Most investors have a trusted realtor on their real estate team. While you’re focused on finding deals and cash flow, you may not initially think about how do realtors get paid and if that fee comes out of your pocket.
Realtors are essentially intermediaries between buyers and sellers, so they are paid on commission when you close on a property. But who is responsible for that fee, and how much commission do realtors normally take? This article explains how realtor commission works and when they receive their payment.
What Is The Difference Between a Realtor and a Real Estate Agent?
It’s very common to use the terms “realtor” and “real estate agent” interchangeably, but there is a difference between the two. Realtors are normal real estate agents and National Association of Realtors members. On the other hand, real estate agents are licensed professionals working in the real estate industry. Both real estate agents and realtors assist buyers and sellers in purchasing and selling real estate. Still, only realtors adhere to a code of ethics set by the National Association of Realtors.
An Example of How Real Estate Commissions Work
To better understand how real estate commissions work, let’s first establish what a real estate commission is. A commission payment is a percentage of the home’s sale price that the realtor who represents the buyer or seller earns. Typically, the buyer’s and listing agents split this total commission.
What is a realtor’s commission?
A realtor’s commission is essentially their pay in exchange for the services they offer as either helping a homeowner sell their home or a prospective buyer purchase a home. The realtor and the client negotiate the commission rate at the beginning of the transaction.
What is a typical commission?
The typical commission rate for a real estate sale is 6% of the sale price of a property, with both the buyer’s agent and seller’s agent splitting the commission and getting 3% each. Let’s say you sell your house for $500,000, and the commission is 6%. In this case, the commission would be $30,000 (6% of $500,000), and the buyer’s and seller’s realtor would each receive $15,000.
However, this is just an industry standard, and the commission rate may vary depending on the region, the real estate market, and the type of property involved.
What does a realtor’s commission include?
A realtor’s commission typically covers the following expenses associated with their work on a real estate sale:
- Realtor’s services: The commission includes compensation for the realtor’s services in helping the buyer or seller with the transaction.
- Marketing and advertising: The commission also covers the cost of marketing and advertising the property.
- Legal fees: The commission includes any legal fees associated with the sale of the property.
Do sellers pay realtor fees?
Technically the seller is the party that pays the realtor fees, although the payment comes out of the money the buyer spends to purchase the property.
In some cases, the seller’s agent may take on the role of both the seller’s agent and the buyer’s agent (this is known as dual agency), meaning they would receive the entire commission. Additionally, there may be situations where the seller negotiates a lower commission rate or agrees to cover some of the buyer’s closing costs instead of a commission.
The seller and their agent negotiate the commission rate before working together. However, it’s also important to remember that without the help of a real estate agent, sellers may have a more difficult time marketing their homes, finding qualified buyers, and navigating the complex process of selling a property.
How do realtors get their payment?
The listing broker is responsible for ensuring real estate agents get paid once a real estate transaction completes. Once the transaction finishes and the brokerage receives the commission from the seller’s attorney or closing agent, the brokerage will distribute the payment to the realtor. The amount the realtor receives is typically split between their brokerage and the realtor.
There may also be fees or expenses deducted from the realtor’s payment, such as advertising costs or association fees. Overall, the process for payment may vary slightly depending on the specifics of each realtor’s arrangement with their brokerage.
How is the Commission For The Realtor Determined?
The negotiation process between the realtor and the client, before anyone signs a listing agreement, determines the commission rate for the realtor. The commission rate can vary depending on the region, the real estate market, and the type of property sold.
When, Exactly, Do Realtors Get Their Commission?
Real estate agents get their commission payment after the transaction is complete. The commission payment is typically made at the sale’s closing, and it can take up to 30 days for the payment to process and distribute to the payees.
Does a realtor share their commission with other parties?
Yes, a realtor will share their commission with other parties involved. Initially, the buyer’s realtor and the listing agent split the commission. The agreed-upon split can vary depending on several factors, such as the realtor’s experience, performance, and the specific brokerage they work with.
There are other parties aside from the brokerage that a realtor may share their commission with. For instance, if a realtor refers a client to another realtor who ultimately closes the transaction, the referring realtor may receive a percentage of the commission earned by the closing realtor. Specifics on how and when commission splits or sharing may occur can vary depending on the real estate firm.
What Happens to Commissions When the Sale Doesn’t Close?
Even if a real estate agent works hard, there’s no paycheck guarantee. The realtor will not receive a commission if a sale doesn’t close. A real estate agent earns payment only once the transaction is complete.
Some real estate brokerages have policies that may differ from this general rule. For example, a real estate brokerage may pay the listing agent a reduced commission if the transaction falls through due to reasons beyond their control, such as a natural disaster or financing issues.
Other Real Estate Pay Models
Not all realtors work on a commission basis—there are other real estate pay models besides the commission-based model. Some agents and real estate brokers charge a flat fee, while others charge an hourly rate or a percentage of the sale price.
Do Realtors Receive a Base Salary?
Realtors do not receive a base salary as they don’t have an employer as they are technically self-employed. They only receive payment when they complete a real estate transaction.
What Percentage Do Most Real Estate Agents Charge?
Real estate agent fees are a significant expense during a sale, so it’s important to understand what percentage most real estate agents charge.
On average, real estate agents in the United States charge around 6% to sell a home, typically split between the buyer’s and seller’s agents. However, this percentage can vary.
In some cases, agents may charge a flat fee or a lower percentage for more expensive or less competitive properties. Researching and asking potential agents about their fees and services is important before deciding to work with them.
Remember, while real estate agent fees can be a significant expense, they can also save you time, money, and stress in the long run by helping you navigate the complex process of buying or selling a home. So, don’t be afraid to ask questions and find an agent who fits your needs and budget.
Are You Supposed to Pay Your Realtor Directly?
Typically, you don’t pay your realtor directly. Instead, the real estate agent’s commission comes from the property’s final sale price. This means that if you are selling a home, the commission will come out of the proceeds from the sale. If you buy a home, the seller pays the real estate agents.
Find an Agent in Minutes
Match with an investor-friendly agent who can help you find, analyze, and close your next deal.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.