{"id":134973,"date":"2021-02-11T09:30:41","date_gmt":"2021-02-11T16:30:41","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=134973"},"modified":"2024-01-15T14:21:58","modified_gmt":"2024-01-15T21:21:58","slug":"realtor-commission","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/realtor-commission","title":{"rendered":"Understanding Real Estate Commissions (And How to Negotiate Them!)"},"content":{"rendered":"\r\n<p><iframe loading=\"lazy\" src=\"https:\/\/playlist.megaphone.fm?e=BIGPOC9008751054&amp;light=false\" width=\"100%\" height=\"200\" frameborder=\"0\" scrolling=\"no\"><\/iframe><\/p>\r\n\r\n\r\n\r\n<p>If you are\u00a0<a href=\"https:\/\/www.biggerpockets.com\/blog\/prepare-buy-home\" target=\"_blank\">preparing to buy a home in 2021<\/a>, you\u2019ve got plenty to think about. Long before you put your money on the table, you should make sure you have a number of key advisors in place. You should, for instance,\u00a0<a href=\"https:\/\/www.biggerpockets.com\/blog\/choosing-financial-planner\" target=\"_blank\">choose a financial planner<\/a>\u00a0who truly understands real estate investing, then conduct adequate research to find\u00a0<a href=\"https:\/\/www.biggerpockets.com\/blog\/find-investment-broker\" target=\"_blank\">the right real estate broker<\/a>\u00a0for your city.<\/p>\r\n\r\n\r\n\r\n<p>Taking good advice is only part of the picture, though. You should also make sure that you understand how buying property actually works. This includes the legal implications of ownership, as well as how and when money changes hands. Part of this process is a real estate commission.<\/p>\r\n\r\n\r\n\r\n<p><em>Looking for a real estate agent? Check out <\/em><a href=\"https:\/\/www.biggerpockets.com\/agent\/match\" target=\"_blank\"><em>BiggerPockets&#8217;s agent match<\/em><\/a><em>!<\/em><\/p>\r\n\r\n\r\n\r\n<p>First-time homebuyers are sometimes confused by commissions. It can seem like you are paying a real estate agent a lot of money for what appears on the surface to be little effort. But while there are some work-averse agents out there, good agents use a commission to cover costs that you might be unaware of.<\/p>\r\n\r\n\r\n\r\n<p>In this article, we\u2019ll break down everything you need to know about real estate commissions\u2014how much they are, what they are used for, and whether you can negotiate them.<\/p>\r\n\r\n\r\n\r\n<p><em><strong>Related<\/strong>: <a href=\"https:\/\/www.biggerpockets.com\/blog\/real-estate-investment-analysis?itm_source=ibl&amp;itm_medium=related&amp;itm_campaign=opt\" target=\"_blank\">Introduction to Real Estate Investment Analysis<\/a><\/em><\/p>\r\n\r\n\r\n\r\n<h2 class=\"wp-block-heading\">What is a real estate commission?<\/h2>\r\n\r\n\r\n\r\n<p>The reason real estate commissions exist is the slightly unusual way in which real estate agents are paid. Most real estate agents, even if they work for large firms that have a flow of steady sales, don\u2019t get paid a salary. Instead, they make money when a real estate deal actually goes through.<\/p>\r\n\r\n\r\n\r\n<p>Agents who work hard do well financially with this system, because it incentivizes them to make plenty of sales, negotiate hard, and close deals. This system also means that they might not get paid for months on end, receiving a sizable paycheck just twice or three times a year. For most of us, that kind of unreliable cash flow would be unacceptable. In the world of real estate agents, though, it\u2019s par for the course.<\/p>\r\n\r\n\r\n\r\n<h2 class=\"wp-block-heading\">How much is a real estate commission?<\/h2>\r\n\r\n\r\n\r\n<p>Because real estate agents only get paid when a purchase goes through, the commission represents weeks or months of work and arrives in one chunk rather than being spread out. To the average consumer, this is the property world version of sticker shock.<\/p>\r\n\r\n\r\n\r\n<p>Different agents and brokerages charge different amounts of commission and have different models for how they charge. However, commission rates typically range from 5% to 6% of a home\u2019s final sales price. On a $200,000 home, a 6% commission would amount to $12,000, which is paid by the home seller out of their proceeds.