There is no set law stating the amount or percentage of a real estate agent commission. As such, commissions can be negotiated between the client and realtor. Even with this flexibility, ‘generally accepted’ commissions have developed over time. And now, many cities and states around the U.S. have their own standard rate based on local customs. The next part of the equation involves the actual payment, in other words, who is responsible for paying the realtor commission. Before we cover this topic in detail, it’s important to understand the relationship between realtor commissions and broker commissions. Because one does not happen without the other. A licensed real estate agent cannot work independently, they must work for a broker or brokerage firm. Likewise, a realtor cannot directly receive a commission from their client. It must go to the brokerage firm first, then it will get paid out to the realtor. The contract, or listing agreement, defines the percentage a broker and real estate agent are each entitled to. To understand realtor commissions better, we will cover commissions earned for rentals and home sales. These parties include the landlord, tenant, buyer, and seller.
For rental properties, it’s common for the landlord to pay a realtor commission after finding a tenant. If this is the agreement between the realtor and the landlord, then the commission could be a percentage of the monthly rent. Often, the average real estate agent commission falls between 10 and 15 percent.
So, if the monthly rent on a rental is $3,500 and the agent charges 10 percent, the total commission will be $4,200. To arrive at the total commission, assume the rental period is 12 months. Take 12 months and multiply by $3,500. That gives you $42,000. This represents total yearly rent, which is then multiplied by 10 percent to arrive at $4,200.
This commission amount generally gets split 50/50 between the realtor who listed the property and the realtor representing the renter, or tenant. So, in this example, each agent gets $2,100 ($4,200 ÷ 2). The actual commission amount received by the realtor comes from the agreement he or she has with their broker.
Another scenario for paying a real estate agent commission is to pay the amount equal to one month’s rent. When this is the agreement between the landlord and agent, the commission is often paid using the tenant’s first month’s rent. Furthermore, if the tenant decides to renew his or her lease, the agent could receive a renewal commission. But, the lease agreement would have to include a clause stating this. The commission amount stays the same in the event a renewal commission is stated in the lease agreement.
There are some instances when the renter pays a real estate agent to find them a place to rent. This is more common in cities with a higher renter demand and limited housing supply, such as SF and NYC. In these instances, a tenant might pay a commission equal to half the first month’s rent. Before you agree to pay any real estate agent commission, confirm whether it’s customary in that city. And if it’s customary for the tenant to pay, discuss the commission rate before agreeing to work with that realtor.
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The buyer of a home generally does not pay a commission, that is the responsibility of the seller. And the commission gets paid by the seller during closing. It is customary for the commission amount to get subtracted from the home’s sale proceeds.
As discussed earlier, the commission gets paid to the listing brokerage firm. Upon receipt of the commission, the broker then distributes part of the commission to the agent who represented the buyer. Although the buyer doesn’t make a direct payment, they pay indirectly through the price of the home. Since the seller pays commissions to both the listing broker and buyer’s broker, they tend to factor this in when establishing the listing price.
When a house sells, the seller pays a commission between five and six percent of the sales price, generally speaking. So, in the following scenario, let’s assume a home sells for $500,000, and the commission rate is six percent. Each broker involved in the transaction gets half of the total commission, or $15,000 ($500,000 x 0.06 = $30,000 ÷ 2 = $15,000).
Details about the real estate agent’s commission rate should appear in the agreement. Besides selling a home, an agent’s commission generally includes other services. It can include the costs of taking photos, printing and marketing materials and listing the home. Yet, costs such as staging your home or making repairs would be your responsibility.