The EffectiveAgents® team took a hard look at average Realtor® commission rates so far in 2023 to determine how much the average real estate agent receives in gross compensation for a full-service listing. With the real estate market in transition and fewer listings and sales to go around, is this impacting the comission rates that realtors® charge? Additionally, new services have emerged that offer homeowners discounted listing packages and even flat-fee arrangements that have saved home sellers a lot of money. In many of these flat-fee or discount scenarios there is not a "full-service" agent on call. After over 14 years of home sale price analysis, we have concluded that having a competent and skilled agent will produce the best overall outcome for home sellers. We will address why the numbers bear this out, but first, data.
Our Analysis occurred on 5/22/2023 and was comprised of a large sample of US existing home closings. The average commission rate for 2023 YTD is 5.46%
Since the early 1980's the percentage share of FSBO transactions vs. agent-assisted transactions has decreased from 15% to 8%. There are a few reasons for this, but the net result is that FSBO sales are not generally "actively" marketed and a home seller is typically poorly equipped to accurately price a home, field offers and then get a buyer to the closing table.
When it comes to buying or selling a house, the majority of people turn to real estate agents for their expertise. In fact, nearly 86% of home buyers seek professional help to navigate the complex world of real estate transactions. The role of a real estate agent goes beyond just finding a property or buyer. They assist with scheduling tours, negotiating deals, and even attending important appointments like inspections and closings. But have you ever wondered how these agents are compensated for their services? Are their commissions fixed, or can they be negotiated? Let's delve into the intricacies of real estate commissions to understand what buyers and sellers need to know.
Real estate agents typically work on a commission basis, meaning their payment is based on a percentage of the total transaction amount. However, the commission percentages can vary significantly. On a national level, the average commission is 5.46%.
Market conditions, such as whether it's a buyer's market, seller's market, or a transitional one, can influence commission rates. The type of property being bought or sold may also impact the commission structure.
In the luxury market segment, for instance, commissions tend to be lower. Higher-end properties command higher price tags, allowing agents more flexibility to negotiate their fees while still ensuring a fair compensation for their services.
The exact commission percentage is typically negotiated and outlined in the initial contract between the agent and the seller. For example, if a 5% commission is agreed upon and a home is sold for $500,000, the real estate brokerage representing the agent would receive a $25,000 commission once the transaction is completed. However, it's important to note that this commission is rarely kept in its entirety by the individual agent. They often have to split the payment with other parties involved, as we'll explore further.
Who pays the real estate commission?
Generally, it's the seller who bears the responsibility of paying the commission. The commission is then divided between the seller's agent and the buyer's agent. It's essential to understand that although the buyer doesn't write a physical check for the commission, it's factored into the overall price of the home. This means that the buyer indirectly contributes to the commission through the home's price.
The commission structure can be complex and has attracted scrutiny in recent years. In 2020, the Justice Department filed an antitrust lawsuit against the National Association of Realtors (NAR), alleging that the lack of transparency in the commission system and limited price competition was harmful to consumers. While the lawsuit is still pending, it has prompted changes within the industry, such as NAR rules prohibiting buyer's agents from advertising their services as "free" and allowing listing sites to disclose buyer's agent commissions.
In addition to the division between the seller's agent and the buyer's agent, commissions rarely end with just those two parties. Unless the same agent helps both the buyer and the seller, the selling agent must share a portion of the commission with the buyer's agent, typically in a 50-50 split. Using our previous example of a $25,000 commission, the listing agent would receive $12,500, and the buyer's agent would also receive $12,500.
Furthermore, the commission may be subject to further splits. Agents often have to share a portion of their commission with their brokerage firm's leader, known as the broker. These splits vary depending on the brokerage, starting at around 60-40 (with 60% going to the agent and 40% to the broker) and going up to 90-10 for more experienced agents.
Considering these additional splits, the agents involved in the $25,000 commission scenario mentioned earlier would each take home only $7,500 after accounting for a 60-40 split with their brokers.
It's important to note that not all real estate brokerages operate under this commission structure. Some brokerages, like Redfin, pay their agents a salary rather than relying solely on commissions. Brokerages like Realty ONE Group allows its agents to keep their full commissions, although agents do pay fees to the company.
Are Real Estate Comissions Negotiable?
The good news is that all commissions are negotiable. If you're a seller looking to negotiate a lower commission with a potential agent, it's crucial to have an upfront conversation. Request a detailed breakdown of the proposed commission and the services the agent will provide in exchange for their fee. This allows you to identify areas where certain services can be removed or reduced to achieve a lower commission rate.
Occasionally commission rates can vary based on the level of service an agent provides. Factors such as marketing efforts or additional services like drone photography and virtual tours can influence the commission price. For example, if a client wants comprehensive marketing and advanced technology features, the commission may be higher compared to a basic MLS listing.
Negotiating the commission may also depend on market conditions. In a seller's market where homes are selling quickly at inflated prices, sellers may have more leverage to negotiate lower commissions. However, in a buyer's market with less demand, other properties may offer more enticing commissions, limiting the potential for negotiation.
Can buyers negotiate commissions?
While opportunities for negotiation are relatively rare for buyers since sellers typically cover the full commission, there may be some room for negotiation in specific situations. Buyers may have more leverage if their agent is also the listing agent for the property they are purchasing or if they are buying a For Sale By Owner (FSBO) property. Additionally, some brokerages offer buyer's commission rebates, typically in the form of closing credits, although this practice is banned in eight states.