<\/p>\r\n\r\n\r\n\r\n<p>That seems like a lot of money, but it\u2019s important to recognize that not all of this money goes straight into the pocket of your real estate agent. The average agency uses this sum to cover many of the\u00a0<a href=\"https:\/\/www.forbes.com\/2007\/07\/11\/real-estate-commission-ent-fin-cx_mf_0711fundrealestatecosts.html\" target=\"_blank\" rel=\"noopener\">operating costs of their business<\/a>\u2014advertisements for their properties, a relatively new and exponentially increasing amount to fight cyber fraud, and, finally, their agents\u2019 bonuses.<\/p>\r\n\r\n\r\n\r\n<p><em><strong>Related: <\/strong><a href=\"https:\/\/www.biggerpockets.com\/blog\/real-estate-comps?itm_source=ibl&amp;itm_medium=related&amp;itm_campaign=opt\" target=\"_blank\">How to Determine a Property\u2019s Value Using Real Estate Comps<\/a><\/em><\/p>\r\n\r\n\r\n\r\n<h2 class=\"wp-block-heading\">Who pays the commission?<\/h2>\r\n\r\n\r\n\r\n<p>Again, there is a range of models in use across the country, and the way in which commissions are charged may vary widely between brokers and agents. However, in the \u201ctraditional\u201d model, a buyer\u2019s and a seller\u2019s respective agents will split the agent commission equally. So if a home sells for $200,000 at a 6% commission, the listing agent and buyer&#8217;s agent will split that $12,000, and each receives $6,000. This comes off the top before a seller realizes any profit.<\/p>\r\n\r\n\r\n\r\n<p>Within this broad picture, there are more than a few complexities. It\u2019s not unusual, for instance, for a commission to be based on the experience level of an agent, so that someone who has been in the game for decades takes a larger share than a younger agent.<\/p>\r\n\r\n\r\n\r\n<p>There are also sales in which the same agent represents both the buyer and the seller. In this case, they are what is known as a \u201cdual agent,\u201d and get paid both parts of the commission. While lucrative for the agent, the specter of conflict of interest\u2014since the agent stands to gain from a higher price\u2014is never far away. Obviously, a shady agent could play buyer against seller to artificially inflate the final sale number.<\/p>\r\n\r\n\r\n\r\n<p>For this reason, some agencies don\u2019t allow their agents to work as dual agents. This practice is even illegal in some states.<\/p>\r\n\r\n\r\n<hr class=\"wp-block-separator\" \/>\r\n\r\n\n    \n  <div id=\"visibility-group-block_d2e65a267c797efbec6926588eaed343\" class=\"visibility-group alignwide  hidden\">\n        \n\n<div id=\"hero-block_653d389a5f1781af32fb5bd713680770\" class=\"first:mt-0 hero-block py-4  alignwide   has-background has-slate-200-background-color has-text-color has-theme-gold-color\">\n    <div\n        class=\"gap-10 lg:gap-20 flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 lg:w-1\/2 \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-slate-800-color has-text-color has-large-font-size\" style=\"font-style:normal;font-weight:800\">Find the Right Agent, Close the Best Deal<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-slate-900-color has-text-color\" style=\"font-size:18px\">Step #1: Use Agent Finder to match with top <em><strong>investor-friendly<\/strong><\/em> real estate agents to help you find, analyze, and close your next deal.<\/p>\n\n\n\n<div id=button-custom-event-block_31f2aa01edf7871c626e59599d5f70ed class='button-custom-event'>\n      <a href=\"https:\/\/www.biggerpockets.com\/agent\/match\" x-on:click=\"window.analytics.track(&#039;Blog Block | B2C Marketplace Agent Finder&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/realtor-commission&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Find an Agent<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\"lg:w-1\/2 first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/Marketplace-Blog-Blocks-Agent-v3.png\" alt=\"investor friendly real estate agent\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>\n\n  <\/div>\n  \n\n\n<div class=\"wp-block-group\"><div class=\"wp-block-group__inner-container is-layout-constrained