How do Realtors get paid?

This is actually a question that I feel there is often some confusion about with the everyday person who doesn’t deal with real estate on a daily basis. What I usually find is that most people hold a common misconception that when they go to sell their house with a Realtor, they’re going to be out 6% of the price when they decide to sell. Although this is probably the most common rate that Realtors have traditionally charged for their services, the sales commission that you negotiate with your Realtor is not fixed and actually can vary considerably between Realtors.

Below I’m going to explain the “typical” residential transaction. In reality there are other ways your Realtor may get paid, but this is by far the most common.

Typical distribution of commission

Two Sides to a Deal

In every transaction there are two sides to a deal.  There is a seller and there is a buyer.  Typically the seller is represented by a Realtor and the buyer is represented by another Realtor.  In some instances this person is the same Realtor working with both the seller and the buyer.  In Colorado this person would be designated as a Transaction Broker.  There is also the possibility that one party is represented by a Realtor and the other is not.

For our purposes, we’re going to assume that both parties are represented by different Realtors.  Typically, when the seller decides to put their home on the market they meet with their Realtor and negotiate an acceptable fee for their services.

As a part of this negotiated fee, the Realtor who will be helping the seller agrees to also pay the “other” Realtor who brings a willing and able buyer to purchase the home.  As a result you have some of the commission going to the selling Realtor and some going to the buying Realtor.

The Brokerage’s Piece

Now before we go farther, the brokerage that is involved in the deal also needs to get their piece of the pie.  When an agent works for XYZ Real Estate Brokerage, they have to then give a portion of their commission to the brokerage before they take home their pay.  This portion is also negotiable and varies depending on the brokerage and the services it provides its agents.

Example

The Realtor who works with the Seller is called the Listing Broker.  Let’s say the seller pays 6% at closing.  The Listing Broker then takes the 6% and gives 3% of it to the Selling Broker (Buyer Side…I know confusing term), which leaves the Listing Broker with 3%.  Then they split the 3% up between themselves and their brokerage based upon their agreed upon terms, let’s say 50%.  So in the end the Listing Broker takes 1.5% and the Listing Brokerage takes 1.5%.  The same typically holds true for the buying side as well.

Where Rates Vary

Rates most often vary on the listing side of a commission.  If your broker wanted to be aggressive they could choose to only charge 2% for their side of the deal and still offer 3% to the buy side.  This would make the total commission 5%. The buyer’s agent would still receive the “going rate” but the seller would be saving 1% on the sale of their house.

Can you offer less to the Buyer’s Agent?

The short answer is yes, but I wouldn’t advise it.  Even homes that are “For Sale By Owner” typically still offer 3% to the agent working with the buyer.  This is because they typically want to do everything they can to make their home competitive in the market.  If a buyer is deciding between two homes, one offering 2% and one offering 3%, which home do you think will have a better chance of selling?