Understanding Commission Rates

finance, mortgage, rates, calculate, pmi

Whether you’re buying or selling a home, if you’re working with a real estate agent, a commission will have to be paid for their help and services. Understanding how commission rates work, how much they are, and who pays them are important factors in which to familiarize yourself. Most commission rates are between 5% and 6% and are paid to the agent (or agents) at the completion of the real estate transaction. This might seem like a high percentage. For example, a home that sells for $250,000 with a 5% commission would be $12,500. However, the average house spends around 110 days on the market in Northeast Tennessee and Southwest Virginia. This means months of research, driving, showings, time, and effort spent on behalf of the realtor before they get paid.

So Who Pays the Commission? 

In most cases, the seller pays the full commission. While this can be negotiated between the buyer and seller, it’s commonly understood that because the seller is wanting to sell their home, they paid for the ability to do so. To put things in perspective, if you were selling an item on eBay, you would be responsible for paying eBay to sell on their platform, shipping costs, etc. The same is true for real estate.

When both the buyer and seller are represented by an agent, the commission rate is equally split between the two agents. Again, the specifics can be negotiated and determined by all parties involved – no deal is ever the same. However, in the previous example, the $12,500 would be spilt 50/50 and each agent would receive $6,250. There are situations in which a realtor acts as a “Dual Agent,” or when they represent both the buyer and seller. This typically only happens when an agent knows both parties and there is little risk of being impartial to one side or the other. It’s preferred that each party have their own agent in order to protect the best interests of each client.

What Am I Paying For? 

Listing a home for sale with a licensed real estate agent has numerous benefits. We previously wrote on the Pros & Cons of Listing Your Home For Sale By Owner (FSBO),where we discussed some of the services and benefits of listing with an agent. However, historical market data has shown that selling your home with the assistance of a realtor reduces time on market, increases showings and market visibility, and improves selling prices across the board. A 2018 study found that homes sold FSBO had an average selling price of $200,000 compared with $280,000 with an agent. The increase in selling price and value provided by an agent far exceeds the commission paid in most instances.

In closing, make sure to set the terms of your contract with your agent. These terms should include what the commission rate is, who is responsible for paying the commission, as well as how long the agent will represent you. Not sure where to start in your search for a real estate agent? Read our quick guide to finding the perfect realtor.