wp-block-group-is-layout-constrained\">\n    \n  <div id=\"visibility-group-block_64dd31c79f00f\" class=\"visibility-group  \">\n        \n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div id=\"hero-block_64dd2875dba9d\" class=\"first:mt-0 hero-block py-4    has-background has-slate-100-background-color has-text-color has-theme-slate-color\">\n    <div\n        class=\" flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 w-full \">\n            <main class=\"py-4\">\n                \n\n<h3 class=\"wp-block-heading my-0 tracking-tight font-extrabold has-theme-slate-dark-color has-text-color has-large-font-size\">Join the community<\/h3>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-theme-slate-color has-text-color\" style=\"font-size:16px;font-style:normal;font-weight:400\">Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more. <\/p>\n\n\n\n<div id=button-custom-event-block_64dd2888dba9e class='button-custom-event'>\n      <a href=\"https:\/\/www.biggerpockets.com\/signup\" x-on:click=\"window.analytics.track(&#039;Blog Block | Acquisition | Free Membership Signup&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/realtor-commission&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Sign Up<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n            <\/div>\n<\/div>\n\n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n  <\/div>\n  <\/div><\/div>\n\r\n\r\n<hr class=\"wp-block-separator\" \/>\r\n\r\n\r\n<h2 class=\"wp-block-heading\">What does a real estate commission cover?<\/h2>\r\n\r\n\r\n\r\n<p>People are often wary of taking on real estate agents because of the level of commission charged. Buying property is likely to be the single largest expense in a person\u2019s life\u2014whether seeking a house to live in or property as an investment. Paying an extra 6% on top of an already large number is more than some stomachs can stand.<\/p>\r\n\r\n\r\n\r\n<p>In reality, employing an experienced and trustworthy real estate agent saves stress, time, and money. This is because a good real estate agent provides a wide range of advice and service\u2014not just helping you price your home, but also listing and even advertising to get the word out.<\/p>\r\n\r\n\r\n\r\n<p>The real value of a real estate agent, though, becomes apparent once negotiations commence. An experienced agent knows the property sales process inside and out and can help you get the best price, whether you are buying or selling. That\u2019s why the typical \u201cFor Sale by Owner\u201d home <a href=\"https:\/\/someplaceproperties.com\/statistics\/investment-property\/\" target=\"_blank\" rel=\"noopener\">sells for considerably less<\/a> ($200,000 compared to $280,000, in 2019) than agent-assisted home sales. A bit of simple math tells us that, judging by the numbers, going with an agent is a no-brainer.<\/p>\r\n\r\n\r\n\r\n<p>This advice and plethora of services are ultimately paid for by your commission. As mentioned, the commission seems high, but remember it represents the only pay they receive for months of work.<\/p>\r\n\r\n\r\n\r\n<h2 class=\"wp-block-heading\">Can I negotiate a real estate agent commission?<\/h2>\r\n\r\n\r\n\r\n<p>This is the first question out of the mouth of some people when confronted with the reality of the cost of their real estate agent. The simple answer is yes, you can often negotiate a lower commission.<\/p>\r\n\r\n\r\n\r\n<p>At least technically, that is. Though 5-6% has long been the industry standard, there is nothing in the law that sets a commission at this price point. This means that real estate agents can charge, in principle, any level of commission they like. Conversely, you can definitely ask them to reduce it.<\/p>\r\n\r\n\r\n\r\n<p>If you&#8217;re operating in a dual agency arrangement\u2014where the listing broker also represents the buyers\u2014they may be willing to reduce their compensation. However, there are a number of reasons dual agency isn&#8217;t a great deal, even if you are getting a reduced commission. An agent representing both the buyers and the sellers will struggle to keep both parties&#8217; best interests in mind.