How Does Commission Work in Real Estate

By TradeCasa Team

The way commission works in real estate is not always clear to homeowners. It is generally assumed that most fees are retained by the agent that you hire. But that is far from reality.

The average commission fee in the United States to sell your home is approximately 6% of the final selling price. In Canada the average commission is slightly lower, equating to about 5%. Although, commission fees are generally negotiable, if you decide to sell your home using a full-service broker (traditional agent), you can expect to pay in the tens of thousands of dollars in real estate fees.

How Are Commissions Paid Out?

In a typical real estate transaction, there are many pockets to fill, including the agent that you hire to sell your home. Although, most homeowners do not pay much attention to how many “intermediaries” are involved in their sale, understanding where the money goes will help you appreciate your agent that much more or perhaps motivate you to choose a more favorable marketing alternative.

How commission works in real estate

In our example above, let’s assume a home selling price of $500,000. The final cost to the seller at 6% will amount to $30,000 in fees. But your agent will only pocket a fraction of that fee.

In most cases it is the buyer’s agent that brings the buyer to your sale. When two agents are involved in the transaction, the seller’s agent (your agent) and the buyer’s agent, will split the commission earnings 50/50, in our example each agent will take $15,000. But the final earnings per agent are further divided with their respective brokers.

Even real estate agents have a boss, and that boss is known as the broker of record. It is here that the pot of loot is divided once more. The agents involved typically hand over 50% of their respective earnings to their brokers. Granted that the broker must cover their costs of operating their brokerage, which includes office space, utilities, and cost of advertising.

For your consideration, the money that is earned by the agent that you hire to sell your home is usually one quarter of the total commission. In our example above, your agent would earn 1.25% or $7,500, which is still not bad for an average of 10-20 hours of work!

How Are Commissions Calculated?

You may have already noticed that commissions are calculated on the final sale price of the home and not the proceeds of your sale. Why is this important? The final sale price does not represent your equity if you have a mortgage on your home. Which means that the commission is much higher if you look at it from an equity perspective.

Let’s assume that you have a $300,000 mortgage on a home that sells for $500,000. Then your proceeds or equity will amount to $200,000 after the mortgage is paid off. But your payable commission is still $30,000 regardless. In this case, the commission represents 15% and not 6% of your equity in the home. Leaving you with only $170,000 after everyone is paid off.

When Are Commission Paid Out?

The only upside to how real estate commissions work pertains to when they are payable. Unlike the for sale by owner model, where you pay a fee upon listing your home, commissions are only payable upon a successful sale. In most cases this gives the homeowner the comfort of knowing that they will only pay if the home sells.

It is also important to note, that the actual payout takes places upon closing. This means that even when you have a pending offer and all conditions are satisfied, the commission money is not settled until all the money is collected from the new owner and the deed to the property is transferred. This is called the closing date.

The Commission Alternative

No matter what the value of your home, the cost in real estate commissions remains extreme. Most importantly, the money you will pay in commission fees will greatly reduce your overall equity in your next home.

Instead of paying all the intermediaries, why not pay yourself instead! At TradeCasa we offer the most effective and economical ways to help you sell your own home and save thousands. Check out our for sale by owner listing packages and experience the reward for yourself!