Real estate agents, along with nine other professionals, have adopted a wild wide-range compensation system. Their payday potential hangs on the balance of a percentage sign.
If you are hoping to join the industry, you could be wondering why they opted for such a system. Why do real estate agents get a percentage? Real estate agents get a percentage because they are not the owners of the property but rather sale facilitators. This fashion of work which dates back centuries, only affords them a share of the payment. And did I mention unlimited earning potential?
But today, we’re playing “Question Master” to uncover the purpose behind percentage payouts still ruling the industry. Grab your magnifying glass as we investigate beyond the percent symbol on agent commission checks to expose how real estate agents work.
How Real Estate Agent Commissions Work
A commission is essentially the fee an agent earns for their role in facilitating a property sale. This commission, calculated as a percentage of the final selling price of the property, often ranges from 5 to 6%.
However, that fee doesn’t all go into one agent’s pocket. It is divided between several parties involved in making the sale happen.
The first division happens between two agents: the listing agent, who represents the seller and has listed their property for sale; and the buyer’s agent, who assists the buyer with finding the property. Both these agents typically split this commission equally.
Numerically, that means you would get either 2.5% of the sale or 3%, depending on the rate. But it is not odd to find a split differential where the seller’s agent gets 2.83% while the buyer’s agent only receives 2.66%.
Before you start calculating your earnings based on this rate, there are other hands dipping into this pool, namely brokerages. Since agents usually work under brokerage firms, which provide them with support services like office space or advertising, they also get a share of the commissions.
The broker cut will depend on the agreement you signed with your broker. If you have a 50/50 split, your broker will get 50% of the 2.5% you received.
Let’s try an example:
You sold a house for $540,000. At a 6% rate, you and the buyer’s agent both walk with $32,400. Split that in half and you have each earned $16,200.
Time to factor in the broker split. If you are working on a 50/50 split, then your total earnings are $8,100. But if you are at a better split of 75/25, then you would bag $12,150.
To get a better understanding of the math realtors use, check out our article Calculating Success: the Essential Math Realtors Use in Real Estate.
Who Pays the Commissions?
With two main characters involved in the transaction, who gets to pay these commissions? May I go against the grain and say both buyer and seller?
Let me explain: The commission is not an upfront cost but paid at closing, the point where keys get handed over to new owners, by sellers out of proceeds from home sales. While it might seem like buyers are off-hook financially here, they’re indirectly paying the fees.
Hence, I consider this a joint effort. But in some transactions the buyer may go a step further and also directly pay for a portion of the commissions. However, it is not a norm.
Recent cases are suggesting that this may soon become a norm.
A case brought before the Missouri Federal Court against the National Association of Realtors, one of the best companies for new real estate agents Keller Williams, and HomeServices of America demanded a change in the commission structure.
The two-week case suggested that the realtor association and defendants were inflating commissions, unfairly burdening sellers with the task of paying both the seller and buyer’s agent fees. The Missouri homebuyers walked away with a $1.8 billion settlement.
And, it is being celebrated across the country as a consumer victory, one that has opened the door to commission discussions beyond the Show-Me State.
What Is the Average Real Estate Agent Commission Rate?
The average real estate agent commission rate in the U.S. typically oscillates between 5% and 6% of the property’s selling price. But a survey by Clever Real Estate of over 630 agents found an average of 5.49%.
However, this isn’t a fixed figure and can vary significantly based on different factors such as location, market conditions, and individual contracts.
For instance, in hot markets where properties sell quickly or in high-demand urban areas where competition is stiff among agents, you might find lower rates.
But in slower locales, agents typically bargain for a higher commission.
Here is a summary table revealing the median in every state:
| Alabama: 5.45% | Alaska: 6.00% | Arizona: 5.44% | Arkansas: 5.99% | California: 5.11% |
| Colorado: 5.62% | Connecticut: 5.47% | Delaware: 4.88% | Florida: 5.37% | Georgia: 5.81% |
| Hawaii: 4.78% | Idaho: 5.50% | Illinois: 5.35% | Indiana: 5.56% | Iowa: 5.67% |
| Kansas: 5.58% | Kentucky: 6.00% | Louisiana: 5.56% | Maine: 5.17% | Maryland: 5.34% |
| Massachusetts: 5.45% | Michigan: 5.92% | Minnesota: 5.82% | Mississippi: 6.07% | Missouri: 5.58% |
| Montana: 5.50% | Nebraska: 5.25% | Nevada: 5.80% | New Hampshire: 5.25% | New Jersey: 5.21% |
| New Mexico: 5.90% | New York: 5.39% | North Carolina: 5.52% | North Dakota: 5.00% | Ohio: 5.99% |
| Oklahoma: 5.95% | South Carolina: 5.62% | South Dakota: 5.49% | Oregan: 5.03% | Pennsylvania: 5.48% |
| Rhode Island: 5.50% | Tennessee: 5.58% | Texas: 5.73% | Utah: 4.90% | Vermont: 5.49% |
| Virginia: 5.45% | Washington: 5.25% | West Virginia: 6.67% | Wisconsin: 5.15% | Wyoming: 6.00% |
Over time, however, these rates have seen some shifts influenced by various factors, including economic trends and changes in consumer behavior due to technological advancements.
The rise of online platforms has increased transparency leading to more room for negotiation, while during economic downturns, sellers often negotiate harder on commission rates to maximize their returns.
Understanding the Real Estate Commission Game
The real estate industry operates on a percentage-based commission system, which dates back centuries. This system allows agents to earn income based on their role as facilitators in property transactions.
Next Step:
Ready to dive into the world of real estate? Here are some steps you can take right now:
1. Research your local real estate market: Understanding your local market will help you gauge average commission rates and identify potential opportunities.
2. Assess different brokerages: Different brokerages offer varying support services and have different agreements regarding commission splits.
3. Stay informed about economic trends: Changes in consumer behavior due to technological advancements or economic downturns could influence negotiation power over commission rates.
We hope this deep dive into why real estate agents get a percentage has been enlightening! Do you have any additional questions or thoughts? Share them with us below!
Or better yet – if you’re an aspiring agent or just curious – put this knowledge into action by exploring your local real estate scene today!
