How Real Estate Agents Commissions Work
Summary
Real estate commissions are 100% negotiable. The usual full service commission is 5-6%. A discount commission is 3-4.5%.
A Flat fee brokerage charges a set fee (a percentage of the sales price) instead of a commission. This is paid upfront whereas full service commissions are paid out of escrow at closing.
Commissions are typically split between the listing broker(seller’s side) and the selling broker (buyer’s side). The broker owns all commissions because he owns the listing. The broker pays the agent his cut of the commission (usually a 70-30 split between broker & agent).
When the listing broker puts a listing on the MLS and offers a cooperative offer of commission, it’s traditionally a 50-50 split between the listing side (3%) and the selling side (3%).
Only licensed agents and brokers can get paid in a transaction.
How are referral fees paid? A 30% referral fee (taken out of the listing side of the commission) goes to the referring broker.
Real estate commissions are worth it because clients are paying for the value of the service that a skilled agent delivers. When a skilled agent nets his client the most money, this more than covers his commission.
Full Transcript
In today’s video, I’m going to talk about how real estate agent commissions really work. And I’m going to talk about it in five simple steps. We’re going to talk about how commissions are determined, how they’re set, we’re going to talk about how they’re split, we’re going to talk about how they are paid, we’re going to talk about who can get paid. And the final question is, are they worth it?
So, stick around, it’s going to be an interesting video. And I’m sure I’m going to get a lot of interesting comments. So, whatever your opinions are on real estate commissions, make sure you put in the comments below. Whether you are a real estate agent, a new real estate agent, a seasoned real estate agent, a discount real estate agent, or a buyer or seller or somebody who’s been screwed by agents or somebody who’s had a fabulous agent, please put your comments in the spaces below.
How are commissions set?
All right. So number one, how are commissions determined? How are they set? Well, here is the law, real estate agent commissions are 100% negotiable. They are fully negotiable. There is no set commission anywhere. Now, a broker has the right to determine their, his or her commission, how much they’re willing to accept for their services. It’s their services, they can set their fee, but it’s not set by law, it is set by the individual broker.
Now, traditionally, a very common commission structure in residential real estate in North America, in the United States, has been 6%. Now, that goes all the way back to European common law. And that has been the case for hundreds of years. And so, in America today, you’ll see 6% is still the most common. In some areas where there’s higher price range property, sometimes you’ll see 5% being common as well. So, 5 to 6% is typically considered a full service commission. Although, there are agents that charge 4% and there are agents that charge 7 or 8 or 9 or even 10% depending on the circumstances.
So, there are those who would be considered full service commission, like a 5 or 6% commission would be considered full service. Now, then there is what they call a discount commission. Now, what’s a discount? Well, it’s anything that you consider to be less than the standard full service commission. So, a discount may be four and a half percent or 4% or 3%, that would be considered a discount commission. Now there are also flat fee brokerages out there. And a flat fee brokerage is one that charges a set fee instead of a commission.
Now, commissions are typically a percentage of the sales price. Okay. So, we’re talking about 5 or 6%. We’re talking about 5 to 6% of the final negotiated sales price between the buyer and the seller. Okay. A flat fee would be somebody who charges $997 or $497 or a thousand dollars or $2,000 or $5,000, it’s a set fee for listing and selling some property. So, the listings side, the listing agent’s commission may be a flat fee. And then the buyer’s agent commission… I’m going to talk about how commissions are split here in a second… it may be a percentage. So, it can be done any number of ways. And again, it’s all negotiable. Now, typically flat fee commissions are paid upfront, whereas real estate commissions that are full service commissions would be paid at the close of the transaction. So, that’s how commissions are set. Let’s just say, they’re fully negotiable.
How are commissions split?
Now, how are they split? So, on the whiteboard here, let’s just say you have a house for sale and the actual sales price is $500,000. Now, the list price does not matter when it comes to real estate commissions, typically they are paid on the final sales price. So let’s say that you have a house that sold for $500,000, it goes under contract for $500,000. That is a sales price. And let’s just say that the commission is 6%. So, we have a 6% commission on a $500,000 sale. So, you’re talking about a total commission, that would be your gross commission, would be 500,000 times 6% would be $30,000. That’d be a $30,000 commission. All right. I’m doing this all in my head so I just had to double check my math. It’ll be a $30,000 commission.
Now, typically commissions are split between two different sides, there’s two different parties here. So, you have, first is the listing broker. So, you have the listing broker and then you have the selling broker. Now, the selling broker is typically the broker or the agent that brings the buyer. Okay. And the listing broker would be the agent or the broker that has the listing. So, the listing side represents the seller. So, the listing, this typically represents the seller and the selling agent typically represents the buyer.
