Real Estate Commissions: Everything You Need To Know
Feb 19, 2024
As you may know, real estate agents make their money from commissions. When agents work with clients to buy or sell properties, they take a certain percentage or flat fee of that sales price as payment for their services. Real estate commissions are not cheap, and although sellers are acutely aware of how much agents cost, most buyers aren’t aware of how these commissions factor into the sales price of a home.
Whether you’re buying or selling, it’s essential to know what these commissions are and what you can do (if anything) to minimize them!
Real Estate Commissions Are Typically Between 5-6%
The first thing that you should know about these commissions is that they typically are around 5-6%. This figure includes the commission for both the buyer’s agent and the seller’s agent. Each one usually takes about 2.5% of the home’s value for their services.
While 5% might not sound like a lot, consider that as of May 2020, the average home price in the US was $284,600. Therefore, the average homeowner paid about $14,230 in commissions.
Imagine what you could do with $14,000 extra in your pocket. That could pay for a small car (or be a nice extra down payment on your next property!).
Of course, for homes worth $500,000 or $1 million, the stakes get even higher. If you’re selling one of these properties, you could easily be looking at paying two new cars’ worth of commission.
Who Pays for These Commissions?
Technically the seller pays for all real estate commissions. However, this is somewhat misleading. When the buyer closes on a property, they’ll initiate a wire transfer to an escrow company. From the closing price, the seller has to pay specific fees. Two of those line items are the real estate commissions, one for the buyer’s agent and one for the seller’s.
So while the seller “pays” for the commission, it’s the buyer who indirectly pays for it. If there were no real estate commissions involved, the seller could accept a lower offer and make the same amount of money. Instead of taking a $250,000 offer, they could get one for $237,500 and walk away with the same amount in their pocket.
It’s a very similar concept to credit card fees. Technically the merchant pays the fees per swipe, but if there were no fees, the sellers could offer lower prices and still make the same amount of money.
How Can I Avoid Commissions?
After reading the above, you might want to avoid these commissions altogether. After all, is it worth $12,500 to sell your $250k house? That’s a lot of money to give away.
It’s tough to avoid real estate commissions entirely, but there are ways to reduce them. Here are two popular ones.
For Sale By Owner
If you’ve looked around the internet, you may have noticed some listings tagged as “for sale by owner.” These listings have no seller’s agent – the seller is doing all the work of advertising, showing the home, and typing up the contracts themselves. It’s perfectly legal to sell a home without the help of a real estate agent!
This tactic avoids the seller’s real estate commission because there’s no seller’s agent involved. It doesn’t, however, prevent the buyer’s agent commission. If the buyer comes with a real estate agent, the seller must pay the buyer’s agent commission if they accept the offer.
So the “for sale by owner” tactic only saves 2.5%-3%, not the full 5-6% commission amount. On a $250,000 home, that would be somewhere between $6,250 and $7,500. It’s not a small sum of money by any means, but not quite as impactful as saving the full 5-6%.
However, there are cons to this approach. Putting your home up as “for sale by owner” will save you money. The problem is that real estate agents do provide benefits for clients. For example, buyer’s agents know plenty of negotiating tactics to cut into the seller’s profit. Seller’s agents, of course, know these tactics and can advise clients appropriately. There’s a reason why homes sold by real estate agents tend to have higher prices than those sold by the owners.
Understanding Real Estate Brokerage Commissions
Real estate brokers play a pivotal role in facilitating real estate transactions, with most real estate agents charging a commission that is a percentage of the sale price. This fee, often split between the selling agent and the listing broker, is governed by norms set forth by the National Association of Realtors.
The real estate agent’s commission incentivizes them to list the property on the Multiple Listing Service (MLS), effectively reaching potential buyers and ensuring a wider exposure. It’s essential to recognize that the real estate brokerage commission is not just a fee but an investment in professional expertise and market access. By understanding the dynamics of real estate transactions, including the role of the selling agent and the listing broker, homeowners can navigate the process more effectively, ensuring a smoother transaction and potentially better financial outcomes.
Use a Low Commission Platform Like SimpleShowing
For most people, the problem isn’t using a real estate agent. It’s well-known that real estate agents bring a lot to the table when it comes to negotiations, legal liability shielding, and helping close deals. Agents tend to get sellers more money for their homes for far less work on the seller’s part than going it alone.
What if, therefore, the goal wasn’t to eliminate real estate commissions altogether but instead minimize them?
Fortunately, there is. SimpleShowing is a platform designed with this objective in mind.
Instead of paying a 3% listing commission, you’ll pay a 1% commission when selling. On a $250,000 home, that’s a savings of $5,000. However, you’ll still have an experienced, local agent selling your home. You’ll get all the benefits of a listing agent, just without the expense!
Buyers also receive benefits. They’ll get money towards closing costs with SimpleShowing, which incentivizes them to find your property on our search platform. It’s a win-win for everyone. You save on commissions, and the buyer saves on closing costs!
Real Estate Commissions: Not Entirely Avoidable, But Not Bad Either
There’s a common misconception that real estate commissions are somehow “bad.” They’re not. Real estate agents provide a valuable service to sellers and buyers, and they deserve some compensation for that service.
However, the old model of these commissions needing to eat up 5-6% of the home’s value is outdated. SimpleShowing can charge just 1% of the home’s value to sellers with streamlined technology and an innovative business model. Assuming the standard buyer’s commission of 3%, that means you’ll pay 4% instead of 6%. You’ll still get all the benefits of a real estate agent, though.
2% might not sound like a lot, but when you’re dealing with homes in the hundreds of thousands, it’s a lot of extra money in your pocket.
If you’re thinking of selling, give SimpleShowing a try!