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What is the Cost of a Real Estate Agent? | Dwellful

Jan 10, 2022 11:25:57 AM

When you first begin looking for someone to represent you in a real estate transaction, whether it is a first time home buyer real estate agent or another specialty agent or broker, you may be wondering how the agent will be compensated and what part you’ll play in the compensation structure. After all, with the average home purchase price in the US topping $400,000, the services provided by real estate agents are more valuable than ever before.

How much do Realtors charge in exchange for representing you in the sale or purchase of perhaps your biggest financial asset? Does the cost vary for selling a home and buying a home? Who decides? Perhaps most importantly, who pays the real estate agent commission? Read on to explore more about the costs of real estate agents.

How Much do Realtors Charge

How Much Does a Real Estate Agent Cost?

Unlike many other professionals, real estate agents do not charge a flat fee for their services. In fact, different areas of the country and even different types of transactions might involve different types of commission structures.

In general, a commission is charged on the transaction itself, with the agents agreeing to split the commission in various ways. Sometimes the buyer's agent and listing agent may choose to split the commission right down the middle, taking an equal amount for each side of the transaction. In other cases, the listing agent may offer a reduced commission to the buyer side agent on the transaction.

In still other cases, a listing agent may recommend to the seller that they offer additional compensation to the buyer's agent. This could be in the form of an increased commission or in a bonus paid to the buyer's agent for bringing a well-qualified buyer by a specific date. This is a popular strategy to use when the seller is highly motivated or working on a compressed time frame.

According to Ownerly, the average real estate commission rate in the United States is 5-6%. So with the typical practice of splitting commission equally, it is typical for both the buyer's agent and listing agent to receive 2.5%-3% of the final sale price of the home.

Can You Negotiate Real Estate Commissions?

In some cases, a real estate agent may choose to charge a discounted commission or negotiate the commission they charge. This happens sometimes in the case of an agent working with an investor who is buying and selling a large number of properties on an ongoing basis. It may also happen when an agent is working with a seller on the sale of their current property and on the purchase of their subsequent property.

Aside from the traditional commission structure, some brokerages or service providers charge lower commissions or offer flat fees or an a la carte menu of services for both buyers and sellers. These lower-cost options often mean that the client ends up doing more of the legwork for the transaction or paying extra for things that a commissioned agent would provide as part of their standard service.

What Does a Real Estate Commission Cover?

A real estate commission covers the agent’s professional services, of course. However, there are far more expenses associated with providing real estate services than simply the agent’s compensation. In most cases, a real estate agent pays most or all of the expenses associated with providing service to their clients out of their commission, so the amount they receive does not represent mere compensation.

When working with a buyer's agent, you may be asked to sign a buyer agency agreement, which sets expectations for how you (the buyer) and the agent plan to work together. If this agreement is signed, it can be more complicated to break off the relationship with your agent should you ultimately decide to not purchase a home or request a different agent down the line. In this case, we always recommend reading the fine print and going over the exact terms and conditions of the agreement before signing.

Real estate agents on both sides of the transaction pay for their income taxes out of the commission, as well as for expenses associated with maintaining their licensure. They pay broker’s fees to their brokerage and pay for professional memberships at the local, state, and national levels. They pay for lockbox access and for transportation and other professional expenses. 

Buyer’s agents generally put a great deal of time into helping their clients search for and find the right home. They may coordinate ahead of time with a lender on the client’s behalf, then work with a transaction coordinator to facilitate the various elements of the contract period, including home inspections, appraisals, and the closing process.

The listing agent generally pays most of the costs associated with the marketing of the home itself. These include: 

  • Signage for open houses and for sale signs along with a service to install and remove the signs
  • Marketing collateral like professional photography, videography, graphic design and copywriting services for listing descriptions and flyers
  • Direct mail costs for printing and mailing promotional postcards or flyers to potential buyers and to the immediate geographic area
  • Online and social media marketing costs for targeted advertising
  • Professional networking events to bring attention to the listing
  • Open houses and broker open houses along with food and door prizes

On top of these expenses, some listing agents may offer additional services like staging or provide more high-end event marketing services. This is especially true for luxury listing agents or for those working with large and complex estates or land sales.

Who Pays the Commission?

In most cases, the seller pays the real estate commission for both sides of the transaction. This is because it is the combined effort of the two real estate professionals that allows the seller to successfully sell their property.

Price adjustments and credits may affect how much the buyer’s agent actually gets paid. If the appraisals or home inspections reveal something that may lead to a price reduction in the home, then the agent also takes less commission from that. Additionally, if you feel as if the agent did not represent your needs well, you can open up a discussion on having your real estate agent credit some of the commission in closing costs. A quality real estate agent will not give you this problem, however, the agent commission is not always necessarily determined by the seller.

Some sellers have objected to the expectation that they pay both sides of the commission. In fact, there has been legal action taken in some areas to “uncouple” the two sides of the transaction so that buyers would be forced to pay for their own representation. The National Association of Realtors argues that this uncoupling would put a damper on buyer demand, especially among first time home buyers who may be working with a limited budget.

Some "For Sale By Owner" (FSBO) homeowners are disinclined to pay any commission at all, even to the buyer's agent who brings them a qualified buyer. You may need to discuss compensation with your agent ahead of time if you choose to move forward with the purchase of a FSBO property.

