Home buyers and renters are eager to minimize real estate expenses, especially in today’s highly competitive market. With property and rental prices steadily rising amidst increasing demand, it’s no wonder buyers and renters are looking to save wherever possible.
At the same time, real estate agents earn their living by taking a previously negotiated or percentage-based fee off of every rental or sales deal they close. Known as a commission, this fee is meant to fairly compensate agents for their time, service, and expertise they bring to every deal. In this article, we’ve outlined what every agent needs to know about buying, selling, and rental commissions and how it can impact your earnings, especially as a new agent.
What is commission?
Commissions are how agents earn their income in the real estate industry by closing deals successfully. When an agent facilitates a real estate transaction, they are paid a real estate agent fee for their services known as a “real estate commission”.
In home sales, commission is typically a percentage of the final sale price and is split between the buyer's agent and the seller's agent. The commission compensates the agent for various tasks including property valuation, market analysis, negotiation, and ensuring a smooth transaction process from start to finish.
For rental transactions however, commission structures are slightly different. In some cases, the agent's fee is a percentage of the annual rental amount, typically ranging from 8% to 15% of the yearly rent. In other instances, agents may charge landlords a flat fee often equivalent to one month's rent or a percentage of the total lease value. Additionally, some markets have rules and regulations where the tenant, rather than the landlord, pays a portion of the agent's fee.
Understanding commission percentages
Traditionally, the standard commission rate is around 5% to 6%. While these standard rates act as a general guideline for agents, they are not set in stone and agents can always negotiate them. In fact, negotiating commission rates is a fairly common practice in the real estate industry.
Agents should consider factors such as the property's unique features, current market conditions, industry trends, and the level of effort required to complete the deal when determining the commission percentage.
Calculating real estate commission
To calculate the total real estate commission, follow these simple steps:
- Multiply the sale price by the agreed-upon commission rate. For example, if the sale price is $300,000 and the commission rate is 6%, the calculation would be: $300,000 x 0.06 = $18,000
- Determine the split between the listing agent and buyer's agent.
- Consider additional fees or agreements.
- Check for Multiple Listing Service (MLS) fees.
Note: the total commission is commonly split 50-50 between the listing agent (the agent representing the seller) and the buyer's agent, but that percentage split can be negotiated. In our example above, a 50-50 split means each agent would receive $9,000.
Additionally, some agreements may involve additional fees or specific terms. For instance: depending on the contract between the seller and the listing agent, there may be a minimum commission amount, a flat fee, or other arrangements. There are also Multiple Listing Service (MLS) fees that agents need to pay to use that database's services, which factors into an agent's overall costs and can influence how commissions are calculated.
Agent fees: Understanding included services
Agents are paid a commission fee for their services which can include any or all of the following:
- Conducting market analysis
- Promoting the property
- Providing guidance to the landlord on setting competitive rental rates
- Discussing necessary improvements to attract tenants
- Arranging and participating in property/rental showings
- Collecting applications and deposit checks from potential renters
- Evaluating applicants' credit, references, and employment/income sources, and presenting the compiled information to the landlord
What happens to an agent’s commission if a deal falls through?
Real estate agents usually only get paid when a sale is successful. However, there are unique scenarios where a seller may still be obligated to pay the broker's commission even if the sale doesn’t close. While these situations are rare, they can arise if the seller:
- Changes their mind and refuses to sell
- Encounters complications with a spouse unwilling to sign the deed (if that spouse initially signed the listing agreement)
- Faces title issues left uncorrected
- Engages in fraudulent activities related to the transaction
- Cannot deliver possession to the buyer within a reasonable timeframe
- Insists on terms not specified in the listing agreement
- Mutually agrees with the buyer to cancel the transaction
Recent commission lawsuits
Beyond understanding commission basics, it’s equally important to recognize that the real estate industry is not immune to legal disputes. With a recent uptick in commission-related lawsuits, real estate agents need to stay informed about how these cases can affect their earnings and the overall dynamics of real estate transactions.
The lawsuits, such as Moehrl and Sitzer/Burnett, involve home sellers seeking billions in damages, claiming that existing rules force them to pay buyer's agent commissions that would otherwise be covered by homebuyers in a truly competitive market. Defenders of the current compensation structure believe that it benefits consumers, saves sellers' time and expands the pool of buyers with professional representation.
If these lawsuits lead to substantial changes, they could impact millions of transactions and agents nationwide. The outcome might influence how brokerage companies and other listing services conduct business in the future. The implications could extend to the fundamental practices of how real estate agents are compensated and alter traditional commission structures and legal frameworks. An analysis from Keefe, Bruyette & Woods projects a potential 30% decrease in the annual $100 billion paid in real estate commissions with as many as 1.6 million agents facing a loss of income.
Being aware of these evolving commission structures and legal challenges in the industry can not only help new agents take proactive steps to mitigate risks, but navigate potential changes in how real estate transactions are compensated and how it might affect their livelihood.
Navigating rental commissions with RentSpree’s calculator
Understanding real estate commissions is foundational for new agents aiming to build successful and sustainable careers. RentSpree's commissions calculator makes it easy to navigate the intricacies of commission structures, enabling agents to quickly assess compensation by inputting property details and commission rates.
Our calculator not only aids in financial planning but also empowers agents to negotiate confidently, setting realistic expectations for both themselves and their clients.
Ready to start using RentSpree? Request a demo today.