Real estate is undoubtedly a sizable investment.
We know you have a lot of questions about how real estate agents get paid, and how their commission works, and what your commission pays for.
In this article, we hope to answer all your questions on how and when real estate agents get paid..
Table of Contents:
- How do Realtors get paid?
- What is a Real Estate Agent’s Commission?
- Why do Realtors get 6%?
- Can I negotiate my agent’s commission rate?
- When do Real Estate Agents get paid their commission?
- Do Real Estate Agents get paid at closing?
- What do closing costs include?
- Who pays closing costs?
- Do Realtors get paid for by the buyer?
- What if I can’t afford closing costs as a seller?
- Do Realtors get paid if the house doesn’t sell?
- Does my agent keep all of the commission?
- Do Real Estate Agents get paid monthly?
- Do Real Estate Agents get paid hourly?
- How much do the best Real Estate Agents Make?
- How many parties are involved in a real estate transaction?
How do Realtors get paid?
Real estate agents and realtors receive most of their income from commissions generated from the house sale, also called the closing cost, closing fee, or realtor’s fees.
This commission is paid by the seller. It is typically deducted from the total proceeds from the final sale of the property.
Most realtors receive a commission of 5-6% of the total house sale. This means that if you were to sell a house for $100,000, the realtor’s commission would be about $5,000 or $6,000.
What is a Real Estate Agent’s Commission?
Based on a FastExpert study in 2021, the average real estate agent’s commission, aka realtor fees, is 5.46% of a property’s total sale. That commission is typically evenly split between the buying and selling agents, so each will earn 2.73% of a home’s sale price. These numbers vary between localities and market conditions.
Real estate agent commissions vary around the world. The highest average commission rate globally is in Austria, amounting to the US $8,458 (7,600 Euros).
In the United States, the rule-of-thumb has been to assume a commission rate of 6%. This is because the National Association of Realtors set that as the standard in the 1950’s.
While the NAR has advised agents to stand by the 6% commission rate, the average realtor commissions have varied widely over the years.
In 2021, the average commission is currently 5.45%, but in 1992 commissions were as high as 6.04%, but in 2018 was as low as 5.08%.
Real estate agents who are new to the industry might charge you as little as 3-4% of the sales price. Top realtors might charge anywhere between 6-10%, but deliver exceptional service by comparison.
Be careful of low realtor commission rates, it might be a red flag regarding the trustworthiness of a real estate agent.
Why do Realtors get 6 percent?
In the 1950s, the National Association of realtors suggested that the commission be 6% of the sale price. This standard has been largely maintained to this day. This is because it can adequately pay for the commission of both the buyer and the seller’s real estate agent. By making commission a fixed percentage, it is nearly immune to the power of inflation.
Real estate agents fees are not always 6% though. In some cases, the real estate agent is willing to take a smaller commission to land a larger sale.
Can I negotiate my Realtor’s Commission Rate?
Often, yes, you can negotiate with your agent to work out the best commission rate for you. This is easiest to do when you are interviewing multiple agents, but it can happen even if you only interview one.
Negotiating commission fees is easier with some agents, and harder with others. It usually comes down to the level of experience that a real estate agent has.
The agents who are the most negotiable with their commission fees is often the ones with the least experience. This does not mean that the agent’s are bad, but it does mean you may lose out on the comforts of working with the most experienced realtors available.
The agents who are the least negotiable on commission rates are often the ones with the most experience – but with good reason. The most experienced real estate agents can often help you sell your home for more than 6% of the home’s value, and buy your next home for less than 6% of the listing price.
The most experienced agents should easily be able to justify why they charge the commission rate that they do, so this is a good question to ask them during your interview with them before signing a contract.
When do Real Estate Agents get paid their Commission?
In short, real estate agents get paid their commission when a deal is closed and closing costs are paid, and the agent’s brokerage releases their share of the commission payment. Even still, there are more intricacies involved in the timing and who ends up paying the real estate agent commission.
As we mentioned, the commission – also known as realtor fees – is how sellers are charged for realty services rendered for the sale or purchase of a property.
Realty services include finding interested parties for a buyer’s place, completing paperwork, and most importantly, negotiating the selling and buying prices.
Once a deal has been finalized in the form of a contract, the seller releases funds to the real estate agency – not the agent directly.
The real estate agent commission is usually added to the selling price of the house. This means while the seller is the one who pays the agent, the buyer is likely footing the cost.
For example, if a property has a selling price of US $ 500,000 and agents charge 6% in realtor fees, the buyer will purchase the $530,000.
Once the agency receives the payment, the amount is distributed between the listing and buying real estate agents and their brokerages.
Following is the process of how a normal real estate exchange takes place and an exchange-of-money structure;
- You and an agent finalize a commission rate
- The listing and buying agents settle on a split percentage
- Once the deal between buyer and seller gets finalized, all the necessary documentations are done and funds are released by the buyer to their agent
- The buying agency splits the amount received into two parts – seller’s amount and commission amount
- The seller’s amount gets transferred to their account while the commission amount gets split further
- The brokerage sends the listing agency their share
- Both agencies keep their share and transfer the real estate agents commission to them, effectively completing the transaction.
Do Real Estate Agents get paid at closing?
Essentially, yes. The agent receives their payment from their agency after the sale has been closed and the property has been purchased.
