The American real estate industry is often seen as a mixed-bag. On one end of the spectrum, you have Donald Trump, The Mob, and slumlords managing rat-infested properties. On the other? old-school investors, architectural visionaries, and affordable housing non-profits.
Where do real estate agents fit in? In reality, you have the same extremes in the brokerage industry. There are genuinely good people interested in helping those find their forever home. Then there are swindlers overcharging honest, hard-working people for mediocre service. In my experience as an agent, I have met both types, and everyone in-between.
How Do Real Estate Agents Get Paid?
In most real estate transactions, there is a seller’s agent (or listing agent) and a buyer’s agent (or sale agent). As you would expect, the seller’s agent represents the seller of real estate and the buyer’s agent the buyer.
Most real estate agents work on commission. Generally, a seller’s agent signs a listing contract with the seller. The contract may say something like this: If the seller accepts an offer on their home when it is listed on the Multiple Listing Service (MLS), the seller agrees to pay the listing agent 6% of the gross sale price at closing. The listing agent will then give a certain percentage (usually half, so 3%) to the buyer’s agent.
So, if a home sells for $300,000 with a 6% commission due to the seller’s agent at closing, then the seller’s agent is paid $18,000 when the deed is transferred to the buyers. The seller’s agent will then give the buyer’s agent half of the proceeds, so $9,000. Therefore, each agent walks away with $9,000.
However, most agents are affiliated with a brokerage, such as Coldwell Banker, Re/Max, etc. In many cases, the brokerage firm will take their cut first, and then distribute the remaining money to the agent. Therefore, if the above listing agent is on a 60-40 split (meaning the listing agent gets 60% of their commission), they would walk away with $5,400.
Of course, if one of the agents (or both) works for themselves, they will keep the entire $9,000. Therefore, it is possible (and likely) that in each transaction both the buyer’s and seller’s agent are walking away with different payouts.
However, commission splits between brokerages and agents are also negotiable! So, things can get complicated quickly. But, that will not concern you as a buyer or seller of real estate.
A Note for Real Estate Buyers
Since a seller’s agent generally advertises a payout to a buyer’s agent for bringing a buyer, then there is usually no extra cost for buyers wishing to hire a buyer’s agent. In other words, there may not be a financial advantage in representing yourself!
If you are a buyer, ask your agent if they charge any additional fees, before hiring them. For example, some low-cost brokerages only offer a small payout to a buyer’s agent when they list a property. Hence, a buyer’s agent may expect the buyers to pay additional fees if you do end up buying a home that is listed with a discount brokerage.
Other Ways to Pay an Agent?
Even though many agents work commission, some agents, both for buyers and sellers, work hourly. Others work for a flat fee.
Then there are other types of listing contracts, such as a net listing, where a listing agent gets all proceeds above a pre-set sale price, which is illegal in many states.
Some agents work as a facilitator, and there are such things as designated agency and dual agency. You can read more about these agreement in the article How to Find a Real Estate Agent – The Ultimate Guide.
Why Do I Have to Pay My Real Estate Agent 6%?
The good news is that all real estate contracts are negotiable. I Repeat, they are NEGOTIABLE. Another important point to understand is that there is no set wage for real estate agents. Federal anti-trust laws prohibits it.
For example, if an agent says, the industry, or local, standard commission is 6%, 5% or whatever, they are wrong. Flat out wrong.
However, each firm can have its own set commission. So, a Coldwell banker agent is legally allowed to charge their own fee, and so is Re/Max, Sotheby’s, eXp, etc. Plus, many experienced agents will not negotiate on commission, and many brokerages prohibit their agents from doing so.
The important concept to grasp is that commission is negotiable. If you do wish to bargain on commission, you need to do so before signing a contract.
You will put yourself in a better position if you can save your agent time or money. For example, if you are a seller of real estate and the agent you want to use lives next door, you may ask for a discount as your home may be an easy-to-service listing.
What About Discount Brokers?
I touched on this when I wrote about For Sale By Owner (FSBO), but using the services of a discount brokerage may not be the best idea.
In fact, a study conducted by the Brookings Institute found when consumers listed their homes with agents who charged a low commission rate, it took longer for their homes to sell.
Conclusion – How Much to Pay a Real Estate Agent
You may have read this article feeling more informed, but less confident in what to do. That’s ok! You may feel that real estate agents charge too much, but that there is no simple way to save money when hiring one.
If you want to better understand how much money real estate agents make, play around with this free real estate agent salary calculator I made. Hint: Most agents are not swimming in money.
Ultimately, which direction you go in is up to you. In most markets, you can find cheaper agents. If you are a seller, you can FSBO your home. If you are a buyer, you can buy with a company like Redfin and get a refund check after closing. The choice is yours.
My best advice is to choose the agent that you feel will provide you the most amount of service. Think about it this way: An agent that wants to charge you an extra 1% gross sales price, may save you 3%, 5%, 8%, etc. during negotiation.
Above all, buying real estate is a long process with many steps. Don’t get hung up on one while ignoring the rest.