How Do Realtors Calculate Commission?

If you enlist the services of a realtor, you will pay a certain commission. So, how do realtors calculate commission? This guide has the answers.

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If you enlist the services of a realtor, you will pay a certain commission. So, how do realtors calculate commission? This guide has the answers.

Realtors charge a commission of 5% to 6% per transaction. This commission will come from the sale of a house. So, if a house sells for $500,000, then the realtor's commission will be $25,000 to $30,000. However, some realtors also charge a flat fee, which can benefit clients on a tight budget.

In this guide, you will learn more about realtors' commissions, how realtors calculate commissions, what realtor commissions cover, as well as who pays the commission. And by the time you finish reading this guide, you will have all the information you need about how realtors' commissions work as well as the amount you can expect to pay if you decide to hire a real estate agent.

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Table of Contents

About Real Estate Agent's Commission

If you are looking to buy or sell a house, there's a high chance you will work with a realtor. Realtors have a thorough understanding of the real estate industry. Therefore, their expertise will help you get the right offer.

Also, working with a real estate agent will make the entire process smoother. Besides helping you to get the right offer, they can also negotiate on your behalf and ensure you file the right paperwork on time, among other tasks.

A realtor will also save you a considerable amount of time. For instance, if you are selling a house, you will have to prepare it, stage it, and show potential buyers around, among other tasks. However, if you are working with a realtor, they can handle all these tasks for you, thus saving you time.

But as you may expect, their expertise in the real estate market is not free. So, if you decide to work with a realtor, you will have to pay for their services. And this comes in the form of commissions.

What Percentage Do Most Realtors Charge?

As mentioned above, realtors will charge you a commission if you decide to use their services. The commission they will charge you will depend on the value of the house you are selling, as opposed to paying them an hourly wage.

So, what percentage do realtors charge? Most realtors across the country charge a commission of approximately 5% to 6% of the property's sale value. Some may also charge you a service fee on top of the commission. However, this isn't common.

Assuming you are buying a house worth $500,000, the commission you will pay to the realtor is approximately $25,000 to $30,000.

However, it's worth mentioning that this amount may not necessarily go to one realtor since most transactions may involve several agents. And each agent involved in the transaction will get a cut of the commission earned.

For example, if there are two agents working on the above transaction, then each will get half of the commission earned, which may be around 2.5% to 3%.

While the commission earned may appear like a lot of money, real estate transactions may sometimes take several months to complete.

Using the example above, the realtor will help you to find a house, negotiate the price with the seller, ensure the house is ready for your occupation and file the necessary paperwork. Therefore, if you were to pay for the services on an hourly basis, you may have ended up paying a lot more.

Furthermore, realtors also have to split the commissions they have earned with their firms. Again, the 2.5% or 3% commission earned may be split further to around 1.25% to 1.5%.

Therefore, while the seller may pay a $25,000 to $30,000 commission on a sale, the realtor may only take home approximately $7,500 from the transaction.

What Does Realtor Commission Cover?

As mentioned above, most realtors charge a commission of around 5% to 6% to help you buy or sell a house. Hence, if you were to sell a house worth $1,000,000, then the realtor will get approximately $50,000 to $60,000.

And some people may feel as if the realtor is getting too large a cut, simply for helping them find a buyer.

But the truth is, selling a house is more than just finding the right buyer. Simply put, there's a lot more that goes into the entire process.

So, what exactly will the $50,000 or $60,000 that the realtor will get go towards? Here are some of the services that you will be paying for with the 5% or 6% realtor commission:

Listing the Property

Once you hire a realtor to help you sell your house, they will need to list it on the appropriate market. And before doing that, they will first gather all the vital details about the property.

Such details may include things like the location, square footage, condition, number of rooms, special facilities, and potential issues. The realtor will use these factors to come up with appropriate pricing for your house, based on the market.

Also, your realtor will shoot some photos of the property, which they will attach together with the other details. And from there, the realtor will make your property's listing available across several listing services.

Pricing the Property

Pricing a property is one of the most important steps in the entire sales process. If you overprice it, you will deter potential buyers. Therefore, your property will stay longer on the market than it should.

And the longer a property stays on the market, the lower the chances of getting the right buyer since some people may think there's something wrong with it.

On the other hand, you don't want to underprice your house, since you may end up losing out on some potential profits. And this is where your realtor will come in.

Your realtor will ensure your property is properly priced. This way, it will sell fast and for the right offer.

Handling Home Inspections

Home inspections can be overwhelming and scary for most buyers and sellers. After all, most people don't know what to expect when the home inspector comes around.

