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How does real estate commission work?

How does real estate commission work?

November 1, 2020

Real estate commission work

Advance Real Estate Commission

As a real estate agent, realtor or industry professional, you depend on commission to earn your living.

 A deeper understanding of how real estate agent commission works can help you make the best possible decisions as a real estate professional, from projecting the value of an individual sale to developing a prospective budget that helps you manage your finances.

 Keep reading for an in-depth answer to the question “how does real estate commission work?”

Real estate commission defined

The U.S. Department of Labor defined a commission as a payment provided once a defined task is completed. In the case of real estate, that generally means closing a deal on a specific piece of property included in a listing agreement reached between your real estate broker and the seller. This is by far the most common way for real estate agents to be paid for their services.

 Real estate commissions are based on the final sale price of the home agreed upon by the buyer and seller, explained. There isn’t an exact standard used to determine the size of the commission, nor are there state or federal laws that define acceptable ranges.

 In practice, a real estate agent commission rate most often falls between 5-6% of the sale price. This amount is generally paid by the home seller, although this is another matter of convention as opposed to an industry rule or law. The buyer could offer to cover the total commission cost, as a way to sweeten the deal for the seller and close on the property, for example. The buyer and seller could also agree to split the cost, for similar reasons.

 That 5-6% commission rate paid by the seller — or whatever amount all parties agree to — doesn’t go to a single agent, however. The buyer’s agent and seller’s agent frequently split the total amount in half. A portion of that money will also go to the brokers for whom both agents work.

 Commission splits between a real estate agent and broker are highly variable because the percentages are agreed upon individually by the two parties. However, a 60/40 split that favors the agent is common.

 You or the other real estate agent involved in a transaction may work for a discount broker. In these instances, the half of the 5-6% of the sale price that goes to the listing real estate broker is reduced, although the amount paid to the buyer’s agent and broker often remains the same. The specifics can vary significantly, but are agreed upon ahead of time between the listing broker and listing agent.

Buyer, seller and broker: Who pays what?

The distribution of funds can be complex because it involves the seller, buyer (in some situations) buyer’s agents, seller’s agents and the brokers who both of those agents work for. However, the source of funding itself isn’t particularly complicated. The seller of the property in question generally provides the money needed for commissions. As previously noted, the buyer may become involved in certain situations, but does not need to do so.

 Those funds are directed to the brokers involved, as agents can’t receive commission funds directly, SmartAsset pointed out. The listing broker pays the listing agent according to their agreement for sharing commissions, and the buyer’s broker does the same for the buyer’s agent. Depending on your point of view, it can be valid to say the broker is paid out of the agent’s commission. The agent does the lion’s share of the work for selling an individual property, after all. However, from a technical perspective, the real estate broker pays the agent.

What else is there to know about real estate commission?

We’ve covered a lot of ground answering the question “How does real estate commission work?”. Here are a few more points to keep in mind.

 It’s important to understand salary projections in the real estate industry, both to track the general health of your profession and to set personal benchmarks for your own financial goals. After earning a real estate license, finding a broker to partner with and completing other necessary steps, real estate agents can expect to earn a median salary of $48,930, according to the U.S. Bureau of Labor Statistics.

 This figure is impacted by several factors. Some are mostly outside of your control, such as the area where you work and the specific homes you sell. Others, however, can potentially change more easily. You can attempt to negotiate your commission split for your home sales with your broker, both before you begin working for them and if you feel your performance deserves greater compensation.

Commission advances that support real estate agents

Whether you’re a real estate agent, realtor, Redfin agent, dual agent or one of many other types of professionals in this field, you can benefit from advances on pending sales. With an advance, you can smooth out peaks and valleys in your budget, as well as make more actionable plans for the future. Learn more about Just Commission Advance’s processes, and apply for your own advance today.