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Real estate agents typically work on commission, earning payment only when a transaction closes. Understanding how commission works helps buyers and sellers budget appropriately and negotiate effectively. Commission structures and amounts vary by market and are negotiable.

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How Commission Works

Real estate commission is a fee paid for agent services, typically calculated as a percentage of the property sale price.Key points:
  • Paid at closing from sale proceeds
  • No sale means no commission
  • Amount is negotiable
  • Split between multiple parties
Traditional model: Seller pays total commission out of sale proceeds at closing.Buyer-paid commission: In some markets or situations, buyers may compensate their own agent directly through buyer-broker agreement.Recent changes: Real estate commission practices have evolved. The traditional model where sellers pay both agents’ commissions is no longer universal. Buyers should discuss commission arrangements with their agent upfront.
Total commission is divided:
  • Seller pays total commission (traditional model)
  • Split between brokerages: Listing brokerage and buyer’s brokerage each receive a portion
  • Split between broker and agent: Each brokerage splits its portion with the individual agent
Example:
  • $400,000 sale price
  • 5% total commission = $20,000
  • Split: $10,000 to listing side, $10,000 to buyer’s side
  • Each brokerage keeps portion and pays agent remainder based on their agreement

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Typical Commission Rates

Commission rates vary significantly by location and market conditions. There is no standard or typical rate.Rates are always negotiable between seller and listing agent.
Commission may be influenced by:
  • Local market customs
  • Property price (higher-priced homes may have lower percentage)
  • Property condition and marketability
  • Services provided
  • Competition among agents
  • Market conditions (hot vs slow market)
  • Complexity of transaction
High-value properties often have lower commission percentages but higher dollar amounts.A $2 million property might have a lower percentage rate than a $300,000 property, but still results in substantial compensation.

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Alternative Fee Structures

Fixed dollar amount regardless of sale price.When used:
  • Discount brokerages
  • Limited service models
  • Very high-value properties
Considerations: Ensure services provided meet your needs at the flat fee offered.
Different rates at different price points.Example: Higher percentage on first $500,000, lower percentage above that amount.More common with luxury properties.
Some brokerages charge by the hour or monthly retainer instead of commission.Rare in residential real estate. More common with:
  • Real estate consultants
  • Specific advisory services
  • Commercial real estate in some cases
Reduced commission in exchange for limited services:May include:
  • MLS listing only
  • Limited marketing
  • No showings assistance
  • Minimal negotiation support
Savings vs service tradeoff: Lower cost but more work and responsibility for seller.

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What Commission Covers

Professional marketing costs agents incur:
  • Professional photography
  • Virtual tours and video
  • Staging consultation
  • Print marketing materials
  • Online advertising
  • Open house expenses
  • Signage and lockboxes
Agent time investment:
  • Property showings (often evenings and weekends)
  • Market research and analysis
  • Negotiation time
  • Transaction coordination
  • Problem-solving
  • Communication and updates
  • Paperwork and documentation
Agent business expenses:
  • MLS and association dues
  • Licensing and continuing education
  • Errors and omissions insurance
  • Office and administrative costs
  • Technology and software
  • Transportation
Agents don’t keep full commission:
  • Broker receives portion for supervision, office, insurance
  • New agents may split 50/50 with broker
  • Experienced agents may keep 70-90%
  • Some pay flat fees instead of percentage to broker

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Negotiating Commission

Sellers can negotiate commission with listing agent:
  • No standard or fixed rate
  • Discuss rate before signing listing agreement
  • Consider value provided, not just cost
  • Compare offerings from multiple agents
When evaluating commission:
  • Marketing plan quality
  • Agent experience and track record
  • Services included
  • Agent’s market share and reach
  • Comparable sales data
  • Your property’s marketability
The agent who will net you the highest sale price may not be the one with the lowest commission.
Commission negotiation happens:
  • During listing presentation
  • Before signing listing agreement
  • As part of total service discussion
Once listing agreement is signed, rate is set for that contract period.
Buyers should discuss compensation with their agent:
  • How will agent be compensated
  • Amount expected
  • If seller doesn’t offer to pay, who pays
  • Impact on offer strategy
This should be addressed in buyer-broker agreement.

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Additional Costs

Costs beyond agent commission:
  • Closing costs (title insurance, recording fees, etc.)
  • Property repairs or improvements
  • Staging costs
  • Home warranty for buyer
  • Prorated property taxes
  • HOA fees and assessments
  • Moving expenses
Agent can help estimate total selling costs.
Costs beyond agent commission (if applicable):
  • Down payment and closing costs
  • Inspection fees
  • Appraisal fee
  • Lender fees
  • Title insurance
  • Homeowners insurance
  • Moving expenses
Agent should help buyer understand all transaction costs upfront.
Some agents charge separate fees for:
  • Transaction coordination
  • Administrative services
  • Document preparation
These should be disclosed in listing or buyer agreement.

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Getting Value

What full-commission agents typically provide:
  • Comprehensive marketing
  • Professional photography and materials
  • Active showing management
  • Skilled negotiation
  • Full transaction coordination
  • Problem resolution
  • Local market expertise
Situations where limited-service might work:
  • Hot market with high demand
  • Pristine, highly desirable property
  • Seller with time and willingness to handle tasks
  • FSBO with MLS listing access needed
  • Very straightforward transaction
  • What services are included in your commission?
  • What marketing will you provide?
  • How do you handle showings?
  • What is your negotiation experience?
  • How available are you throughout the process?
  • What happens if challenges arise?

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