Now, you may hear, the selling agent may be called the buyer’s agent, the listing agent would be called the seller’s agent. Now, you have the broker. Okay. You have the broker and you have the agent. Now, sometimes the broker is the agent. And sometimes the agent is the one actually doing the selling and the broker is who sponsors them. So, I’ll get to that in a minute.
So then, you on the selling side, you also have the broker and the agent. Now, in almost every state, certainly in North America, in the United States, every state, a broker is kind of the head honcho in the real estate space. A broker’s license allows you to list and sell real estate and get paid commissions. An agent license, which may be called a salesperson’s license or sales license in most States, requires that you have a sponsoring broker. So, a broker typically has more experience and they have more training and so forth. Getting a broker’s license is more difficult and typically requires some experience before you can get a broker’s license compared to a real estate sales person’s license. An agent can be brand new and they have to have a sponsoring broker.
So, the vast majority of real estate transactions in America are done by agents who have brokers. Most brokers, if they’re broker-owners of companies may not be doing their own real estate transaction. Some do, some don’t, but I’m going to treat it as if… And especially because most of my audience here is. If you’re watching this, you’re probably not a seasoned broker, you’re probably a brand new agent or somebody thinking about getting into real estate and going like, “How does this whole thing work?”
Well, when you get into real estate, you get your real estate license, you’re going to get your license as a real estate agent, not as a broker, you will have a broker. So, all commissions, all real estate commissions belong and are owned by the broker because the listing is owned by the broker. So, even if you go out and you, as a real estate agent, get a listing, you get a seller to hire you to sell the house, the broker, actually, is the one they’re hiring with you as their sales person underneath that broker. So, the commission will be owed to the broker and then the broker will give you your cut of that, whether you’re on a split or however that structure is worked in your office. Okay.
So, typically commissions then, this is the gross commission, which is actually controlled by the… Sorry… it’s controlled by the listing broker. So, the broker’s the one who actually controls the commission. However, whenever they take the listing and they put it in the MLS, they offer a co-broke or what we typically call a cooperative offer of commission. It says if you bring the buyer to another broker agent, I will cooperate with you in the sale and I will split the commission with you.
Now, the split does not have to be 50-50, it is totally negotiable. However, traditionally, you see, a lot of times you’ll see a 50-50 split. So, in the case of a 50-50 split, what you are going to see is, you’re going to see 3% go to the listing side and you’re going to see 3% go to the selling side. So, in that case, that 3% is going to go there, 3% is going to be here. $15,000, it goes to the listing broker and $15,000 goes to the, that’d be 15,000, it goes to the selling broker. And then the broker pays their agent out of the commission. Okay?
So let’s just say that I’m an agent and you’re an agent here. And you are on a, we’ll say you’re on a 70-30 split. Okay. You’re on the 70-30. So, with the 70-30 split, you’re going to get 70% of the 15,000 and the broker is going to get 30%. So, that would be, to the broker, they would get a 30%, which is going to be $4,500. And then, you’re going to get the other $9,500, which would be your split. Okay. So, on the sale of a $500,000 house, if you’re on a 70-30 split as a real estate agent, you’re going to get $9,500 and your broker is going to get $4,500. And it would be the same over here if they’re on a split.
Now, let’s just say that this is a hundred percent, this person’s on a hundred percent split and they get all $15,000, but they pay their broker a set fee on every transaction or they just pay their broker a flat fee every month, regardless of how many homes they sell and so forth. So, however that’s worked out, the gross commission, the whole, the big part, belongs to the broker and then the broker splits it out to you as the agent depending on your split and your arrangement with them. That is how real estate agent commissions are split.
How are commissions paid?
Now, how are they paid? Typically, real estate commissions, this commission right here is typically going to be paid by the seller. The seller is typically the one that pays the commission. Now, there’s reasons for that. One, tradition. But the logical reason for why sellers typically pay it is because they’re the ones selling a house and typically they have the equity, which typically means they are going to get a big chunk of cash on the sale of their property.
Whereas a buyer is taking their available cash and they’re using it to purchase the property and so they already have a whole big set of closing expenses so it’s just typically easier for sellers to pay the commission. So, typically sellers pay the full commission at closing, out of the proceeds of the sale of their house. Out of the money they’re going to net out of the sale, they pay that commission and then that commission is then split among the different parties to this transaction, the brokers, agents, and so forth that are involved.
