How do real estate agent commissions work?

When I first started working in real estate, I had to get used to the fact that I’d have to talk about how I get paid all the time. In my previous career in corporate tech, salary and compensation never felt like topics to be openly discussed outside of hiring interviews and performance reviews. When I became a realtor, I realized agent commissions are a hot topic for everyone, real estate professionals and consumers alike. Real estate commissions can be confusing, so let’s break it down.

In real estate, sales commissions are the primary, and oftentimes only, compensation earned by real estate agents. Earnings are based on sales, and agents typically don’t get paid unless a sale closes. (Some real estate agents are salaried, i.e. Redfin agents, but most agents must close sales to earn any income.) 

That said, a real estate agent’s income fluctuates based on their client’s needs and timelines. An agent could work with a client for weeks, months, or years before they close a sale – IF they close. Almost every agent I know has had the misfortune of a client or sale not panning out; it’s a risk of doing business. There have been times when I’ve worked with a buyer client for years before we found the right property. Sometimes the stars align and my client lands the first house they make an offer on. In either scenario, I don’t earn a commission until escrow closes on that property.

Commissions: Amounts and splits

Typically a real estate commission is 5% to 6% of the home’s sale price, though commissions are always negotiable. In Santa Clara County, I’ve observed total commissions as low as 4% (i.e. discount brokers) to as high as 10% of the sale price (i.e. land sales, highly unique properties). In real estate transactions, the commissions are paid out to the listing side and split with the buying side.

First, let’s get some terms out of the way. For simplicity, we’ll use the term broker and brokerage interchangeably.

Commissions – the fees paid to real estate brokers and their agents in a real estate transaction

Listing broker – the real estate company or firm under which the listing agent works

Selling/cooperating broker – the real estate company or firm under which the selling agent (buyers agent) works

Listing agent – the real estate professional who represents the seller in the sale

Selling agent (buyers agent) – the real estate professional who represents the buyer in the sale

Between seller and listing broker

The listing agent and the seller agree upon the commission amount at the time of finalizing the listing agreement. The seller pays the commission at close of sale, and the commission is split between the listing broker and the selling/cooperating broker. (Notice I said listing broker and selling broker, not listing agent and selling agent. That’s because every broker-agent commission split is different.) The split is oftentimes 50/50 but not necessarily. In some cases, the seller and listing agent agree on a higher percentage going to the listing side because of the costs associated with listing property. For example, if the total commission is 6% then the listing and selling brokers may each get 3% (50/50 split) or the listing broker may receive 3.5% and the selling broker 2.5% (or some other split adding up to 6%). 

Between listing broker and selling/cooperating broker

When the sale closes, the listing broker compensates the selling/cooperating broker with a percentage of the total commission as outlined in the listing agreement. Listing agents disclose these percentage allocations when inputting listings into the MLS. Usually in Santa Clara County, I see 2.5% going to the buy side, but sometimes I’ll see 2%, 2.25%, or 3%. A listing with a lower commission percentage could deter some agents from showing the property just as one with a higher commission might motivate agents. (Ethically speaking, agents should show properties that fit their clients’ criteria, but behavioral economics have proven time and again just how powerful incentives can be.)

Between broker and agent

The listing broker compensates the listing agent at close of sale according to their broker-agent split. A 90/10 split means the agent earns 90% of the commission and the broker earns 10%. Top producing or high volume agents see 90% while most agents see somewhere in the range of 70-80%. These splits vary from brokerage to brokerage and depend on a variety of factors. 

That said, if the listing broker receives 3% from a sale, then the agent receives their split percentage of that 3%. The same goes for the selling/cooperating broker and selling (buyers) agent. If the selling broker receives 2.5% from a sale, then the agent receives their split percentage of that 2.5%.

Between selling agent (buyers agent) and buyer

The buyer does not pay the selling agent (buyers agent) a commission as part of a home purchase, though the buyer does need to pay closing costs. The seller pays the real estate commissions. Of course, the buyer and their agent can always negotiate a separate fee or bonus for superb service (the same goes for the seller and their agent).

What if the same agent represents both seller and buyer?

In this dual-agency scenario, the listing broker earns the total commission. Sometimes the seller and listing agent agree to a specialized commission rate in anticipation of this situation. For more reading on this topic, see my post on variable/dual rate commissions.

Now for some commissions math

Let’s take an example of a property listing in which the seller and listing agent agree on a total commission of 6%, split 50/50 between listing broker and selling/cooperating broker. The property sells for $2,000,000. The total commission comes out to be $120,000 (6%).

The listing broker and selling/cooperating broker each make $60,000 (3%). For this example, we’ll say the listing agent stands to make 85% of that 3%, so $51,000. The listing broker earns the remaining $9,000. The selling agent (buyers agent) stands to make 70% or $42,000, with the selling broker earning $18,000. 

Why agents earn their commissions

Unless you’ve worked in the industry yourself, it might be difficult to imagine all the effort that goes into successful real estate sales. So much happens behind the scenes, not just the work itself but also the costs. Every real estate agent is working for themselves, running their own small business. Just like any other small business, there are baseline costs to keeping the lights on. Additionally, we have industry- and brokerage-specific costs to cover: license fees, office fees, association fees, MLS fees, transaction coordination fees. Because of the constantly changing environment, we invest in continuing education, training, networking, industry events, and conferences. Many agents invest in software and marketing tools to enhance various aspects of the client experience. 

Successful realtors invest heavily in the client experience

In addition to expertise, the greatest value I provide to clients is the time I spend with them throughout the entire sales or purchase process. Clients have access to me and the critical resources necessary to stay informed and make smart decisions. I’m always scanning and gathering data to stay on top of the trends so I can give my clients every advantage. Most clients work 9-5 schedules, which means I often meet with them during evenings and weekends. 

In addition to time investment, each transaction incurs specific financial costs, too. When I take on a listing, I cover many costs associated with marketing and advertising the property. Here’s a shortlist: photography, videography, 3D virtual tours, floor plans, digital marketing (social media, emails), physical marketing (flyers, mailers), broker tours, and open houses. There may be other costs I incur upfront and get reimbursed after closing, such as staging, cleaning, painting/repairs.

With buyer clients, I invest large chunks of time previewing and showing properties. I get to know the listing side if I’m not already acquainted. If my clients want to explore a property’s potential or upside, I offer design ideas and vendor referrals. I carefully pore through disclosures and other documents to ensure my clients can be as informed as possible prior to making a purchase decision.

From negotiating the best price and terms to overseeing the transaction through closing, I advocate for my clients until they have keys in hand or see money in the bank. Even after closing, I make myself available to assist with post-transaction tasks, such as referring movers, cleaners, contractors, or property managers. Work with me and you get real estate guidance for life.

Successful clients work with savvy realtors

As people say, the devil’s in the details, and there are so many details involved with a real estate transaction. The right information can make or break a deal. When your realtor knows what information to look (out) for, how to obtain it, and how to use it to your advantage in negotiations, you know they’re earning their keep. Working with a skilled realtor with strong business acumen and intuition means you can save money and time, avoid regret, and have peace of mind. 

My clients know the value of working with a competent and responsive realtor. They realize the value in their net proceeds from the sale, in the smoothness or swiftness of escrow. Perhaps, most importantly, they feel it in the joy of having achieved their real estate goal.

Want to experience the value I can add to your home sale or purchase? Contact me or email me at fsun@intero.com for a consultation.