How Real Estate Commissions Work
It’s important for consumers looking to experience the American dream of homeownership to understand how real estate agents are paid for the services they provide. At the outset, the seller and that person’s listing broker agree on the amount the listing broker will receive for the services it provides to the seller. The listing broker and seller also discuss and agree upon an amount that the listing broker will pay a broker who successfully closes the transaction with a ready, willing and able buyer. Here are seven additional things you need to know.
Commissions can be negotiated at any point throughout the transaction, including at the outset, after the results of a home inspection and after an offer has been made. Sellers negotiate with their broker what fee they are willing to pay for their broker’s services and what fee they are willing to pay a cooperating buyer broker for finding someone who wants to buy their home.
Buyers have many different choices about which broker they want to work with in terms of everything from the commission model to a real estate agent’s particular expertise to the agents’ customer service approach. In the full-service approach, commissions are negotiable at any point during the home buying process. The reduced service/discounted fee model allows for flexible offerings and pricing. The flat fee approach allows buyers to negotiate a set price per service.
The free market organically establishes commission costs within local real estate markets based on service, consumer preference and what the market can bear, among other things. National Association of REALTORS’® guidelines ensure that the listing broker advise all other participants in their local broker marketplace what the amount of compensation to the buyer’s broker will be for closing the sale. That amount is determined by the seller and the seller’s broker. Commissions fluctuate over time, including having decreased steadily in recent years and having fallen to a new low of 4.94% in 2020.
The vast majority of mortgage lenders do not allow commissions to be added to home loans. For many, saving for a down payment is difficult enough. If buyers had to pay commissions directly on top of their closing costs, it would increase their out-of-pocket expenses in a way that would freeze out many from an already competitive market. That’s especially true for first-time and low- and middle-income buyers, and communities of color that disproportionately fall in those categories
REALTORS® are bound by NAR's Code of Ethics to always further clients' best interests, including showing homes that meet buyers’ needs regardless of commissions offered. Additionally, in November 2020, NAR introduced its Fair House Action Plan, abbreviated ‘ACT,’ which emphasizes (A)ccountability, (C)ulture Change, and (T)raining in order to ensure America’s 1.5 million REALTORS® are doing everything possible to protect housing rights in America.
Because of broker cooperation, buyer and seller brokers are incentivized to share their information in their local, independent broker data hub. Without it, lack of complete, transparent and accessible data for all would mean smaller brokerages and new entrants have to piecemeal information and couldn’t offer as many options to sellers and buyers, and larger brokerages would dominate local markets, creating emerging behemoths that would drive up costs.
The U.S. model has long been – and is still – viewed as the best option for consumers around the world.
Buyers abroad are forced to wade through a complex and fragmented market where they have to work with multiple brokerages and where there is no exclusivity so sales can fall through. Generally, the homebuying process abroad is similar to buying a car in the United States where you have to go dealer to dealer, it’s very time consuming and impersonal. It’s also common for brokers to charge fees and taxes in other countries that add up to the equivalent or greater of costs associated with buying and selling property in the U.S., yet only provide a fraction of the services consumers receive here.
In the News
Following are stories that bring to life how REALTORS® advocate for consumers, how local broker marketplaces advance equity and access, and how small businesses are beneficiaries of these local real estate marketplaces.
Regardless of the market, buying a home is complicated. It involves expert negotiations and familiarity with contracts and extensive paperwork. A good Realtor will have a thorough understanding of the market. This includes providing a comprehensive report known as a comparative market analysis (CMA) to help you understand market trends and determine what price to offer. CMAs will also provide you with the important “need to know” facts such as how long the home has been on the market and whether the price has gone up or down. This information can be incredibly valuable when it comes to evaluating whether a home is a safe investment and worth the price you’ll pay for it in today’s market. In addition, there are often small problems with initial negotiations and paperwork that, if unnoticed, can put your entire transaction in jeopardy. Your Realtor or real estate agent will work with you closely to ensure nothing falls through the cracks.
…The truth is, selling your own home can be difficult. Many statistics and reports indicate that the failure rate is high. According to Zillow, 36% of sellers want to sell their homes themselves, but that number gets reduced to under 10% because of the difficulty in doing so. The National Association of REALTORS® reports that over 90% of all For Sale By Owners fail and hire a real estate agent.
