Blog > What’s the Scoop on Commission? An Honest Look at How Real Estate Agents Get Paid

What’s the Scoop on Commission? An Honest Look at How Real Estate Agents Get Paid

by www-localnests-com

Have you ever wondered how commissions on a real estate transaction work?

Or maybe you’ve looked at the commission amount on your home sale and thought, “Wow, that seems high…is my agent really worth that much, or are they just trying to get rich off of my sale??”

Real estate commissions can be a point of confusion and frustration when you’re buying or selling a home. To help make things a little clearer, here’s an inside scoop on how commissions work and how real estate agents get paid from your home sale.

When and How Real Estate Agents Get Paid

For the most part, real estate agents are not paid a base salary. Instead, they are paid through a commission that’s based on a percentage of each home sale. (Occasionally, a commission can be a flat fee instead of a percentage, but that’s rare.)

Even though real estate agents are required to be part of a brokerage, technically they are self-employed. This means they pay the full amount of federal and state taxes on their income themselves, as well as insurance, brokerage dues, MLS fees, advertising, continuing education, and other business expenses.

So while it may seem like an agent makes a lot of money on each home sale, in the end they really don’t take home as much as you’d think.

According to Indeed, the average annual income for real estate agents ranges from $97,315 to $127,684, depending on how many years of experience they have. But the median annual salary in 2021 was much lower, at around $48,770 (U.S. Bureau of Labor Statistics).

Of course, many agents make much more than that, and some make less. In the end it all depends on how many homes they sell and what price points those homes sell for.

What Happens If a Sale Doesn’t Close?

In a real estate transaction, the commission is paid out at closing, so in most cases, if a sale doesn’t close, the agent doesn’t get paid. This is true even if they’ve put dozens of hours of work into trying to make the sale happen. There are some exceptions to this rule: in certain situations a seller can be liable for the broker’s commission even if the sale doesn’t close. But this is rare, and it should be disclosed in the listing agreement.

Still, a good real estate agent will work hard to help their clients buy and sell homes, putting in long hours to show homes, market listings, and make sure each transaction goes as smoothly as possible. It’s a gamble we willingly take because we love what we do.

What Is a Typical Commission Percentage?

When a seller lists their property for sale, they sign a listing agreement with their real estate agent and broker. This contract includes all the terms of the listing, including the commission percentage that will be paid out at closing, as well as the split between the buyer’s side and seller’s side.

While commissions always vary (and are negotiable), they typically range from 5-6% of the final sale price. Depending on the agent and current market conditions, that percentage may be higher or lower.

Commission Splits Between Agents and Brokers

How much an agent makes in a year depends on the number of transactions they complete and the amount of commissions they bring in. But it also depends on the split they have agreed to with their sponsoring broker.

Most of the time, the commission on a home sale is split four ways:

Buyer’s broker
Buyer’s agent
Seller’s broker
Seller’s agent

When a home sale closes, commissions are typically paid out by the title company to the brokers on each side of the transaction. From there, each commission is split between the broker and their representing agent. The split percentage varies widely. Many do a 50/50 split, but it depends on the agreement each agent has with their sponsoring broker.

There are exceptions to this rule. For example:

If a single agent represents both the seller and the buyer, they split the commission only with their sponsoring broker.
If a real estate broker sells a home, there is no additional split with an agent.
If a broker represents both the buyer and seller, they keep the full commission—there is no split.

Who Pays the Commission on a Home Sale?

Unless the buyer and seller agree otherwise in the purchase agreement, the seller typically pays the commission for both the buyer’s and seller’s sides. However, most sellers realize this up front, and the listing price of their home reflects the commission costs. So, in a way, the buyer ends up paying the commission fees indirectly.

This is, of course, negotiable, and there are certainly instances where the commission cost is split between the buyer and seller. But generally speaking, the commission is the seller’s responsibility.

There are other pay models within the real estate industry, but for the most part, this is how real estate agents get paid. I hope this makes a confusing issue a little clearer for you, so you can better understand how commission works in a real estate transaction.