finding an agent: how agents are paid
Real estate agents are paid on commission, meaning they earn a certain percentage (normally 5–6%) of the final sale price. The commission comes out of the seller’s earnings from the sale, hence the buyer has not out-of-pocket expenses when buying a home (related to commissions).
Who Actually Gets Paid
The commission is generally split evenly between the buyer’s and seller’s agent. Real estate agents work for a brokerage, which is managed by a managing broker (note that some states use different terms for agents). The brokerage is the actual entity that gets paid, and so the commission is actually split four ways: the buyer’s agent, the buyer’s agent’s brokerage, the seller’s agent, and the seller’s agent’s brokerage. How the commission is divided between the agent and their brokerage is known as the “split” and is unrelated to the commission level negotiated between the seller and the seller’s agent.
The agent agrees to split the commission with their brokerage in exchange for the ability to ‘hang their license’ at the brokerage and receive tools, training, office space, marketing materials, etc. from the brokerage.
Purchase Price x Commission = Gross Commission = $500,000 x 6% = $30,000
Split x Gross Commission = Side = 50% x $30,000 = $15,000
Side x Agent Split (To Brokerage) = $15,000 x 60% = $9,000
In the above, a $500,000 sale results in the agent, after splitting with the other agent and their brokerage, receiving a commission of $9,000, from which taxes and other expenses (gas, tools, the marketing to acquire the client, and more) are deducted.
Can You Negotiate?
Yes! The seller and seller’s agent initially negotiate the commission, but commissions can get creative. For example, a seller’s agent may set a floor price on the listing and take the difference out of their commission if the listing sells below the floor. For example, an agent may say, “The commission is 6%, but I will deduct any amount the home sells for under $500k from my commission” — a risky bet, but a strong one for a confident agent in a strong seller’s market.
Buyers can also negotiate with their agent on their commission, and that comes into play in negotiations around offers. This becomes important to the seller because if the commission figures are lower, the seller may be more willing to entertain a lower offer price because they may still walk away with more cash after paying commissions.
Another model that is emerging is that of the discount brokerage. These brokerages agree to a low, flat commission (Redfin often makes available a 1.5% listing fee) or a flat fee (for example, $5,000) to list and sell your home. These can be very appealing to both buyers and sellers, but a fixed or low fee can also work against the client because the incentive to work harder to earn more money is eroded.