Who pays the commission when selling a house?

Woman figures out who pays the commission when selling a house

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Selling your home can be a daunting task for many reasons, especially when it comes to determining how much money you will net versus how much you will owe in closing costs and other fees. One area of confusion that seems to always come up is who pays the commission when selling a house commission and how do real estate agents get paid?

I’ll help clear the confusion on home sales and agent commissions below.

How real estate commissions work

Real estate agents do not make hourly or salaried wages and are paid a commission if, and only when, a real estate transaction closes. And though it would make sense that real estate agents would be compensated by their respective clients, but that isn’t the case.

So, who is responsible for paying the agent commissions? The buyer bringing money to the closing table or the seller who hired a real estate agent to market the property and negotiate on their behalf?

How real estate commissions are determined

Commission rates are negotiable, and not every deal is identical. This is why before a home is listed on the market for sale, the seller and the listing agent agree to a brokerage fee (or total commission) that the seller pays at closing. This fee is almost always a small percentage of the final sale price of the home.

Who shares the commission?

Most real estate agents, whether they hold a salesperson or associate broker license, work under a real estate brokerage as an independent contractor. So, though the broker commission percentage may seem like a large number, that percentage is typically being split among four or more parties:

  • Listing agent or seller’s agent—the real estate agent who was hired by a seller
  • Listing broker—the broker who holds the listing agent’s license
  • Buyer’s agent—the agent who represents the buyer
  • Buyer’s agent’s broker—the broker who holds the buyer’s agent’s license

How is the brokerage fee or total commission split?

When a home is listed for sale on the multiple listing service (MLS) it is standard practice for the seller’s agent to offer the cooperating broker or buyer’s agent a portion of the seller’s agent’s total commission as compensation. Though the shared percentage is not always the same for every listing, for simplicity’s sake, we’ll say it is half of the total commission fee.

In summary, sellers pay the total commission fee agreed upon in their listing contract, and that commission is then split between the brokerages of the buyer’s agent and seller’s agent.

The buyer’s agent and the seller’s agent then receive a split of the commissions from their respective brokerages.

Why is compensation offered?

The National Association of Realtors reports that nearly 90% of buyers use a real estate agent to guide them through the home buying process. Offering a fair commission share is one way to attract buyers. The more potential buyers are interested in a property, the higher the selling price will be and the more the seller will net.

What happens if no compensation is offered to buyer’s agents?

There is a common misconception that buyer’s agents work for free. In actuality, they are almost always compensated by the total commission agreed upon by the seller and the listing agent.

In the rare instance that no compensation is offered to buyer’s agents, the buyer’s agent’s commission is usually built into the offer sales price. Here are some variations where this can occur.

Discount brokers

Though real estate commissions are negotiable, there are industry standards for listing agents and for what they offer to buyer’s agents. Most discount broker fees only cover the commission for listing agents, but they also don’t offer the services of a full-service listing broker, such as professional photography, multi-platform marketing, broker-to-broker marketing, experienced negotiating, knowledge of how to qualify buyers, and general guidance throughout the process regarding legal, title and financing issues that may come up.

This can be enticing for sellers, especially in a seller’s market, but the likelihood of today’s buyers not using representation in such a difficult market is very low. The buyer will usually choose to incorporate their real estate agent’s commission into their offer price, and the seller will end up paying the same real estate commission of a full-service broker without getting any of the marketing or negotiating services.

For sale by owner (FSBO) sales

Selling a home FSBO (for sale by owner) is one way sellers can avoid real estate agent fees, but it doesn’t always net the seller more out of their home sale. NAR estimates that FSBO sellers sell their homes for 8% lower than comparable homes sold with a listing agent. But most homeowners who want to sell their home on their own don’t choose to do it for the net gain. They do it out of a principle of doing it on their own or because they just want to try it out.

Similar to what happens when a seller lists with a discount broker, FSBO sellers will often find that most of the buyers inquiring about their home are working with a real estate agent, and when they receive offers, the buyer’s agent fees will be included in the offer price.

Sometimes, a buyer may decide to pay their real estate agent’s fee separately from the purchase price of the home. This can lower the final sales price of the home by the commission amount, but it may make sellers feel like they are saving money. And overall, it’s the same amount of money being exchanged among the parties.

When do real estate agents get paid?

Broker fees are paid at the closing table. The broker will then take their split and pay the real estate agents involved in the transaction. So, though the total commissions are paid at the closing table, your real estate agent won’t have their commission until after the closing.

The bottom line

In a typical real estate transaction, the seller pays the total commission negotiated when the listing paperwork was signed, and from that total commission, both the buyer’s agent and seller’s agent commissions are paid. If the seller’s agent does not offer a portion of the total commission to a buyer’s agent, then the buyer’s agent can include their commission in the offer price or the buyer client can pay the buyer’s agent commission separately, though this last option is very rare. 

Author

Cristina Morizio

Long Island real estate agent Cristina Morizo
As an experienced REALTOR® and Long Island native, I know the ins and outs of the real estate market. I help home buyers, sellers, investors and homeowners navigate and negotiate. Questions? Ready to buy or sell? Let’s talk!

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