If you’ve never bought or sold a house personally, you may be aware that Realtors get paid for selling a home or bringing a buyer to a seller, but you’re not really sure how it happens.
Realtors get paid for their services in the form of commissions — usually a percentage of the final selling price of a home. In exchange, a full-service agent provides support throughout the entire selling process — which usually includes help with choosing the optimal listing price, staging your home, leading negotiations with a potential buyer, and completing paperwork to make the sale complete.
Let’s break down the typical cost for a traditional agent’s services, why you may be paying more than you need to, and alternatives for getting the same services with less out of your pocket.
How does Realtor commission work?
A Realtor’s commission is agreed upon before they and the seller begin working together. The most typical way to figure the agent’s final commission amount is to multiply the final selling price by the agreed upon percentage.
This means you may not know exactly how much you’ll pay in Realtor commissions until all factors — including price — have been negotiated with your buyer. While the listing agent typically gets 5% to 6% in commissions, it’s important to note that commissions are always negotiable.
On a home that ultimately sells for $231,000 (the average value of a home in the U.S.), you could count on paying just under $14,000 in commissions. This full commission is typically paid for by the seller and subtracted from their final profits.
But, it is courtesy — and industry standard — for the listing agent to then split this full commission with the buyer’s agent 50/50. This means each agent usually profits around 3% of the selling price (not including what may be subtracted to pay for their broker).
In our example, each agent would profit $7,000 for their time and expertise.
While technically the seller pays both agents’ commissions, they usually compensate for the commission fees by rolling them into the price of the house when listing their home for sale. So, you could argue that the buyer is ultimately paying the commissions in the form of a higher purchase price.
How can I save?
While Realtor commissions are always negotiable, there are other ways you can save when selling your home.
If you’re a DIYer and looking to save on commission, you may go the for-sale-by-owner (FSBO) route.
This means you’ll be the one to handle anything and everything having to do with the sale, including setting your listing price, staging, photography, marketing, showings, negotiations, and any paperwork.
Selling your home as a FSBO can be a heavy lift if you work full-time or have a family to care for, but it will avoid you having to pay any commissions — for a listing agent at least. Keep in mind you’ll still probably be on the hook for about 3% of the home’s selling price, as it is customary for a seller to pay for a buyer’s agent’s commissions.
On the average U.S. home, this means you’ll still pay about $7,000 in commissions even though you’ve done all the work yourself. You don’t have to offer to pay the buyer’s agent commissions, but you pay lose out on the sale as a result of refusing to do so.
While you may save on commissions by selling as a FSBO, most sellers opt to use an agent in the end. Sellers who list their own home are known for overvaluing the worth of their home and setting their listing price too high.
While this may seem harmless, it can turn off potential buyers who either assume they can’t afford the high-priced home or see it as a red flag that you’ll be unwilling to negotiate to a more reasonable number.
Flat Fee MLS
A local multiple listing service (MLS) is where buyers and their agents find homes that are listed for sale. But, only licensed real estate agents or brokers can list homes on the MLS — this is one of many services they provide their clients.
This means that if you’re selling as a FSBO, you’re unable to list your home on a local MLS and have to rely solely on Zillow, Facebook, and your own marketing.
As a way around this, you may opt to pay a flat fee MLS broker. These brokers offer solely the service of listing your home on the local MLS for a fee much lower than a full-service agents regular commission — usually ranging anywhere from $49 to $500.
Just as a FSBO though, if the buyer comes with an agent, it's likely you’ll still have to pay 3% of the selling price to foot the bill for that buyer’s agent.
A happy medium between going it alone and hiring a traditional agent for 5% to 6% commission is hiring a discount Realtor.
Often, you can find a local, full-service agent that will sell your home for a flat fee. Instead of charging a commission based upon the house price, a flat-fee real estate agent charges a standard fee for their services.
The amount the agent makes on the sale stays the same regardless of the price the house sells for. This amount is almost always less than that of a traditional agent whose commission is a percentage of the final selling price.
There are different types of flat fee agents. Some discount flat fee agents will only list the house and provide limited or a la carte services. Flat fee, full-service agents will do everything that a traditional commission-based agent will do, but will do it for less.
This allows you to keep the equity you’ve built in your home, while still having the expertise and knowledge of the local market from a trusted real estate agent.
Ben Mizes is the CEO of Clever Real Estate, the online platform that helps you find a top-rated, full-service real estate agent for a fraction of the traditional cost. Ben is an active real estate investor in St. Louis with over 22 units at the age of 25.