Now that you have a better sense from last issue of why commissions are A Thing (see: money makes people act funny and our industry is litigious), we can chat about what commissions are.
Below are answers to FAQs about commissions, ranging from the foundational to the more complex. The actual answer to all of them is that everything is negotiable. Except perhaps transparency and honesty, which are imperative (and like...often legally required).
Enjoy as much or little of this as you like at a time (or ever!), it’s all here when you need it—I even made a clickable Table of Contents to save you from…me.
And because I hate the idea of filling this piece with stock photos of money stuff, we’re filling it with pictures of cool floors I’ve found.
Table of Contents
OKAY, ANALISE: what’s real estate commission?
Commission is the consideration paid to a real estate agent as a representative of an employing broker, for fulfilling the terms of a contract they have with a buyer or seller. Typically, contract fulfillment = the sale or purchase of property.
Interesting, I guess. When does commission get paid?
In the case of the purchase or sale of a property, agents receive their commission at the close of escrow, aka once the property is on record with the county as having a new owner. Agents typically get that payment direct-deposited from their brokerage, who receives instructions from the title company handling funds during the transaction.
If a client doesn’t end up buying or an owner decides they don’t want to go through with a sale—does the client owe the agent?
The short, easy answer is no. In the most typical scenario, if I as your agent don’t sell your house or get you into a new one, I don’t get paid.
Yes, this does mean that sometimes I work with someone for months or even years, and sometimes that means life ultimately takes someone in a different direction and I’m essentially paid in the friends we made along the way.
And no, I don’t think that’s a waste, I think that’s a hazard of the job, it’s a relatively rare outcome, and there is always something to learn—though if you work with me we will have conversations as we go to make sure there’s mutual understanding and that efforts are made in good faith.
(The less short, less easy answer here is that there are some scenarios in which an agent can pursue compensation for expenses or efforts rendered in the event an intended outcome changes).
What’s the typical commission amount?
Commission is always negotiable, which again is a statement that could (should?) really accompany every question in here. That said, in residential real estate in California and here in the Bay Area, commission is usually 5-6% of the purchase price of a property. Aka if a home sells for $1M, there might be $55K paid in total commission.
Wait, that 5-6% commission goes to one agent?
Typically, the commission is split by the agent representing the seller (the “listing” agent), and the agent representing the buyer (the “selling” or “buyer’s” agent). When we say commission on a sale is 5%, that usually means 2.5% of the purchase price goes to each side. A 5.5% rate typically reflects 3% to the list side and 2.5% to the buy side. But…everything’s negotiable.
Great, so who’s actually paying the commission?
*Repeats furiously ad nauseam: Everything is negotiable, everything is negotiable!* Historically speaking, the seller usually pays the full commission, aka the seller pays the commissions of both the listing agent and the buyer’s agent.
Why would the seller pay the whole commission?
This is a big question! There was literally a lawsuit about this! Can’t wait to get a bunch of Realtors in my DMs on me about how I could’ve explained this better or differently. Please don’t offer this up on Reddit, give me at least three more months of increasingly opaque posts to thicken my skin.
Mario here we gooo: There are a lot of complexities and history tied up in the notion of “cooperating commission,” but suffice it to say that by offering commission to both the list and buy sides, the seller incentivizes and empowers all parties to come correct, which leads to a better outcome.
Usually: more accessibility = bigger reach = more competition = higher selling price.
While a 2024 national lawsuit aimed to more clearly outline (among other things) the fact that sellers DO NOT HAVE to pay the buy side’s commission, it didn’t take into consideration other factors that might ultimately end up indirectly costing the seller as a result.
What’s an example of the “hidden cost” of a seller not paying buy side commission?
Say you have a pair of first-time buyers who’ve worked very hard to save up the down payment and one-time closing costs needed for a purchase, and who are leveraging everything they have to qualify for a mortgage to cover the rest.
Now imagine that they can *either* spend $20K to adjust their mortgage equation to be able to afford a home at a significantly higher purchase price (a difference even of hundreds of thousands of dollars) *or* they can pay their buyers’ agent.