Now, also how they’re paid is they’re paid at closing. And they are paid by the title company or the escrow company or whoever the closing company is in your state. They are paid out of escrow at closing. So, all of the funds, the buyer brings all of their funds to closing, if they’re taking out a mortgage, taking out a loan, then the bank wires all that loan money to the escrow company, that closing company and that closing company is they’re going to disperse the funds. Now, typically they’re going to disperse the funds to the brokers.
By law, the broker owns the commission, they have to cut the check directly to the broker unless the broker submits to the closing company a commission disbursement agreement. Okay. Or a commission disbursement statement that basically says, we authorize you as the broker or I authorize you to cut a check directly to my agent for $9,500 and so forth. 4,500 comes to me, 9,500 it goes to the agent or whatever the terms are. If they’ve got fees or anything else involved, then that all is between the broker and the agent. The broker sends a CDA, a commission disbursement agreement or arrangement to the closing company. And then they’re going to split that out. So, that is how they are paid.
Who gets paid in a transaction?
Now, fourth question, who can get paid in a real estate transaction? Answer: Only licensed brokers and agents can get paid commissions in a real estate transaction in most States. Now, in some States, a licensed attorney can function as a real estate broker, so they can also get paid commissions. And where this question comes up a lot more often than not is when it comes to referral fees.
So, how are referrals fees paid? Well, a referral fee would be paid out of the commission. Okay. Who can be paid referral fees for referring a client to an agent? And the answer is, only someone who is licensed in a state to receive real estate commissions. Okay. Now, that would be a real estate agent, a real estate broker, licensed broker, a licensed agent, or an attorney. And most States attorneys with their attorney license are licensed to do real estate transactions and are allowed to be paid a commission. But a non-real estate licensed person cannot receive a commission or a referral fee for referring business to a real estate agent. Okay.
So, who can get paid? Brokers and agents and attorneys, as a general rule, are the ones that can get paid. Now, the final question. So, let me do the referral fee. So, how are referral fees done? So let’s just say that this seller was referred to this agent by another agent in another office or another company or another state or whatever it was. And let’s just say that they charge them, for simple numbers, we’ll say a 30% referral fee. Okay. So, there’s a 30% referral fee now. I think referral has two Ls. But a 30% referral fee is now going to be paid out of this $15,000. Out of the listing side of the commission, typically $15,000, 30% of that is going to go to that referral agent. So, at closing now, instead of just having this $15,000 split between the broker and the agent, 30% is going to come off the top of that and is going to be paid to the referring broker. All right.
So, how that works is you’ve got a total of a $15,000 commission check. 15,000 that is going to be split now three ways so it’s $15,000. So 30% of that, which is $4,500 is going to go directly to the referring broker. And so, what’s left now is $10,500. That $10,500 is now going to be split between the broker and the agent. In this case, if it’s on a 70-30 split, then 70% of this, which is approximately going to be seven, I’ll say, 7,350, I’m not sure if that’s exactly right, 7,350. And the rest 3,150, this is going to go to the agent. And the 73, no, I’m sorry. 7,350 goes to the agent and 3,150 goes to the broker. Okay. And that’s how that works.
So, the $4,500 goes to the referring agent. And by the way, even a referral, the broker owns the commission. So, this referral would be paid, $4,500 would be sent to the broker. And then the broker would pay to the agent in their company, whatever split their own or whatever their arrangement is for referrals in their company. So, that is the final straw on who can get paid, how they’re getting to get paid and all of that.
Are real estate commissions worth it?
So then the final and biggest question that I’m not going to spend a whole lot of time in on this video is are real estate commissions worth it?
Well, here is the truth. And now, if you’re watching this and you’re a homeowner, a seller or a buyer, I’m sure you have a whole lot of opinions on this, if you’re a real estate agent, you have an opinion on this. And here is the truth, here’s the reality. Real estate commissions are a fee paid for a service. And how good the real estate agent is, is determined by the value of the service that they deliver. So if you are a skilled real estate agent who is skilled at delivering great results for a client, then you have a whole lot more value than a real estate agent who has no clue what they’re doing and all they’re doing is they’re just filling out paperwork and opening up houses, and that’s all they’re doing and they do not know how to deliver a better result for their client.
And how do you deliver a better result for a client? Well, for example, if you’re a listing agent and you’re helping sell the house, your ability to position the house in the market, to make sure it’s priced right, to get much a buyers in there, to get the best offers, to negotiate those offers, to get the best terms and price and then even in the negotiation period and even in the contract period, to be able to protect your seller from losing equity, for example, to a lot of expensive repairs and all of that. Your ability to help a seller get the best terms and price and net the most money in their pocket at closing determines your true value for a seller. Your ability to advise them, but mostly is your ability to deliver them the best results because what most sellers want is I want the most money in my pocket.
