How Real Estate Agent Commissions Work
By Zach Burnham
Most probably do not know this but there are quite a few national lawsuits going on the last couple of years regarding how real estate agents are paid. These lawsuits have caused quite a stir within the real estate industry. I’m not going to get into the specifics of the court cases because that’s out of my expertise and they’re still ongoing. But I want to explain in more detail exactly how real estate agent commissions work and who pays them.
What these lawsuits come down to is the lack of transparency between real estate agents and their clients, both buyers and sellers, when it comes to how and who pays the buyer’s and seller’s agents. This lack of transparency is the reason why it’s so hard to understand how real estate agent commissions work. So I want to clear this up.
Objectives
My goal as a real estate agent is to help people. God has blessed me with knowledge and know-how of the real estate and construction industries. S0 the way my life can be most fulfilling is using my God given talents to help others. And I truly believe the best way to “help” people is to be straightforward and transparent.
When agents hide or omit details to either make their clients feel better, or worse take advantage of them in some way, it’s really counterproductive. 9 times out of 10 these details will be discovered eventually. And the “cover up” is going to look worse than if they were straightforward with their clients from the start. One of these details agents often gloss over is their commissions and how and who pays them.
Commissions Are ALWAYS Negotiable
The most important detail I want to be very clear about from the start is that agent commissions are 100% negotiable between the agent and their client. Yes, sometimes certain offices are more negotiable than others but as an industry, commissions are always negotiable. If you are interviewing an agent and they say anything that insinuates that you cannot negotiate agent commissions with any real estate agent this is the first sign they are not the right agent.
It’s ultimately up to the agents’ broker what commission they will accept. They may not be willing to negotiate on their commission fee. But do not let them make you think every other agent or office charges the same fee. There is no “standard” commission fee charged by all offices. If you don’t like the fee an agent or their office is charging, you have every right to shop around to other offices. If an agent says they charge 7% and you shouldn’t interview other agents because they have the same rates, run.
Who Pays the Commissions?
Now let’s get down to how real estate agent commissions work and who pays them. This can be pretty confusing if it’s not explained entirely. So I’m going to lay out all the details in depth but as simply as I can.
To start, let me explain that seller’s typically do pay both their selling agent and a buyer’s agent. But this is not required. It never has been. Antitrust laws have always protected the clients right to negotiate all terms of commissions. But it is most commonly handled this way because it is 100% most beneficial for a seller to do this.
Why?
This is basically because the seller is obtaining proceeds from the sale of their home and buyers are doing the opposite. Buyers are often times bleeding their accounts dry to afford a purchase. Another thing to keep in mind is that if you are selling your home and paying a buyer’s agent commission, you are most likely going to be or already were a buyer and had a seller pay your agents commission. So looking at it as a “what goes around comes around” type of situation is very logical as well.
Let me break it down a little bit more though the logic behind the seller paying a buyer’s agent commission. The main reason sellers’ agents almost always recommend a seller to offer a buyer’s agent commission is because it will open your house up to far more buyers. Buyers are already shelling out a lot of money to purchase the home. With today’s affordability issues another 2-3% to pay their agent will make or break their ability to buy your home.
If a seller is not offering a commission to a buyer’s agent, the buyers are left responsible to pay their agent. But this isn’t possible for most buyers in this market. So, they could be forced to find a different home where the seller is offering to pay the buyer’s agent.
What Goes Around Comes Around
As I mentioned, if you’re the seller now you’re most likely going to be a buyer also. This is also important to consider when understanding how real estate agent commissions work.
Put yourself in the shoes of a buyer and think about if you were comparing two homes. One is offering a buyer’s agent commission and the second is not. Both houses are asking $300,000. You’re going to have basic closing costs on both like lender costs and transfer taxes. But if you select the second house you may have to pay an additional $7,500 (2.5%). (Depending on the agreement you made with you {buyer’s} agent.) And that’s cash due at closing, that is not money that can get rolled into your mortgage.
Would you want to come up with that additional cash to bring to the closing table?
From the Buyer’s Perspective
Let’s further look at this from the buyers side. Your agent you hire as a buyer should be explaining this to you as well. Their commission is always spelled out in the buyer/broker agreement that you sign with your agent. If you have been working with an agent to buy and haven’t seen your buyer agreement, ask them for it. Buyer’s agents will most often accept the commission a seller is offering. But in the event the seller is not offering any commission or offering a commission lower than what your buyer’s agent charges, the buyer’s agreement will spell out what happens.
This can be negotiated but you need to know as a buyer to negotiate it before signing a buyer/broker agreement. It will list the lowest commission acceptable to the buyer’s agent. And spell out what happens if the seller of the home you wish to purchase is not offering a commission.
What to Look for in Your Buyer Agreement
If your buyer agreement says you as the buyer are responsible for the difference of what the seller is offering and the buyer’s agent fee of let’s say 2.5% for instance, you could be liable for paying that entire 2.5% if the seller is offering nothing. Or if the seller is only offering 1% you may still need to pay your agent the additional 1.5%. Again, all of this is negotiable between you as the buyer and your agent. So be sure to discuss this before signing their buyer/broker agreement tying you to using them as your agent.
And before you think about just breaking your buyer/broker agreement and buying with another agent or without one entirely, keep in mind that they also spell out how you can cancel it and most often will include a stipulation that you will still owe them a commission if you buy something they showed you or anything within a certain time frame. So, you can see it’s important to do all the negotiating with your buyer’s agent prior to signing that buyer/broker agreement.
Important Reminder for Sellers
There is one more pertinent detail when it comes understanding how real estate agent commissions work and why seller’s offer a buyer agent commission. Yes, some people are successful selling their home without an agent. It’s certainly not advised but that’s an entirely different subject for another time. What is important to realize though is that it is way harder to buy a home without an agent than sell without an agent.
In 2024, 88% of home buyers in the U.S. used an agent to purchase their home.* That is obviously the lion’s share of the market. That’s mostly due to the roller coaster ride and the extent of the details to know when buying a home. An agent is really a necessity for a buyer. So, if a seller is not willing to offer a buyer’s agent commission, they could be cutting out 88% of potential buyers that require the skilled assistance of an agent.
In review, let’s go over the key points to take away about how real estate agent commissions work…
Key Points to Remember;
- Agent commissions are always 100% negotiable between buyers or sellers and their agents.
- Buyers need to be aware of what their agent charges and negotiate what will happen if a seller doesn’t offer their agents’ full fee. This should all be negotiated and agreed to before signing your buyer/broker agreement with your agent.
- Although an agent or their office may not be flexible and negotiable on their commission fee, commissions are still negotiable in general in the fact that you have every right to shop around to other agents that may charge less or be more willing to negotiate.
- Sellers most often offer to pay the buyer’s agent commission in order to expose their listing to the most buyers. It’s best to think of this practice as offering to pay someone a finder’s fee for bringing a buyer for what you are selling.
- Remember that it’s really a wash at the end of the day when you as a seller pays a buyer’s agent commission and then become a buyer yourself and the seller of the home you purchase pays your agent’s commission.
Sources:
* https://www.nar.realtor/research-and-statistics/quick-real-estate-statistics
If you enjoyed learning how real estate agent commissions work you can check out more of my Real Value real estate content HERE.
How Real Estate Agent Commissions Work