How much commission do real estate agents make? Research shows a lack of commission rate transparency and negotiability at traditional real estate firms. Please note that this story has been updated to add in additional information that shows how real estate commissions get split between brokers and the real estate agents who work for them.
It’s easy to know what you’ll have to pay for most of the stuff you buy or sell. But when it comes to your home, it’s really hard to know how much commission real estate agents earn. Too bad, because home sellers collectively pay about $100 billion in real estate commission each year, according to research by the Consumer Federation of America (CFA). And when it comes to that kind of cash, you ought to know how much you are (or should be) paying.
The CFA studied over 250 agent and broker websites, had conversations with 200 agents in 20 cities, conducted a national survey of over 2,000 Americans and reviewed published research on commissions for their latest report. Their research found traditional real estate agents and brokers make it difficult for consumers to learn about real estate commission rates.
Traditional real estate agents and brokers don’t advertise their commissions or include information about it on their websites. In fact, they rarely mention commissions are charged at all online. In response to general phone inquiries, they don’t provide full information about commission rates. And, in conversations with prospective home sellers, when asked about seller costs, they don’t quickly provide information about commissions (though eventually, nearly all did).
Why? Real estate commissions are, by law, negotiable. That means, sellers are supposed to be able to negotiate the commission they pay. Traditionally sellers paid a 6 percent commission to the brokerage firm representing them, but today, commissions are all over the board. Some sellers might pay 2 or 3 percent (if they’re using a discount broker) all the way up to 7 or 8 percent (for a really hard to sell house). And, then there are ibuyers, which charge fees rather than commissions.
How Much Commission Do Real Estate Agents Make?
An overwhelming 99 percent of the agents the CFA interviewed said they charge a 5 percent or 6 percent commission for their services. Whatever the fee that is charged by the listing broker, the total commission is paid to the brokerage company. The brokerage company then divides the commission between itself and the agency that represents the buyer. Typically, the real estate commission is shared equally between the two companies, but not always. The real estate commission is then shared between the listing broker and the agent and the buyer’s agent and the brokerage company that agent works for.
Here’s how it works in practice: If the total commission is 6 percent, each brokerage firm would get 3 percent, which would then be split in half again, so that each real estate agent would earn a commission of 1.5 percent of the sale prices and the brokerage company would get the rest.
How Real Estate Commissions Get Negotiated
While real estate commissions are supposed to be negotiable, in practice commission rates are often near-uniform and commission splits (the portion received by the buyer agent) are even more rock solid.
Five or 6 percent of a home sale can be a significant amount of money ($15,000 to $18,000 on the sale of a $300,000 home). Saving even one percentage point can be meaningful, notes Ilyce Glink, author of 100 Questions Every First-Time Home Buyer Should Ask, and publisher of ThinkGlink.com.
“The reluctance of traditional real estate agents and firms to provide information about commission levels helps explain why there is so little price competition in the industry,” noted Stephen Brobeck, a CFA Senior Fellow. “It also helps explain why most consumers, even recent home buyers and sellers, do not know that nearly all commissions range between five and6 percent.”
A national survey from 2009 found only 32 percent of respondents, and 44 percent of recent home buyers and sellers, knew that a typical commission is five or six percent.
Is the Real Estate Commission Negotiable?
Again (and we can’t state this often enough), real estate commissions are, by law, negotiable. But what happens if the agent isn’t willing to negotiate? You might have to find another agent. Sounds easier than it is, since more than 70 percent of the agents the CFA interviewed said they would not negotiate their commission rate.
The CFA suggests that real estate commissions could become more transparent and more negotiable if:
- Home sellers start asking about commission levels and the willingness of agents to negotiate them down in initial interviews with listing agents.
- Consumer groups, journalists, and other third parties provide more information locally about commission levels and their negotiability.
“The industry is beginning to feel more pressure from litigators and regulators to increase price competition,” noted CFA’s Brobeck. “We believe that more visible pricing would not only lower costs for consumers but also increase consumer confidence in agents who play a critical role in most home sales,” he added.
Read Ilyce’s followup on how commissions are split here.