How Do Real Estate Commissions Work?

When you work with a real estate agent to buy or sell a house, naturally, they’ll get paid for their services. But just how much do they get paid – and who pays them? That can vary depending on your unique situation, the housing market and other factors.

This is especially true in the wake of the recently settled class action lawsuit against the National Association of Realtors, which ultimately caused NAR to change its long-held cooperative compensation rules for its 1.5 million-plus member agents and hundreds of multiple listing services nationwide.

“Before the lawsuit, it was customary for sellers to pay commissions for both their agent and the buyer’s agent,” says Sal Kabir, a real estate broker and owner of Einstein Realty in Upland, California. “After the NAR lawsuit, the way real estate agents get paid has shifted.”

Are you planning to buy or sell a home soon? Here’s what to know if you use a real estate agent.

What Changed After the NAR Lawsuit

As Kabir noted, prior to the lawsuit against NAR, the gold standard was a shared commission model. The home seller would pay their real estate agent a commission – typically a set percentage of the home’s sale price – out of the home’s total sale proceeds after closing. Then, the selling agent would give the buyer’s real estate agent a portion of that commission for bringing in the buyer.

Seller agents advertised these commission offerings on multiple listing services – the platforms that NAR members use to list houses – presumably motivating more buyer agents to show their listings to clients.

Today, post-lawsuit, agents are no longer permitted to advertise commission splits in their MLS listings. While sellers can still technically pay for the buyer’s agent fees, that must be negotiated through other means. Buyers also must sign upfront agreements with their agents before viewing any homes. These agreements must detail what services will be provided and what fee the agent is to be paid.

“Now, commissions must be negotiated upfront – particularly with buyers,” Kabir says. “The fee for services will be clearly defined at the start.”

Real Estate Commission Fee Structures Today

The shared commission model is still widely used today, even though seller’s agents don’t advertise those offers or pay the buyer’s agent directly.

“In the majority of the closings we’ve seen so far, the buyer is asking the seller to pay the buyer’s broker’s fee,” says Laura Ellis, chief strategy officer and president of residential sales at Chicago-area real estate firm Baird & Warner. “Essentially, the commissions are being paid through the transaction as they really always have been. What’s different now is the negotiation and the paperwork.”

If a seller refuses to cover the buyer’s agent fees, a buyer may need to pay their agent directly. In some cases, they may actually want to pay the fees themselves for tax reasons.

“Occasionally, savvy buyers are making the decision to keep their tax base lower by offering to pay their agent directly and, in turn, have a lower sales price,” says Lindsey Harn, a real estate agent with Christie’s International Real Estate in San Luis Obispo County, California.

Other payment structures have also grown post-lawsuit. Rather than using commission percentages, some agents offer hourly, a la carte or flat fee services. Again, these are negotiated upfront and put in the initial contract between a buyer/seller and their agent, but according to Jonathan Ayala, a licensed real estate salesperson at Compass in Hoboken, New Jersey, they’re “less common” than the traditional approach.

“Flat fee services are particularly appealing to sellers who like to know exactly how much they will pay or for lower-priced properties where a percentage of commission seems disproportionate,” Ayala says.

How Much Are Real Estate Commissions?

Under the old commission-sharing model, the typical commission was usually 5% to 6% of the home’s sale price – and that was split between the seller’s agent and the buyer’s agent, with each agent getting around 2% to 3%. So, on a median-priced home (currently just above $419,000), a seller would pay a total commission of between about $21,000 and $25,000, which would then be divided among agents.

Most agents say this amount is still the gold standard, but it all depends on the market. In places where the market is highly competitive or a home is very high priced, Ayala says, consumers may be able to negotiate lower commission rates.

“In Southern California, it’s still common for sellers to cover commissions, though in some cases the rates have dropped,” Kabir says. “For example, buyer’s agents might receive as little as 1% of the sales price, which is lower than the typical 2 to 3% seen in most transactions.”

Keep in mind that commissions don’t just go to the agents you work with. They also may be split between the agent and the brokerage they work for. The exact amount differs by company and other circumstances, but for example, it may be a 60-40 split, with the agent receiving 60% and the lead broker receiving 40%.

Are Fees Negotiable?

Agent fees are always negotiable. The key is doing it up front, before viewing any homes or putting your house on the market.

“The time to negotiate fees is when you sign a contract with the agent,” says Ashley Dehart, an agent with Realty from Dehart in Fresno, California. “There will be a section in the contract that covers fees, and if you are uncomfortable with the number, then you should bring it up before you sign. A good agent will have had the discussion with you before the contract is drawn up, though.”

Whether the agent will be amenable to negotiations is another story.

“In the end, every situation is negotiable,” Kabir says, “But commissions will depend on the market, the property and the agreement between all parties.”

Good Things to Know

Here are a few important details for buyers and sellers to be aware of during the process: