Home sellers might have the sense that real estate agents charge an exorbitant fee for their services, but some in the business believe they’re not getting paid nearly enough.
Realtor fees can vary depending on what part of the country you’re in and what type of home you’re selling. To better understand real estate commissions, here’s an overview of realtor fees and how realtors are paid.
Realtors are typically paid by the home sellers, says Patrick Duffy, who runs his eponymous brokerage firm Duffy Realty in Miami. After interviewing a few agents, home sellers sign a listing agreement with one in which they agree to pay a commission fee, which can be negotiated but is typically about 5 percent to 6 percent of the sales price.
The listing agent lists the home in the Multiple Listing Service with the intention to cooperate with other area brokers in attracting buyers. If another realtor finds a buyer, the listing broker pays half of the commission to the selling broker.
“That’s pretty much the meat and potatoes of how it works,” Duffy says.
Real estate agents who work for a broker get a cut of the commission as well, and the amount depends on the arrangement they have with their broker.
“The broker has to set the policy and oversee, monitor and supervise everything the agent does,” says Duffy, “and if the agent does something fraudulent or unprofessional, the broker gets sued.”
The typical real estate commission fee averages about 5 percent to 6 percent of the home’s sales price. Most agents work as independent contractors, depending solely on commissions for their livelihoods. But the pay varies widely, depending on the brokerage’s policies where agents work.
According to recent data from the National Association of Realtors, realtors’ compensation structure breaks down as follows:
The jargon in the real estate business can be confusing. For instance, one might think that a listing agent and selling agent are one and the same, but the selling agent is also known as the buyer’s agent. Some states, such as North Carolina, make the distinction between a buyer’s agent and listing agent very clear, as the real estate contract stipulates whether an agent represents the buyer or seller.
When dealing with a buyer’s agent, “You have to sign a buyer’s agency agreement,” says Tim Noland, a buyer’s agent with Great Mountain Properties in Murphy, North Carolina. “A true buyer’s agent works for the buyer. They protect the buyer’s investment, as opposed to the listing agent, who’s actually working for the seller.
“It’s not a good idea to say, ‘This is the prettiest house I’ve ever seen’ (to the listing agent). Those buyers will probably pay more than the listing price for that property.”
It’s perfectly legal for listing agents to sell the properties they’re representing to buyers.
“It ends up being a dual agency, which is legal; undisclosed dual agency is illegal,” Noland says. Dual agency is when one agent represents both the buyer and seller.
Dual agency is illegal in some states, including Florida, Colorado and Kansas. In Florida, transaction broker relationships are the norm.
“You’re really not representing the seller or the buyer, you’re working for the transaction,” Duffy says. “As a transaction broker, the agent will not do anything that would be detrimental to the seller or the buyer.”
According to NAR, the median gross income of realtors in 2018 was $41,800, up from $39,800 the previous year. Median income represents the middle of the scale: Half of realtors made more and half made less. The median income of realtors with 16-plus years of experience last year was $71,000, while the median for those with two years or less experience was $9,300.
Though home sellers may feel fleeced having to pay realtor fees up to 6 percent of their home’s sales price, Duffy argues realtor fees are not high enough. After all, a lot goes into listing a home, such as:
When an offer comes in, the listing agent negotiates on behalf of the seller, often presenting one or more counteroffer. The realtor reviews with their client upcoming closing costs – what they are and what they cover – and may use these as a negotiating tool.
After deducting all the expenses involved, including realtor fees, Duffy calculates how much the seller will net. “The seller wants to know what they will walk out of the closing room with,” he says.
Last year, just 7 percent of home sales were sold by owners without the help of an agent, according to NAR. What’s more is that FSBOs typically sell for less money than homes sold by realtors, NAR claims. In many instances, FSBO sellers know the buyers who end up purchasing their homes.
Roughly a quarter of the buyers who did not already know the FSBO sellers contacted them directly, but the jury is out about whether it’s wise to buy a home without a realtor.
Keep in mind that realtor fees can be negotiated in some cases, especially if you’re selling a luxury home.
“In certain situations where there’s a competitive environment for a prime or trophy listing, realtors sometimes will negotiate the commission upfront,” Duffy says. “For example, if I’m listing a $4 million home at 6 percent that’s a lot of money. In a situation like that there is greater flexibility to negotiate the commission because instead of getting $120,000, if you get $100,000 or $80,000, it’s still a good payday.” (These figures assume that the listing broker ends up with 3 percent of the deal.)
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