Fortunately, your realtor will also handle that. Having handled hundreds of other home inspections, your realtor already knows what the home inspector will be looking for.

And once the process is complete, they will explain what you need to do moving forward, based on the report.

Marketing Your Property

After creating a listing for your property, the realtor will also go a step further and market your house. And marketing costs can be steep, depending on the methods the realtor is using.

Real estate markets are quite competitive. Therefore, the realtor will need to come up with a means of standing out. To this end, they may be forced to use methods like drone photography or virtual tours, which will ultimately increase the marketing costs.

Handling Negotiations

After some time, your property will start getting offers from potential buyers. And once those offers start coming in, your realtor will handle the negotiations.

Your realtor's objective is to get the best possible deal for your property. Therefore, there's a high chance they will negotiate with several clients on various things like the price, contingencies, timelines and closing costs, among others.

During the negotiations, the realtor will cover all the bases, thus making sure nothing will be overlooked. If you were to handle the negotiations yourself, there's a high chance you may end up being shortchanged by the buyer's realtor.

Following Through with Transactions

After negotiating with several potential buyers, your realtor will accept the best offer. And from there, they will now handle the contract details.

During this process, your realtor will ensure that all the details, agreements and timelines are adhered to. Therefore, your realtor will ensure the entire process goes smoothly, from start to finish.

Also, the realtor will have to get in touch with the title company to ensure a timely closing. If the title is delayed, it will also delay the closing.

As you can see, realtors handle quite a lot of work during a home selling or buying process. And the 5% or 6% fee they charge is justifiable.

Is a Realtors' Commission Negotiable?

Some buyers and sellers may feel as if paying a commission of 5% or 6% is too high, especially when they realize how much the realtor will make. And they may want to negotiate this commission and bring it down.

So, is the realtor's commission negotiable? The reality is, realtors' commission is not federally regulated, meaning there is room for negotiation. Also, some of the new realtors in the industry may charge a lower commission of 3% to 4%.

Hence, if you are in a tight financial situation and you are not in a position to afford the standard commission that most realtors charge, you can ask the realtor if they offer transactional agreements.

For a transactional agreement, a realtor will charge you a flat rate fee instead of the 5% to 6% per transaction.

In such an arrangement, if you are selling a house, the realtor will help you to set up the right pricing for the property, meet potential buyers and show them the house, negotiate on your behalf and help you with paperwork.

But, you will not get the entire service package. Furthermore, some realtors may also request you to make an up-front non-refundable marketing fee designed to cover their expenses.

So, if you need a realtor but you cannot afford to pay for the full package, you can settle for a transactional agreement, which may help to lower the costs. However, most realtors don't offer this arrangement.

Who Pays Realtor Commissions?

In most real estate transactions, the seller pays the realtor's commissions. But, the seller will include the realtor's commission when pricing the home.

And this means that the buyer will eventually end up paying the realtor's commission indirectly.

For example, you may be selling a house worth $200,000. Assuming the realtor's commission is 6%, then the amount they should earn on this transaction is approximately $12,000.

And while the seller is supposed to pay their realtor, the money will come from the sale of the property.

While the buyer will pay $200,000 for the property, they will only receive $188,000 from the sale.

Are Realtor's Commissions Included in Closing Costs?

Realtor commissions and fees are not included in closing costs. As earlier mentioned, realtor commissions are purely for representing the buyer or seller.

On the other hand, closing costs may include various miscellaneous fees like loan processing, survey costs, title company fees, deed recording and insurance, among others.

And unlike realtor commissions, closing costs are heavily dependent on the property's sale price. On average, they range from approximately 2% to 7% of the property's sale price.

Do Realtors Charge Commissions if the House Doesn't Sell?

Realtors only earn commissions if a transaction closes. But in some instances, the seller may have to pay the commission, even if the house doesn't sell.

For instance, the realtor may receive the right offer for a house they have listed, and the seller opts against selling the house. And this may be occasioned by various circumstances such as changing their mind and refusing to sell or their spouse refusing to sign the deed.

In such situations, the seller will still pay for the realtor's commissions since they are liable for the transaction failing to close.

Putting It All Together

If selling or buying a house, you may be wondering how much you will pay the realtor or how the realtor will calculate the commission. But as discussed in this article, the realtor's percentage is around 5% to 6%. Furthermore, this commission is not mandated at the state or federal level, which means it's negotiable. Also, you have some options to explore in case you don't want to pay the 5% or 6% commission rate, such as opting for flat-fee pricing.

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