Because agents get paid mostly by commission, they can only access their funds after the buyer has finalized the purchase. This is done to ensure that the agent will hard work for you to close the deal on the purchase.
What do closing costs include?
The closing costs are normally between 8-10% of the house’s purchase price. 2-4% is pays for title insurance, taxes, appraisal fees, deed recording fees, loan origination fees, attorney fees, and discount points. The other 6% makes up the commission which is divided among the real estate agents involved.
There are other smaller fees within the closing cost as well. All of them should be accounted for in the final contract. Read the final contract carefully to know what the costs are and why they are priced accordingly.
Who pays closing costs?
At the end of the day, the seller is responsible for the closing costs. That’s why most sellers incorporate the closing costs into the final price of the home. That way, the seller will guarantee that they can pay the closing costs on their home.
Since closing costs are a part of the contract between seller and buyer, there is room to negotiate terms. In some cases, the buyer may agree to pay certain parts of the closing costs.
While excluding closing costs from cost of the home keeps the price of your home low, it is a risk. This strategy has been applied by sellers who want to keep the price of their home as low as possible.
As a seller, be careful that you negotiate a deal that helps you pay the closing costs comfortably.
Do Realtors get paid for by the buyer?
In one way, yes, but technically no. The seller pays the closing costs for a home. Because of this, the realtor’s fees are typically incorporated into the cost of the home.
This means, in most cases, buyers do not need to pay directly for the agent who represents them. Buyer’s will they only pay for the home. After that, the seller pays the closing fees and commission on purchase of the home.
Typically, the commission is split 50/50 between the buyer’s agent and the listing agent. In some cases, an agent may receive more from the commission than the other agent, but this is rare.
What if I can’t afford closing costs as a seller?
If you can’t afford closing costs, ask your lender or the buyer to help cover some of the cost. Alternatively, you can apply for Down Payment Assistance or a Closing Cost Assistance Grant..
Closing Cost Assistance Grants are specifically available for the purpose of helping low to moderate income households. To learn more, inquire with a trusted lender for more information.
If a loan or grant is not an option. Consider negotiating with your lender to assist you by lowering your down payment on your next house.
The money saved in the down payment should be able to cover your closing costs. By applying this method, you should expect your mortgage costs to increase.
Lastly, if you wish to ask the seller if they are willing to pay parts of the closing costs, make it clear that the sale agreement is contingent on meeting this condition.
You may choose to reveal that you do not have the funds for the closing costs and that you applied for a grant or have spoken with a lender already. You are not required to reveal this unless you choose to.
Before facilitating this negotiation, talk to your realtor for council on how to best move forward.
Do Realtors get paid if the house doesn’t sell?
In most cases, the realtor does not get paid if the house does not sell.
This can be very dependent on your contract between the real estate agent and their contract with their broker.
In most cases, the seller would only need to pay cancellation fees for the listing. In other cases, you may need to pay the brokerage a commission.
As a seller, it is important to read the contract carefully to understand their terms.
Does my agent keep all of the commission?
Typically, no. The percent of the commission that an agent personally earns is decided by the agency they work with.
Every real estate agency has a unique contract with each of its agents.
If an agent is in a salary based contract, they don’t receive the commission directly at all. This is very uncommon though.
Typically, an agent will get a percentage of the commission paid to the brokerage after the sale of a home. Usually, an agent’s share will be between 15% to 50% of the total commission.
The the top performing agents can sometimes negotiate to receive 100% of the commission paid to the listing brokerage. In these rare cases, the agent will only pay their agency a monthly desk-rent fee to continue doing business together.
Do Real Estate Agents get paid monthly?
Typically, no. Real estate agents do not get paid monthly.
The main source of income for real estate agents comes from the 6% commission that is divided among the involved brokerages after the sale.
There are few agencies that offer a base salary, but most real estate agents get paid from the commission received.
Do Real Estate Agents get paid hourly?
Real estate agents do not get paid hourly. Most real estate agents rely on earnings from commissions rather than salary, but none are paid by the hour.
As mentioned previously, it is rare for a company to pay a salary to real estate agents. This means that the amount they earn increases with the number of houses the agent can close. Their earning is also impacted by the kinds of real estate they sell.
How much do the best Real Estate Agents make?
The national average annual income for real estate agents is roughly $80,000.
This figure can vary greatly between agents based on their effectiveness, their location, and their target real estate market.
A survey of our own agents revealed that some agents make more than $150,000 per year. Even still, some will earn as little as $12,000 per year.
How Many Parties are Involved in a Real Estate Transaction?
Sharing the real estate commission isn’t as simple as dividing the commission amount by two. This is because there can be more than two parties involved.
A real estate transaction’s commission will be split between;
- The listing agent
- The buying agent
- The listing agency
- The buying agency
In some cases, the same agent or agency can be representing both parties (buyers and sellers) in a transaction. This is known as “Dual Agency” (or “transaction brokers”) and is a fiercely debated topic.
Some states like Colorado have even made dual agency illegal.
The 2016 Colorado Statute Article 61, Part 8 dictates that dual agency can not be established with any seller, landlord, buyer, or tenant in Colorado.
Other states require that dual agency be disclosed to both parties. This would mean that there is no need to split the real estate agent commission. This can lead to tempting an agent to misrepresent some material facts about a property.
To land the best deal for yourself, you must understand the in’s and out’s of what you are expected to pay.
If you are looking for reliable real estate agents or more information, contact Fastexpert, Inc.
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