Honestly, most folks don’t put much thought into how real estate Realtors make money – neither the commission percentages nor from which side of the deal the fees come. Obviously, one must assume that compensation comes from somewhere, or no one would be in business. Office space, copy machines, and yard signs don’t pay for themselves.
Most buyers are surprised to learn that real estate commissions usually come from the seller. When the home is sold, the seller’s Realtor splits the listing fee with the buyer’s Realtor. Sometimes, the listing side commission is not enough to cover the buyer side compensation. In these cases, the buyer is responsible for paying their brokerage at closing. The amount will be credited with any amount paid by the seller. For example, buyer broker compensation is 3%. Seller is paying 2%. Buyer is responsible for 1% to buyer’s brokerage at closing.
Splits between Realtors are normally 50/50, so if a listing Realtor procures a 6% listing fee, the buyer and seller Realtors will each receive 3% when the deal is done.
Here’s an example of how real estate commissions work.
Note: There’s another scenario where the buy-side commission is split even further. When a Realtor refers their client to another Realtor (typically in another market), the referring Realtor is paid a referral fee, typically 25 -35% of the buy-side commission.
Is there a “set commission” real estate brokers charge consumers?
No. The market decides commission rates, and commissions are always negotiable. Consumers have the choice of who they want to pay and how they want to pay them. Because of the pro-consumer local MLS broker marketplace model, and options like a success fee, there is unprecedented competition among real estate brokers, especially when it comes to the service and commission options available to consumers.
How does the U.S. model compare to other, international broker marketplaces?
The U.S. approach is the most consumer-centric model. By consolidating fees and the overall process, our nation’s model simplifies the experience, provides greater certainty of success to both buyers and sellers, and provides guidelines that ensure the accuracy of housing inventory made available to real estate professionals and consumers, all at comparable or lower total costs than those in other countries.
Why should real estate professionals make the money they do in commissions when so much information is available online?
Real estate brokers provide essential guidance as consumers navigate the legal, financial and community aspects of a purchase, including everything from determining property value to negotiating the price. They also make local broker marketplaces, which online housing portals tap into, possible because of all the information they input into those databases. And REALTORS®’ annual income is just $43,330 and 88% are small businesses, a majority of which are women-owned.
How does the current approach to commissions benefit small businesses?
Access to inventory and free advertising as well as the practice of the listing broker paying the buyer brokers’ commission incentivizes participation in these local real estate marketplaces and creates the largest, most accessible and most accurate source of housing information available to consumers. That levels the playing field among brokerages, allowing small brokerages to compete with large ones, and provides for unprecedented competition among brokers, including different service and pricing models for consumers.
Final Thoughts on REALTOR® Pay
If you’re read this far, you now know how Realtors get paid and how commission splits work. You also know that there are more parties to the transaction than just the two Realtors representing the buyer and seller. Realtors incur many expenses that eat into those seemingly wonderful profits.
You get what you pay for.
Local MLS broker marketplaces allow small brokerages to compete with large ones and provide for unprecedented competition among brokers, including different service and pricing models. So, you can choose from many commission models. Those are choices to consider as you prepare to make likely the single most significant investment in your lifetime.