Are you deciding on buying a home? Real estate is a big investment, and closing the deal can take a long process.
Real estate investment involves a lot of work. It starts when the property is listed to the buyer, making an offer until the settlement is signed.
If you’re selling or buying a house, you’ll get to work with a real estate agent more often than not. Real estate agents make the process streamlined for you.
Read more to find out the importance of real estate agents and how they get paid for their service.
Why are Real Estate Agents Important?
To save money for their commission, you might decide to sell your own house without the help of an agent. However, selling it alone (also known as “for sale by owner”) has more risks than benefits.
Real estate agents take on a vital role in the industry because of their expertise in the market. Agents can also negotiate on your behalf, and they help you make the entire process easier.
Real estate agents can also help you prevent emotional sales. They can handle rejection and negative feedback with professionalism.
Deciding to sell your house alone can also be taxing if you have full-time work. Real estate is a full-time job; hence agents can show your home to interested buyers when you’re unavailable.
Additionally, real estate agents have a professional network, and they can spread the word on your property for sale. Lastly, they can identify who are qualified and interested buyers because of their expertise in the field.
It works both ways, as agents can also help in selling a property. Consider looking for other articles to determine if you should use a real estate agent in selling your home.
Agent, Broker, and Realtor– What’s the Difference?
It’s necessary to understand first the difference between an agent, broker, and realtor.
Real estate agents are licensed to help people buy, sell, rent real estate. Agents work under a broker or a brokerage firm.
Real estate agents cannot work alone and can’t be paid directly by the clients.
Unlike agents, brokers can work independently, and they can hire agents to work under them. Commissions are paid to a broker, and that broker divides it to the agents that are part of the transaction.
Brokers and agents can be realtors if they become a National Association of Realtors (NAR). They are expected to comply with NAR’s strict Code of Ethics.
How Are Real Estate Agents Paid?
Most real estate agents are paid via commission. They charge a percentage of the property’s sale price when the deal is closed.
According to a 2021 FastExpert study, a real estate agent’s estimated commission is 5.46% of a property’s sale price. This percentage is shared between the buying and selling agents, giving both an estimate of 2.73% earnings.
It’s important to note that the given numbers may differ depending on the market and the localities. On top of that, commission rates are also negotiable.
In the United States, the assumption for the commission rate is 6%. The rate is coming from the National Association of Realtors (NAR) in the 1950s.
By keeping a fixed 6% commission rate, it becomes immune to inflation. However, although the NAR recommends agents to stick to the 6% commission, the average commission rate differs through the years.
New real estate agents may charge you for as low as a 3 to 4% commission rate. At the same time, the top-performing agents and realtors can charge from 6 to 10% because of the excellent service.
The commission rate is not part of the listing agreement. It’s an agreement of the seller and the seller’s agent that depends on the sale price and other factors.
The commission rate may also differ on the location. Some regions charge lower than others, while some agents work at a fixed commission rate.
When Do Real Estate Agents Receive Their Commission?
Real estate agents get their commission upon closing the deal and payment of the closing cost. As easy as it may appear, there are more intricate works to that.
First, let’s define closing cost, which usually takes 8 to 10% of the property’s sale price. 2-4% goes to, taxes, appraisal fees, title insurance and other fees, while 6% goes to the commission rate.
The commission is charged to the sellers for the real estate services done in selling or buying the property. After the deal has been made final through a contract, the seller disburses payment to the real estate agency.
The commission of a real estate agent is typically added to the selling price of a property. Therefore, the seller pays the agent, but the buyer is usually footing the total cost.
For instance, a property’s selling price is US $ 300,000; and the agent charges a 6% commission rate. The buyer has to purchase the property at US $ 318,000.
After the agency receives the fund, that fund is split between the listing agent. Then, the buying real estate agent and their brokerages each get shares.
Here’s a step by step on the processing of a real estate transfer:
- Real estate agents charge and finalize a commission rate.
- The seller (or listing) and buyer agents have to agree on a divided percentage.
- All the needed documentations need to be completed and the funds to be released by the buyer’s agent.
- The buyer’s agency divides the amount into the seller’s amount and the commission rate.
- The commission amount gets further divided, while the seller’s amount gets credited to their account.
- The brokerage firm transfers to the selling/listing agency their percentage.
- The buying and selling agencies get their share and commission.
How Do Commissions Work?
If you think now is the perfect time to buy a house, you should also know how commissions work. You may research further for the top things to consider in buying a house.
As mentioned previously, most real estate agents are paid by charging a percentage based on the selling price. The commission usually ranges from 5-6% that gets split between the agents and brokers.
Here’s how you break down a real estate agent’s fee:
- Referral Fee- this fee is paid to a company for referring a seller or a buyer. Referral fees are deducted from the commission.
- Real Estate Franchise Fee – some franchisee brokerage firms pay a percentage of their commission to their franchise. Like referral fees, real estate franchise fees are paid before the commission is divided to the agents.
Again, the commission from a property gets divided further to the brokers and agents. Here’s how a commission is typically divided from property worth US $200,000 with 6% commission:
- Selling/Listing Agent – gets 1.5% share with US $3,000 commission.
- Selling/Listing Broker – gets 1.5% share with US $3,000 commission.
- Buyer’s Agent – gets 1.5% share with US $3,000 commission.
- Buyer’s Agent’s Broker – gets 1.5% share with US $3,000 commission.
Pay Computation Sample
In detail, here’s how real estate agents typically get paid. Let’s use the same example of a property with a selling price of US $200,000 with a 6% commission.
The overall commission would be $12,000. The computation is coming from $200,000 multiplied by 0.06.
Often, the selling broker and the buyer’s broker divide this equally, 50-50. Therefore each broker gets $3,000 each.
Then the brokers would then pay their agents. If their share is 50-50, both listing agent and buyer’s agent get $3,000 each.
The agents will only get paid if the transaction has been finalized and completed.
Who Pays the Agent?
Before the seller receives its amount, the commission comes in first. It’s the buyer who is required to pay the real estate agents.
Because the total sale price includes the commission rate, the buyer also pays the commission.
In exchange for their service, real estate agents usually get paid through commissions when transactions are closed. The commission is directly paid to the designated brokers that get split among those involved in the listing.
The commission typically ranges from 5 to 6%, but it can be negotiable and can vary due to other factors. If you think you’re currently dealing with a high fee, look for a fixed fee or a discount broker.
If you think this article is insightful, consider checking out these articles:
- Is Now A Good Time To Buy A House? Top Things To Consider
- Should You Use A Real Estate Agent To Sell Your Home?
- What Is Title Insurance? Types, And Coverage
Don’t forget to share this article with your friends, loved ones, and aspiring real estate agents that you know. Feel free to comment below your thoughts and opinions on this article.