How Real Estate Commission Work

Have you ever wondered how real estate commissions work? Or maybe you have wanted to know how your buyer’s agent gets paid? Or how much selling your home will cost you? Today we will be discussing these and other commission related questions and explaining how it all works.

How Much Does it Cost to Sell My Home?

There are a lot of misconceptions regarding real estate commissions. To begin, let's look at how much selling a home costs. We have another post discussing all the closing costs sellers can expect to pay when selling a home in Texas. You can see that post here. When sellers hire an agent to sell their home they will agree to pay that agent a certain amount. Every brokerage is free to set their own pricing and structure of payment. One brokerage might take a flat fee payment up front while another might take a flat fee at closing. When done at closing, they only get paid if they successfully sell the house. More commonly, however, the seller agrees to pay a percentage of the sale price. There is not a standard amount that is charged but 6% is not uncommon. I have seen some of our competitors charging as low as 4% and others as high as 8%. There is a lot of variation and even then, sellers can attempt to negotiate for a lower commission.

At BlackJack Realty, we give sellers options. We have 3 different plans that charge different percentages based upon the level of marketing the client wants. If a client wants full marketing including aerial photography, walkthrough videos and 3D tours then they will be paying a higher commission than a client that only wants professional pictures. Marketing costs can add up quickly and since we typically get paid at closing there is a risk spending thousands of dollars upfront and then never getting paid if the house doesn’t sell.

Welcome to the Multiple Listing Service

So let’s say an agent charges you 6% to list your $400,000 home. Wow $24,000 is a huge commission for one sale. Except that is not how it works. See, most agents belong to what is called the Multiple Listing Service or MLS. The MLS is a database that allows agents to share their listings with other agents in hopes those agents will have a buyer that can buy the home. The MLS streamlines the real estate process, otherwise if you wanted to buy a home you would have to go to each and every brokerage and see what homes that individual brokerage was selling. Instead, you are able to go to one agent that can help you with most any home that is for sale.

If you want to learn more about the history of this and how the current system came to be, check out this article.

What About the Buyer's Agent?

So, you hire an agent to sell your home for 6% and they in turn put it in the MLS and offer to share some of that 6% with buyer’s agents. Part of the purpose of the MLS is for agents to have a blanket commission agreement between each other. Now, the seller’s agent can choose how much they are willing to share with the buyer's agent. A lot of agents want to be fair and offer to split the commission 50/50 but they are not bound to that and can offer more or less. So now you have a seller’s agent making 3% and a buyer’s agent making 3%. Back to our example at $400,000 that is $12,000 to each of them. But again, not really.

The Brokerages Cut

The thing is, agents work for brokerages so really it is the brokerage earning that amount. And brokerages often have lots of overhead such as staff, office space, and marketing budgets. So the agents get paid depending on the agreement with their brokerages. Some brokerages pay their agents hourly or salary but that is far from the norm. Most agents are independent contractors and instead have an agreement with their brokerage as to how much they will get paid per sale. This could be as low as 30 or 40% of the earned commission. Other brokerages might give the agent 100% of the commission and instead charge the agent monthly and annual fees along with a transaction fee each time they sell a property. Or somewhere in between.

The Pie Gets Divided into Smaller and Smaller Slices

So to recap, that $400,000 house with a 6% commission paid $24,000 which became $12,000 when split between buyer’s agent and seller’s agent. It then again was maybe cut in half to $6,000. Of course, the seller’s agent then spent a large chunk of that on marketing while the buyer’s agent spent a lot of time and gas showing the buyer different homes until they found the right one. Lastly, let’s not forget our good buddy Uncle Sam. He feels entitled to a large slice of this especially since most agents are considered self employed and have to pay higher tax rates because of this. 

In the end, agents might walk away with only a couple grand from a sale. Not as good as you expected right?

Hopefully this answered a lot of your questions about real estate commissions. Let us know if you have any other questions and if you are considering buying or selling, please reach out to us.