If you’re looking at earning your real estate license and starting a career in real estate, you’re probably wondering just how commissions for real estate agents work. Though commission-based real estate transactions have been the norm for decades, there continue to be misconceptions surrounding this compensation system. Additionally, the 2023 lawsuit involving the National Association of REALTORS® (NAR) has further complicated the compensation matter. Read on for an explanation of the most common components of a real estate commission.
Learn More: Key Changes Mandated by the NAR Lawsuit Settlement
What Is Real Estate Commission?
A real estate commission is a fee paid to a real estate agent or broker for their services in facilitating a real estate transaction. The commission is typically calculated as a percentage of the final sale price of a property.
However, how real estate agents (specifically buyer’s agents) are paid may change due to the 2023 NAR lawsuit. Buyers who hire agents may be asked to sign a written agreement that spells out their agent’s compensation. Some buyer’s agents may still be paid a percentage of the final sale price for their services, while others may negotiate a flat fee or hourly rate.
How Real Estate Commissions Are Split
Traditionally, real estate commissions are split four ways.
- Listing agent – the agent who was hired by the seller
- Listing broker – the broker for whom the listing agent works
- Buyer’s agent – the agent who represents the buyer
- Buyer’s agent’s broker – the broker for whom the buyer’s agent works
How each of these entities is paid may change due to the 2023 NAR lawsuit. However, all four will continue to be compensated for services rendered.
Who Pays Real Estate Commission?
Typically, the commission is taken out of the sale proceeds, and the seller generally pays the commission. However, many sellers factor the commission into the asking price, so it can be argued that the buyer pays at least some of the commission, particularly if there is a higher asking price.
Why Do Real Estate Agents Charge Commission?
Real estate agents provide essential services to both buyers and sellers. They bring expertise and knowledge of the local market, property values, legal requirements, and negotiation skills. Their knowledge and insights help sellers navigate the complexities of selling a property and achieve the best possible outcome.
Granted, the compensation model may change due to the NAR settlement. You may see more real estate agents working for a flat fee or hourly rate. However, they will continue to be compensated for their professional services, expertise, marketing efforts, and time investment.
Learn more: Understanding the NAR Lawsuit Settlement and its Impact
Negotiating Real Estate Commissions
Real estate commissions are negotiable. Both buyers and sellers should discuss compensation with their agents up front and put everything in writing. Consider every contingency, as the buyer’s agent commission will not necessarily be deducted from the seller’s side of the transaction at closing.
When Do Real Estate Agents Get Paid?
Generally, commissions for real estate agents are only received when a transaction is settled. However, there are circumstances in which the seller has to pay the agent’s commission regardless of whether the transaction is closed. For example, if the agent has a buyer who is prepared to make an offer on a property, the agent may be entitled to a commission if the seller:
- Refuses to sell because they have changed their mind
- Commits fraud in the transaction or has a title containing uncorrected defects
- Cannot deliver possession to the buyer within a reasonable time
- Has mutually agreed with the buyer to cancel their transaction
In some cases, real estate agents are employed and salaried by their broker. However, it’s far more common for agents to work on commission.
More Resources for Understanding Commissions for Real Estate Agents
Do you have questions regarding commissions for real estate agents or other topics related to launching your real estate career? Visit the Colibri Real Estate Career Hub. Browse our blog for more tips and tools designed specifically for new agents.
