Real Estate
Commision Facts
How Real Estate Commissions Work
In order to understand how real estate commissions are paid, it’s necessary to first understand the tool used in the vast majority of all home purchases: a Multiple Listing Service.
Multiple Listing Services, or local broker marketplaces, are essentially databases of all the homes for sale in a given market, maintained in most cases by local REALTOR® associations. Local REALTOR® associations also make most of this information publicly available for free, and each database often feeds home search sites.
When a seller lists a property on one of these local broker marketplaces with a listing broker, they get access to the largest pool of possible buyers that have been brought to the marketplace by buyer brokers. Meanwhile, buyers can work with any broker and see ALL homes for sale.
So where do commissions come in?
Typically, the seller’s broker pays the buyer broker’s commission for finding a ready, willing and able buyer. This creates a larger pool of buyers for sellers and saves sellers time and money by working with an established group of brokers. For buyers, it saves them money at closing and enables the buyer to receive professional representation.
The practice of listing brokers paying buyer brokers enables efficiency, effectiveness and accessibility for first-time, low- and middle-income and buyers of all walks of life. This practice also has been the driving force behind a thriving American real estate market. From 2010 to 2020, this approach to commissions:
- Enabled 88% of homebuyers to purchase their home through a real estate broker
- Contributed to an $8.2 trillion increase in total housing wealth
- Helped 6.3 million more new buyers become homeowners
For the 90% of sellers who use a broker, they sell for 30% more on average than homes sold off the local broker marketplace as for sale by owner. That means someone working with an agent could get $390,000 for their home versus $300,000 if they tried to do it on their own.
If this practice changed and sellers’ brokers stopped paying buyers’ brokers, what would be the likely outcome?
- No centralized source of available homes for consumers or brokers
- Buyers would have to visit every broker in town to see all available homes
- Outdated home status information
- Fewer homes for buyers to choose from on real estate sites
- Unverified, inaccurate and unreliable property information
- Sellers would likely have to pay to list and advertise their properties on websites
- Buyers unable to afford brokerages would have fewer options
- Inconsistent broker information in listings across the marketplaces
- Markets would be controlled by the largest brokers
Facts About Commissions
Commissions are always negotiable
The seller decides what fee they are willing to pay for their broker’s services and how much that listing broker should offer a broker who brings a buyer to close the transaction. Commissions can be negotiated at any point throughout the transaction, including at the outset and any time before the transaction closes.
Broker cooperation benefits consumers
Broker cooperation in the commission process leads to brokers sharing their inventory with each other. In turn, that means sellers have access to the largest possible pool of potential buyers, and buyers have access to the greatest number of housing options in one place.
Commissions cannot be included as part of a mortgage
The vast majority of mortgage lenders do not allow commissions to be added to home loans. Listing brokers’ offers of compensation to buyer brokers gives first-time and low- and middle-income homebuyers a better shot at affording a home and professional representation in the home-buying process. For many buyers, saving for a down payment is difficult enough, if buyers had to pay real estate commissions out-of-pocket on top of closing costs, it would push the dream of homeownership even further out of reach for countless people.
Commission rates are determined by market forces
Commissions fluctuate over time and have notably decreased steadily in recent years. In fact, in 2020 the average real estate commission in the U.S. fell to a new low of 4.94%, according to Real Trends.
You get what you pay for
Local MLS broker marketplaces allow small brokerages to compete with large ones and provide for unprecedented competition among brokers, including different service and pricing models. So, you can choose from many commission models. Those are choices to consider as you prepare to make likely the single most significant investment in your lifetime.
U.S. real estate market is the world standard
The U.S. real estate model has long been viewed as the most consumer-friendly around the world. Buyers abroad are forced to wade through complex markets that require consumers to work with multiple brokerages to access fragmented inventory because listings are not shared freely in the marketplace. The result is more time consuming, impersonal and costly.
Walsmith, Bob. “How Real Estate Commissions Work.” Santa Barbara Independant, Santa Barbara Independant, 26 July 2022, https://www.independent.com/2022/07/26/how-real-estate-commissions-work/. Accessed 12 Dec. 2022.