How Do Real Estate Commissions Work?

What services do a real estate broker and agent provide?

A real estate broker is a licensed business owner while agents work for brokers. Agents are typically hired on contract and will earn a portion of the commission from each property they sell or buy.

Some agents work as employees of a real estate broker agency and are compensated with a salary and bonuses for every home purchase or sale they close.

Both broker and agent can use the title “realtor” if they are a member of the largest real estate trade group in the US – the National Association of Realtors (NAR) – and follow their rules and code of ethics.

They can offer wide-ranging services that would generally include:

• Providing information on real estate prices, advice on the local market, and referrals to mortgage lenders for loan information.
• Preparing lists of properties for sale or rent and promoting them.
• Taking potential buyers to view the property.
• Assisting with negotiations between buyer and seller.
• Preparing all necessary legal documents and agreements and ensure the terms are met.

Each broker and agent may have specialized knowledge in certain areas, which is why it is a good idea to shop around and interview potential candidates to ensure they meet your needs before contracting their services.

The real estate broker’s commission

A real estate agent is typically compensated on a commission basis paid when they close the sale, and depending on the circumstances, you may be able to negotiate on their rate.

In fact, only 22% of home sellers successfully negotiated the commission with their sales agent while 5% weren’t able to negotiate the rate or fee, according to NAR’s survey published in March 2023. Furthermore, 15% of sellers didn’t know they could negotiate the fee, while 12% knew but didn’t bring it up.

A Supreme Court ruling (United State vs. National Association of Real Estate Board, 1950) found standardizing real estate commissions is illegal; therefore, commissions should be negotiable. However, knowledge surrounding this ruling is obscure, which led to a federal antitrust class action lawsuit against the NAR, accusing real estate brokers of inflating commissions. As of this writing, a settlement is pending its final court approval hearing.

The agreement calls for the NAR to change its policy and rules to prohibit its members from offering to compensate the homebuyer’s agent on multiple listing services (MLS). This typically involves splitting the commission between the seller’s and the buyer’s agents and paid for by the home seller, a practice that sellers claimed to have led to reduced price competition, inflated commissions, and home prices.

NAR will also require buyers’ agents to enter written agreements with all their clients and clearly state their fees and services upfront prior to touring a home. These NAR rule changes are effective August 17, 2024.

It's hard to know what impact these rule changes may have on home prices, but it does mean that homebuyers will need to negotiate any fee with the broker directly, if they decide to use their services.

How to negotiate the real estate broker commission

If you’re a home seller, knowing the value of your home and the local market could give you an edge when it comes to negotiating the real estate broker commission. Here are some tips to consider before approaching the negotiation.

1. Know your home’s desirability

An agent is more likely to consider reducing their commission rate for a home that sells for over $1 million than a home worth $400,000, as the effort to sell the home may be the same. If your home is higher-priced, there may be room to lower their commission percentage.

Also, if your home is in a prime location that’s close to amenities, top schools, public transportation, etc., these attractive features could make it easier for you to sell your home quickly, and agents may be willing to negotiate their compensation to have a desirable property on their list. 

2. Add to your home value

If your home is a turnkey (one that’s been recently updated or renovated), this may help you in negotiations with the agent. That’s because if your home requires any major renovation and repair, these are additional costs that buyers will need to add to their list of considerations, meaning, more time and effort from the agent to find a willing buyer.

On the other hand, certain home improvements may add more value to your home price like a pool or a fireplace. Speak to your agent to understand what the local housing market might find desirable.

3. Home selling season

Approaching an agent to help you sell your home during low season, typically around winter and holidays, may give you a hand in negotiating their commission. Agents may have low housing inventory and would be open to lower their rate to boost their available listings.

If you are selling your home during high season, such as in spring and early summer, agents may have less reasons to negotiate. Flexibility in the selling season could help you save.

4. Give your agent a hand

This may sound counterintuitive, but you may be able to help the agent with their business and costs. For instance, if you have more than one property to sell, listing both with the same agent would give them incentive to reduce their rates. Or perhaps you know a few other people who want to sell their homes and could refer them to your agent.

You may also be on the market to buy a home, so using the same agent for selling your home and buying a new one could incentivize them to lower their commission.

In terms of costs, you could skip the 3D home tour or handle the photography costs yourself. All these could help reduce the agent’s out-of-pocket costs, as most agents would only be compensated if they are able to close the sale.

Helping your agent may benefit you as well, as in the end, they want to get you the best deal possible.

5. Watch out for junk fees

On top of the commission, some brokers may charge “junk fees” in the form of administrative costs, transaction fees, or broker fees. It’s best to ask questions about these fees before contracting with a broker. You may be able to negotiate to have them removed if you find those added fees to be unreasonable.

You may want to consult with a real estate attorney if anything in the contract with the agent is unclear or questionable.

It’s okay to walk away if what the broker and agent offers isn’t right for you and you feel that you cannot reach a middle ground. At the end of the day, selling your home is a complex process so finding and working with the right real estate partner could help ensure you’ll get the most value for your property.