How Do Real Estate Agents Get Paid?

In most cases, real estate agents are paid after the closing of the transaction. This means that during protracted home sales or searches or complex escrow processes, some agents may be working for months or even years without compensation while spending their own money to market the property or assist their buyer clients.

In fact, an agent may work many months with a buyer who then decides not to buy after all. They may work with a seller who is unwilling to price their home realistically for the market or to negotiate with interested buyers. If the seller then takes the home off the market, the agent could end up going uncompensated for the time and expense they have put into the transaction.

What is Dual Agency and Will it Save Me Money?

In some cases, an agent who is working on both sides of the transaction may be due a commission for both the buyer and seller services. This is called “dual agency.” This occurs when an agent is representing a listing which one of their buyer clients then decides to purchase. 

Some people believe this will save them money, however, this is not necessarily the case. Although they may offer to bring the sales price down, they are still representing both sides. It may be best to hire a buyer's agent or other real estate professional who will focus more on your needs and will best negotiate for what you desire.

Many agents refuse to practice dual agency, choosing instead to refer one of the clients to a trusted colleague. Some brokerages discourage dual agency but do allow two agents within the same brokerage to work the two sides of the transaction. In some parts of the country, dual agency is forbidden outright.

The main objection to dual agency comes down to the fiduciary relationship that exists between a real estate agent and their client. A fiduciary relationship means that the agent is responsible for doing what is in the best interest of the client, without regard to their own interests or the interest of any other party. It is difficult for an agent to, in a sense, negotiate both sides of a transaction while offering appropriate fiduciary services to both parties.

Is Hiring an Agent Worth the Cost?

While no one can answer this question for you, it is important to understand what a real estate agent is bringing to the table on your transaction. Then you can decide for yourself whether they are worth their commission.

  1. A real estate agent offers expertise derived from both their licensure and subsequent education and from their experience on other transactions. They understand the ins and outs of contracts, contingencies, and the escrow and closing processes.
  2. A real estate agent offers trusted advice based on both their experience and market knowledge. By providing guidance throughout the transaction, including guidance related to the search and offer process, a real estate agent saves time and money for their clients.
  3. A real estate agent provides an extensive network of affiliated professionals, allowing you to take advantage of proven leaders in the local market. These include lenders, real estate attorneys, closing agents, home inspectors, and other professional service providers. In addition, they may include designers, contractors, and marketing experts to help with preparing the home for sale or to recover following a negative home inspection.
  4. A real estate agent provides market knowledge that helps them to accurately price a home for sale. An underpriced home could mean leaving tens of thousands of dollars on the table while an overpriced home can drive away potential buyers, causing the home to languish on the market for weeks or months.
  5. A real estate agent provides high level negotiations on every aspect of the contract and transaction. This can include negotiating on price but also on timeline, process, and other elements of the transaction.
  6. A real estate agent offers superior marketing services, including professional content development and distribution. This may be especially complex in the case of an unusual property, a luxury property, or a large property where a buyer is unlikely to come from the local market. 

In fact, a combination of accurate pricing, exceptional marketing, and tough negotiation can realistically more than pay for the commission of the real estate agents on both sides of the transaction.

In order to find a real estate agent who’s worth their commission, it’s important for you to have a sense of what matters most to you in regards to your transaction. Find someone who can provide the following:

  • Professional and prompt communication from the very beginning of your relationship. Talk to your agent about how you prefer to be contacted, whether with a phone call, text, or email, and ensure that all of your information is kept updated throughout the time that you’re working together.
  • Services that are specific to your individual needs and desires. If you are primarily focused on budget, make sure that your agent is aware of this and that they are showing you listings that make sense. If you are primarily focused on the timeline of the home buying process, make sure that your agent is aware of this and that they are helping you move forward appropriately.
  • The advice you need for your particular circumstances. If you are a first time home buyer, you may need an agent who offers plenty of education and information at every stage of the transaction. If you are an experienced buyer or seller with a large number of transactions under your belt, you may need an agent who is more focused on optimizing your time or helping you to meet other goals within the context of your transaction.
  • Market expertise for the specific neighborhoods you are considering. A great agent can help you determine whether the area you have in mind will be a good fit and will work with your budget. If necessary, they can also help you switch gears and find a neighborhood that has the features you are looking for at a different price point or inventory level.
  • A proven track record of exceptional service including client testimonials and a history of effective work with clients like you. Your ideal real estate agent should be able to tell you about the ways in which they have served other clients and identify with the questions you ask and the concerns you express.

Finding the right real estate agent can be a game changer no matter which side of the transaction you are on. Whether you’re trying to find a buyer’s agent, a listing agent, or both, Dwellful’s agent finder provides a targeted and specific match geared toward your individual requirements. What’s more, you’ll receive cash back after your closing. You’ll experience greater peace of mind at every step of the process when you’re working with the right agent for your needs.

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Christy Murdock

Written by Christy Murdock

Christy Murdock is a content writer, consultant, and coach who helps real estate and business professionals stand out as industry leaders through effective content marketing strategies. As a contributor and educator for leading real estate companies such as Inman and ReminderMedia, Christy is a trusted leader in real estate marketing. Through her company Writing Real Estate, Christy writes blogs, property descriptions, websites, and promotional copy that increases traffic and results in higher conversions for real estate agents, brokers and other professionals.