<\/p>\r\n\r\n\r\n\r\n<p>Whether they will actually be open to negotiation is a different question. Given how standardized the 5-6% fee has become, many agents are reluctant to even enter into a discussion about it. They know that, even if you shop around for alternative agents at a lower price, you are unlikely to find one who is willing to significantly reduce their fee\u2014at least, a reputable one.<\/p>\r\n\r\n\r\n\r\n<p>The only major exception to this is that some agents might be open to a deal in which you pay slightly less commission, but don\u2019t receive their full service. You could take charge of listing and advertising your property yourself, for instance, in exchange for paying a lower commission.<\/p>\r\n\r\n\r\n\r\n<p>That said, and given the amount of money you will likely spend on your property, it makes sense to spring for an extra 1-2%, given the value that a real estate agent provides.<\/p>\r\n\r\n\r\n\r\n<p><em><strong>Related: <\/strong><a href=\"https:\/\/www.biggerpockets.com\/blog\/signs-bad-real-estate-agent?itm_source=ibl&amp;itm_campaign=opt&amp;itm_medium=related\" target=\"_blank\">Don&#8217;t Ignore These 11 Bad Real Estate Agent Red Flags<\/a><\/em><\/p>\r\n\r\n\r\n\r\n<h2 class=\"wp-block-heading\">Alternative commission models<\/h2>\r\n\r\n\r\n\r\n<p>Finally, a quick word about alternatives to the traditional system. As we\u2019ve explained above, some real estate agents work on a non-standard model for commissions. However, in most cases, and no matter how much complexity they\u2019ve built into their commission model, at the end of the day it\u2019s likely that they will receive a percentage of the final sale value. If an agent tells you they use a different model, make sure you understand it fully before signing anything.<\/p>\r\n\r\n\r\n\r\n<p>The most popular company that uses a non-standard model is Redfin. This company uses a slightly different\u00a0commission structure, in which listing your property for sale is cheaper than with traditional agents (1.5%). However, you may also have to pay an agent\u2019s fee on closing, which pushes the total commission to around 3.5%.<\/p>\r\n\r\n\r\n\r\n<p>Some agencies also work on a flat fee commission model. These agencies may specialize in for sale by owner properties (FSBOs). In these scenarios, the flat agent fee often simply covers listing on the multiple listing service (MLS).<\/p>\r\n\r\n\r\n\r\n<p>When you start the search for real estate agents, see that their commission is 6%, and do the math to work out what that actually means, it can seem like you will be paying them a lot of money for nothing. In reality, the 5-6% is typically dwarfed by the tools and services a quality agent provides, and will be smaller than the impact they will likely make on the final negotiated sales price.<\/p>\r\n\r\n\r\n\r\n<p>Once you factor all of that in, commissions start to look pretty cheap. That\u2019s why one of our most important\u00a0<a href=\"https:\/\/www.biggerpockets.com\/blog\/home-selling-tips\" target=\"_blank\">tips for a smooth sale<\/a>\u00a0is to make sure you have an experienced real estate broker representing you.<\/p>\r\n","protected":false},"excerpt":{"rendered":"<p>Realtor commissions directly affect how much money you&#8217;ll make when selling your home or investing in real estate. Find out how to calculate this expense here.<\/p>\n","protected":false},"author":5362,"featured_media":134977,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7390,7119],"tags":[],"class_list":["post-134973","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-acquiring-property","category-biggerpockets-daily"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/134973","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/5362"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=134973"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/134973\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/134977"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=134973"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=134973"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=134973"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}