and seller agent commission is set at 5%: 2.5% for each agent. The total commission will be $25,000 with $12,500 going to each agent.
Those commissions are deducted from the price of the home, not added to the sale price. So, while the buyer would pay $500,000, the seller would only receive $475,000 from the sale before closing costs.
Who sets the commission and why is it important to set the right commission?
In the simplest terms, the seller and sellers agent set both the buyer and seller commission. Unfortunately, it’s the case that real estate agents, who are supposed to be working in their clients’ best interest, have an incentive to push the highest possible commission. This is often justified because higher the commission, the more a buyer agent will clients into purchasing the property. This puts sellers in a dilemma and forces the choice between savings and additional prospective buyers.
Here’s why: A typical commission offered a buyer’s agent is 2.5% or 3%. If a seller were to offer a commission under 2.5%, some agents would steer their clients towards other homes offering a higher commission. The National Association of Realtors says sellers offering a commission under 2.5% get 14% fewer showings than sellers offering 2.5% or more.
On the other hand, if a seller offers a higher commission, it is reasonable to conclude buyer agents will nudge their buyers to see the house — even if it is not their first choice, simply because of the higher commission incentive.
Are real estate agent commissions worth it?
The greatest dispute about real estate commissions is whether commissions are excessively high or if service justifies the fee.
A listing agent’s fee may be justified by the amount of work that goes into representing the seller. This includes listing documentation, marketing, photos, home staging, open houses, negotiations, legal disclosures, agent inquiries, contract disputes, and handling all the details of selling and closing a transaction.
While there are a lot of homes that sell within a few days, there are many listings that take weeks. Having a house on the market for an extended period of time translates into additional advertising costs, signage and marketing.
Conversely, the buyer’s agent works exclusively for the home buyer. The commission paid to the buyer’s agent covers costs such as their lead generation, time spent finding a home, and representing the buyer during the transaction.
Real estate commission alternatives and initiatives
As we have discussed, seller typically pays the buyer’s agent commission based on an agreed percentage in the listing contract, however, change may be on the horizon. Some ideas floating around are to make buyer agent commissions more transparent and to have buyers pay their agent directly.
We are already seeing more options for home sellers. Instead of the typical commission-based agents, there are now brokerages offering flat fee full representation services. Other alternatives include agencies that provide a menu of services options based on how involved the seller wants to be.
These services come with varying levels of representation such as MLS entry only, remote full service, and hybrids models. Each model allows sellers to do the parts of the transaction they can do, while allowing experienced agents to handle the more critical elements.
It is also becoming more common practice to see sellers negotiating with their agent on both buyer and seller commission.
Finally, there is the For Sale by Owner option. While this is become less popular over the years it still accounts for around 7% of all real estate transaction. For those who do not want to pay any commission this is the option for you. To sell as a For Sale By Owner (FSBO) the seller will forgo any seller representation. However, our suggestion is to have a flat fee agent or lawyer handle the legal paperwork, and manage negotiations, transaction details, and contract disputes for a low set fee.
If you live in California and you are wondering what the typical agent commission is we have a quick article, https://www.everhome.io/what-is-the-typical-real-estate-agent-commission-in-ca/
Everhome’s Listed With Owner program offers full legal representation to FSBO sellers for a low set fee. To learn more, call (805) 379-3300 for a free consultation.