You don't have to pay a commission fee or the service of a real estate agent if you sell your house yourself or FSBO. But making a successful sale is easier said than done…
In one sense, technology has made real estate more accessible for both buyers and sellers. And yet, while everyone can see detailed property records on their phones or computer within seconds, not everyone can be a negotiator, price setter or resource. Home buyers and sellers can have difficulty navigating the expanse of information available, leaving many unsure how best to use this data to their respective advantage…
… Bringing in an expert with a deep knowledge of the home buying process and marketplace is the most effective way for a homebuyer to ensure, for example, they can win a bidding war without overpaying for a home….
Technology today has provided consumers with access to more information than ever before, and for real estate agents, access to technology products and services enable a higher level of customer service. And in the process, consumers get the best of both worlds: Technology at their fingertips to get them started and real estate agents making sense of all that information and other technology to help people make the right choice about where to start a family, raise their children and build lifelong community.
As Congress advances the biggest housing investments in decades and the Biden administration focuses more attention on housing issues, one policy matter should top the agenda: closing the racial homeownership gap. This persistent disparity not only limits the opportunity for individuals and families to build wealth; it also deprives our nation the opportunity for more robust economic growth….
Our country is making great strides in defeating COVID-19, but the pandemic's long-term fallout will be devastating for minority homeownership if we do nothing to counteract it. The policy reforms discussed here represent proactive steps to reverse trends that will only worsen if matters are allowed to run their course. We must act now to mitigate past harms exacerbated by a pandemic and unlock the benefits of homeownership for more Americans.
Much of life moved online during the pandemic. That became true for even the most tangible of goods—real estate.
Over the past 18 months, virtual walkthroughs and three-dimensional tours have replaced many in-person showings and open houses. Even closing paperwork has moved online, propelling the industry through the pandemic.
This new environment has led some to ask whether the real-estate agent profession is becoming obsolete. Why should someone pay an agent when they can browse properties online or reach buyers directly through an app?
The reality, however, is that modern technology is making agents and brokers more essential, not less.
Before the pandemic, homebuyers and sellers were experimenting with a new, online model of real estate—instant buying, or “iBuying
A critical foundation of American homeownership is the Multiple Listing Service (MLS). These independent, local broker organizations create highly competitive markets that are friendly to small business while ensuring equitable home ownership opportunities, superior customer service and greater options for buyers and sellers.
Simply put, local real estate organizations provide sellers access to the largest possible pool of potential buyers while creating the greatest number of housing options for buyers in one, centralized location.
Leveling the playing field
For people trying to break into this real estate market, MLSs level the playing field, allowing small brokerages to compete with large ones by creating hubs of local real estate market information where all broker participants have access to the same reliable and trusted data. As a byproduct, these data hubs spur entrepreneurship and innovation, allowing consumers to choose the type of broker they want to work with and what fee options they prefer, including those who provide many different service and fee options, from varied commission models to flat fees.
Those attempting to attack the real estate agent commission structure are cloaking their true intentions in misleading claims of consumerism. These class action attorneys and those illegitimately trying to position themselves in the real estate market are looking for a payout if they can confuse enough people with misinformation and glaring omissions.
The reality is that the commission structure gives everyday Americans and small businesses critical advantages they otherwise wouldn’t get. Here’s what these self-serving parties are attacking.
They’re attacking a structure that makes it possible for more people to realize the American dream of homeownership.
The traditional commission structure where the listing broker offers to share his or her commission with the buyer broker ensures greater equity and equality for first-time, low-income and many other homebuyers who otherwise couldn’t afford a home and professional representation.
Regarding “Home-Sales Commissions Under Fire” (U.S. News, Sept. 21): Big Tech has trained us to expect near-zero transaction costs or at least have them hidden from view. It’s therefore no surprise that transparent fees or commissions associated with seldom-purchased, big-ticket items such as real estate seem antiquated.
But the current discussion ignores the benefits paid for by these transaction costs. The Multiple Listing Service (MLS) marketplace of residential-real-estate listings and historic data is unique to the U.S. and Canada. Agents enter billions of data points for millions of residential properties by the rules and regulations of the National Association of REALTORS® and state and local affiliates. This effort is largely self-organized and creates an incredible richness of transparency of data. Agents work mostly on commission and lack benefits such as healthcare, retirement or paid leave.