When you buy a house, you may not know exactly how your real estate agent gets paid. Are you supposed to pay them outside of the sale? The answer to that is easy: No. So, how exactly does a real estate agent get paid? And how much commission do real estate agents make from a home sale?
Let’s start with the first question:
How does a real estate agent get paid?
Unlike a real estate attorney or other industry professionals, real estate agents don’t get paid per hour or for how much work they do for you. Instead, real estate agents are paid a pre-determined amount of money based on the sale price of the property that is involved in the transaction. Real estate is a commissions based industry.
When a seller signs an agreement with a listing agent to enlist their professional help in selling their property, they agree to a certain percentage of the sale price that will become commission. The commission is traditionally split between the buyer’s agent and seller’s agent. That is, the real estate agent listing the property and the real estate agent representing the buyer. Even in a listing that is for sale by owner – that is, the home owner (and also the home seller) is representing themselves in the listing – a percentage of the sale price may be offered to any real estate agent or broker who brings a buyer to the property.
So… who pays the agent in a real estate transaction?
It’s a lot more clear in a rental situation, where the rental listing says, “Fee is a half month’s rent” and the renter is responsible for that fee. When you’re talking about a home purchase, the buyer doesn’t pay the agent.
Once more for those who weren’t paying attention… the buyer DOES NOT pay the agent. The commission percentage is already negotiated into the listing contract, and the listing agent offers out (or “shares”) their commission with whatever agent brings a buyer who purchases the property. Agents share this information with each other via the MLS, which has a field specifically for this information. (The commission splits are not shared on any listing site and are behind the MLS login.)
What’s a normal real estate agent commission?
While there’s no set standard of real estate commission rates for an agent and broker, in MA and CA you typically see 4-6% split between the listing agent and buyer’s agent. Again, there’s no STANDARD for this, but agents over the years (and years. and years) have just kind of stuck with the number of 4-6%. This varies by location, property type, and market conditions.
Some real estate companies have come in over the past 10 years and offered a discounted listing fee, but that could also require that you buy a house with them (at the typical 2.5-3% fee). Regardless, you should know that there isn’t a standard commission by law.
Here’s an example of what a real estate agent commission could look like:
123 Main Street is on the market for $600,000. The seller has agreed (in their listing contract) to pay 5% of the selling price to their agent, to be split with the buyer’s agent.
5% of $600,000 = $30,000 total commissions agreed upon
The buyer would get $570,000 ($600,000 – $30,000)
123 Main Street actually sells for $650,000 (remember, we’re in a hot market)
5% of $650,000 = $32,500 in total commissions paid to the real estate agents
The buyer keeps $617,500 ($650,000 – $32,500)
$32,500 is split between the seller’s agent and buyer’s agent, so each agent walks away with $16,250 (and if the listing agent also brings in the buyer, that agent is eligible for “dual agency” – or double commission, getting all of the commission set aside for the buying and selling agents)
That doesn’t mean on every sale of $650,000, a real estate agent takes home $16,250. The real estate agent typically will have to pay fees to their brokerage, whatever marketing costs they spent on the listing or to acquire the buyer who bought the house, etc.[Note: If your buyer’s agent is a Torii real estate agent, you’ll get a closing costs rebate which typically totals around 1% of the purchase price. That means instead of taking home that full 2.5% of the purchase price, 1% goes back to the buyer. CHA-CHING!]
How does my agent get paid if we don’t buy the house?
In short, they don’t. If the property doesn’t close, the agents don’t get paid.
Have more questions? Check out our Homebuying 101 section for more real estate FAQs.