So, your ability to get more money in their pocket actually increases your value. If you can help them sell a house for more money, better terms, even if your commission’s higher, a lot of times, the extra money that you can get them will more than cover your commission. So, the commission is actually an investment for the seller in hiring a skilled professional agent.
If you have a buyer and you’re an agent representing a buyer, same thing, is your ability as the agent to help that buyer get a great terms and price, find the right house, negotiate for them to get the best terms and price, advise them to help them make the right decisions along the process in terms of getting financing, in terms of repairs, negotiating, all that kind of stuff, your ability to get a better result for your client makes you have more value.
Commissions are a lot of money
Because the bottom line is, the reality is, 6% of $500,000, that’s a lot of money. Real estate commissions are a lot of money. Is it worth a lot of money for the service that real estate agents deliver? And my answer is it’s like buying a car. Not all cars cost the same because not all cars have the same value. And so, I look at it as a professional real estate agent who is highly skilled and knows how to deliver a better result is like a top of the line luxury car. I mean, it is a better car. It is better built, it lasts longer, it’s more reliable, has nicer features, interior, it’s a better experience, it’s faster, all of the things that make…
For example, let’s just say a Mercedes-Benz that costs a hundred thousand dollars. We’ll just take an example of a Mercedes-Benz a hundred thousand dollar car and compare that to a Hyundai, no offense to Hyundai or anything else, but just to a lower end car. This is not necessarily a bad car, but it’s only $40,000. Okay. Now, you take a used Hyundai and it may only be worth $20,000 compared to a brand new. Or you take a 10 year old car, it may only be worth $10,000. Well, a $10,000 car and a hundred thousand dollar car, the reason they’re priced differently is not because one car salesman is a better salesman because it’s a better car. They charge more because it’s a better car, it’s a better product. The same with real estate services.
So, not all real estate agents are created equal, they have different levels of skills, different levels of training. How good you are at delivering a better result for your clients is the biggest determinant in your value. And I think the biggest rip off, the biggest injustice in the real estate industry are agents that are unskilled, unethical, they’re incompetent, they don’t know what they’re doing and they go out there and they try to charge a full commission. And it’s like delivering a used Hyundai level of service and wanting to charge the same price as a brand new Mercedes. That is a rip off.
But are real estate agents too expensive? It depends. If you’re delivering a used car level of service and charge your new car, luxury car price, yes, real estate agents are a rip off. But if you have a skilled agent that knows how to deliver great results, then the value that they deliver will more than cover the cost of their service. It’s just like hiring an attorney, it’s just like hiring an accountant, it’s just like hiring a doctor.
And when you hire somebody that’s good, that can deliver a great service for you and deliver a great result… It’s like hiring a hairstylist. You can go get a $12 haircut and you can go get a $120 haircut. What’s the difference? The scissors? No, it is their ability to do a good job and deliver a great result. Okay.
So, real estate agent commissions work and their worth is based on the worth of the agent. So, it’s not just a matter of all real estate agents are the same. And that’s one of the misconceptions the public has is that they’re like all real estate agents are the same so I just want the cheapest one. Well, that’s like going to a car dealership and saying, all cars are the same, I’m just going to look for the cheapest one. They’re not all the same.
If you go into any real estate office, that’s a large office, let’s just say, an office that has a hundred or 200 agents, you will have the top 2% of agents in that company will outsell the bottom 50%. Why? Because they’re better. Okay. Now, that doesn’t necessarily mean they’re more ethical, it doesn’t mean… But just in general, you’ll have agents that have not sold a single house, you’ll have agents that have sold one or two houses a year, and you’ll have agents that are selling one or two homes a week. They’re going to be more skilled, more experienced and depending on their level of expertise, their value can be dramatically worth. It’s not just a matter of how many homes they’ve sold, it’s a matter of how good are you? If you’re a real estate agent, how good are you delivering results? That’s how you earn your commission. That’s how you develop your worth.
And when you’re great at it, what’s going to happen is your clients are going to be happy, no matter how much you cost them. They’re going to be happy and they’re going to talk about it. They’re going to talk about you to their friends, they’re going to give you video testimonials, they’re going to give you reviews. And your value is going to show up in the amount of business that you get and the amount of satisfied customers that you receive.
I could go on and on, on this, but I hope this has been helpful for you. If it has, make sure you give the video a thumbs up, subscribe here if you haven’t. And I want to hear your comments, what are your perspectives? I know some of you, there’s going to be, I’m sure, some nasty comments are going to come up on this one because yeah, anytime you start talking about that moolah people get on edge. But I hope you enjoy it. And I look forward to reading your comments. I’ll see you on the next video.