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WSJ.com
Money > Financial Tips
By
Aly J. Yale
If you’re hoping to
buy or sell a house, you’ll probably call in a real-estate agent. In fact, nearly nine in 10 home buyers use get professional help to buy their properties—and for good reason.
A real-estate agent can help you zero in on potential properties or buyers, schedule tours and negotiate on your behalf. Many times, they will even stage your house or attend inspections, closings and other appointments with you.
But what do their services cost? And are they negotiable? Here’s what you need to know.
Real-estate agents are typically paid on commission—meaning their payment is based on the total transaction amount. Commission percentages can vary quite a bit, though. Nationally, the average is 5.45%, according to research by real-estate brokerage Clever, but at the state level, total commissions range from 4.90% in Washington, D.C. to 6.07% in Missouri.
Here’s a look at average real estate commission by state:
*Includes payment to listing agent and the buyer’s agent
Clever Real Estate
“Commissions can and do vary widely,” says Adie Kriegstein, an agent with Compass Real Estate in New York. “Location is a huge factor, as markets often vary city to city and state to state. On top of location are just the market conditions: Is it a buyer’s market, seller’s market or simply one that is transitional? The type of property also changes commission rates.”
In the luxury market, for example, commissions can often be lower. This is because higher-end properties come with higher price tags, leaving agents more room to negotiate and still get a decent payday.
The exact commission percentage on is typically negotiated upfront and will be detailed in their initial contract with a seller. So, for example, if the agreed-upon commission was 5% and they sold a home for $500,000, the agent’s real-estate brokerage would get a $25,000 commission check once the transaction was complete.
It sounds like a lot of money, but that check is rarely a single agent’s to keep. They often have to split that payment with one, two or even three other parties(more on this later).
Here’s the tricky part: While both buyers and sellers typically use real-estate agents, generally only the seller pays the commission, which is then split between their agent and the agent representing the buyer.
Despite this arrangement, it doesn’t mean the buyer is getting a free ride. While they won’t hand over a physical check, the commission is largely considered a baked-in part of a home’s price.
“Where agents get in trouble is when they advertise their services as ‘free’ to buyers, because that is not true,” says Joe Rath, head of industry relations for real-estate brokerage Redfin. “The money comes from somewhere.”
If you think this commission model is confusing, you’re not alone. The Justice Department even filed an antitrust lawsuit against the National Association of Realtors, or NAR, in 2020 alleging that the system lacks transparency and reduces price competition.
The suit remains in legal limbo after the Justice Department withdrew from an earlier settlement, but it has so far led to NAR rules barring buyer’s agents from describing their services as “free” and allowing listing sites to start publishing buyer’s agent commissions. Previously, that information was only available through Multiple Listing Services, or MLS, local listing databases that only NAR-member agents have access to.
Making things even more complex, commissions rarely go to only one agent. Unless the same agent is representing both the buyer and the seller, the selling agent gives a portion of the commission to the buyer’s agent—generally in a 50-50 split. With a $25,000 commission, that would mean the listing agent would get $12,500 and the buyer’s agent $12,500.
Beyond that, there are further splits. Often, the agents will also have to share their commission with their broker—the leader of the brokerage firm they work for. These splits vary based on the company, but it often starts at 60-40 (with 60% for the agent and 40% for the broker) and goes up to 80-20 for more experienced agents.
If the agents in that same $25,000 commission scenario had 60-40 splits with their brokers, that’d mean the listing agent and selling agent would take home just $7,500 each.
“Buyers and sellers can be wary of the 5% commission rate, but their individual agent typically ends up only seeing 1.5% on each deal,” says Christa Kenin, an agent and attorney with real-estate firm Douglas Elliman in Connecticut.
To be clear: Not all real-estate brokerages operate this way (just most). National discount brokerage Redfin, for example, pays its agents a salary. Realty ONE Group, which has over 400 franchise offices, lets its agents keep their full commissions, though agents do pay fees to the company.
With inflation and mortgage rates high, a 4% to 6% commission might seem pretty pricey—regardless of whose pocket it goes into. Fortunately, Rath says, “all commissions are negotiable.”
If you’re a seller looking to negotiate a lower commission with an agent you’re considering, it is important to do so up front. Ask your agent to detail what their proposed commission entails—what services and value they’ll provide in exchange for their fee. You can then agree to remove or reduce certain services in exchange for a lower cut.
“Commissions can vary depending upon the level of service that an agent provides, such as marketing, social media, etc.,” says Bryson Taggart, an agent with Opendoor in Arizona. “If a client wants drone photography, videos and a 3-D printing of their home, that commission may come at a higher price than if they simply want it listed on the MLS.”
You may be able to ask for a lower commission depending on market conditions, too. If it’s a seller’s market and homes are selling at inflated prices and record speeds, you may have more room to negotiate than when buyers are harder to come by and selling a home takes more work.
“Consider the conditions of your current market,” Kriegstein says. “If it’s a hot market with little supply and a lot of demand, you can likely leverage your commission. However, if the market is a buyer’s market you may not want to do that, as other properties could be offering more enticing commissions.”
Buyers may be able to negotiate fees with their agents, too, though opportunities for this are rare since sellers typically pay the full commission. You might be more able to if your agent is also the listing agent on the home you’re buying or if you’re buying a For Sale By Owner, or FSBO, property. Some brokerages offer buyer’s commission rebates, typically in the form of closing credits, though the practice is banned in eight states.
Negotiating isn’t your only option. You can also look to alternative agents and brokerages for reduced fees, too. Discount brokerages such as Redfin and Clever charge just a 1.5% listing fee (versus the usual 2% to 3%), plus the buyer’s agent fee. Other brokerages, such as Homie and ListingSpark, operate on a flat-fee basis.
You also have the option to go agent-free altogether. According to the National Association of Realtors, about 10% of all home sales are FSBOs.
Just keep in mind: If you go this route, you’ll need to handle all aspects of the sale yourself. As Kuba Jewgieniew, CEO of Realty ONE Group, explains, “Realtors work incredibly hard, with the bulk of that work done behind the scenes—negotiating, researching, marketing, writing up contracts and more.”
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