How Real Estate Agent and Broker Fees Work
Thinking of buying or selling a home? This is a major financial decision and you will want to make sure to minimize your costs when buying a home or maximize your potential when selling a home.
(For more information on buying a home, see: How to Buy Your First Home.)
Between 70% and 80% of homeowners use a real estate agent or broker when buying or selling a home. Since agents work on commissions, they’re only paid when a home sells and don’t receive payment until after settlement. That agent is going to work hard for you. (For more, see: what's the difference between a Real Estate Agent, a Broker, and a Realtor?)
The standard commission is 6%. This is usually split between the sales agent (listing agent) and buyer agent. However, that full 6% isn’t really going to the sales agent and listing agent. It first goes to the listing brokerage. At that point, an agent often receives a cut of between 60% and 90%, but it can be lower.
If you’re going to hire an agent, it's highly recommended that you research his or her history. If that agent has a great track record, it might be worth paying a premium, which essentially means paying full commission. If you can’t find an agent with a great track record, then at least attempt to negotiate the commission.
Buyer Agent Tips
If you’re buying a home and plan on using an agent, there are several steps to follow to ensure you’re making good decisions. (For more, see how to Choose the Right Real Estate Broker.)
- Shop around for the agent with the best reputation. Paying a premium for someone who can get you the best deal can save you thousands of dollars or more.
- Negotiate commissions. The only exception to this rule is if you’re working with a top-tier agent which would make full commission justifiable because that agent will save you money.
- Don’t reveal to the agent what you’re willing to pay for a home while offering a much lower amount to the seller. The agent might use this information to his advantage if he’s more concerned with his commission.
- Use www.naeba.org, the website for the National Association of Exclusive Buyer Agents. This site will help you find buyer agents who have no ties to seller agents. This is also a good way to find a buyer agent who works on a fee structure as opposed to commissions.
- Be wary of inspector lists provided by buyer agents. The buyer agent and inspectors on that list might have a mutual interest that doesn’t benefit you – it's possible that the inspector won’t disclose the real damages to the home because the buyer agent wants the commission when you buy the home and the inspector wants repeat business from the buyer agent.
If you’re selling a home you can also choose to not use an agent. Pricing is the key to success if you’re selling a home on your own. You can hire an independent appraiser for around $200 to ensure you’re pricing the home correctly.
How much money will you save? Let’s assume you would have used an agent and paid a 6% commission for a $200,000 home. That’s a whopping $12,000. If you instead used an independent appraiser for $200, plus let’s assume $200 for advertising, then you just saved $11,600.
Selling your home without an agent has its challenges including the time spent as well as the expertise needed to navigate real estate procedures and contracts. And if you have an unusual property, or the market is soft, you could be in for a long wait.
The Bottom Line
Buying or selling a home is one of the largest financial transactions most people will make. It's important to understand how real estate agents on each end of the deal get paid. That way you can decide if going it hiring an agent or alone is the best choice for you.