Forgoing their agent (who won’t work for free) isn’t a question because these buyers are smart and not about to sign their names on a package of 300+ legally binding documents that constitute disclosures and inspections and contracts in order to take ownership of an asset that’s as complex and potential-liability-ridden as it is expensive, without expert help.
This means these buyers are going to straight-up offer less for the house—and maybe not even by the literal $20K the buyer’s agent would be owed, but by hundreds of thousands that $20K would’ve afforded them to offer had they been able to put that cash towards borrowing.
Okay so we’re really playing this out, huh?
YEAH YOU BET, because maybe this is a home that also appeals to a lot of first-time buyers, who are all going to be in the same boat. And MAYBE there are some other places on the market nearby that are pretty comparable but which don’t put the buyers on the hook for paying commission, so now maybe the competition on that one seller’s home thins a little and what felt like only $20K the seller didn’t want to pay, has suddenly ballooned into a loss of hundreds of thousands for the seller because the offers are fewer and less, and the negotiations aren’t as pressured.
You, lovely and brilliant reader, can pick apart that example (so can I!), but it illustrates the general point here that USUALLY by investing a bit extra in what is effectively the marketing of a listing, a seller stands to gain way more than it’ll cost them.
But hey, everything’s negotiable and you’re the client so you tell me how you want to proceed and I’ll do what I can and we’ll let it play out.
Back to business: You mentioned a lawsuit. ...what lawsuit?
Read a book, why don’t you! JK this is the book. JK AGAIN this is just a post on the internet. Burnett v. NAR was a 2024 lawsuit brought against the National Association of Realtors in an effort to combat the perception of fixed commission amounts and payers. NAR settled pretty quickly, which ultimately just turned into revisions to a bunch of the contracts we use in the industry in order to really drive home the point that EVERYTHING IS NEGOTIABLE and that EVERYONE KNOWS THAT.
I actually think that particular outcome is beneficial; prioritizing a concept of openness and fairness by literally increasing the amount of language and documentation addressing it, really allows us to live into the importance. We still have things to figure out as an industry, but we’re working on it.
And by the way: it’s not like this lawsuit came out of nowhere, people aren’t crazy to be wary of price-fixing and monopolies and all that—capitalism is rife with bad actors, and the real estate industry DID suffer from legit collusion mid-century out here.
Collusion in California? Say More!
In 1955, some brokers in California did in fact get together and decide that the commission on all home sales would be 6%, and it would be paid by the seller, and it would be split evenly between both sides’ agents.
These brokers were all required members of trade unions that controlled the multiple listing services (MLSes) that advertised properties for sale, so if a rebel agent came along and tried to say, “yeah I don’t think so buddy, I’m doing this differently,” they essentially either got blacklisted or forced into submission in the form of binding arbitration.1
That’s no longer a thing, but we’re still unraveling some of the twisted-up nonsense of times past, so the lawsuit is a good example of what’s essentially real estate PTSD (and/or ambulance-chasing, but that’s a different story).
Thanks for the history, Prof, but back in 2024 how does an agent negotiate their commission?
Great question, not-Analise! You get your hair done at a particular salon that charges $250, because you trust their expertise more than that of the artistes offering a $20 cut at Supercuts, right? (Sorry, Supercuts).
Real estate is basically like that. Within reason, a full-service, qualified, experienced, and dedicated agent is going to charge a higher rate than say a “discount” agent (allegedly popular post-settlement, though I have yet to see many in action in our market). That said, if your go-to hair person suddenly went wild and overvalued their industry’s standards and started charging $500 instead of $250, you might go find someone else.
I will tell you that my sellers pay me, Analise, 3%, and I suggest they pay 2.5% to the buy side, because I like to stay within a reasonable range for the industry while still acknowledging that my skill and efforts are remarkable.
Can you guess what I’m going to say next? If you don’t want to pay me that much, or pay the buy side, you get to tell me that! And we can negotiate. Maybe I want to make an exception to my usual for you, or maybe I offer to connect you with a great colleague who’s less stringent about the bottom line. Negotiations, baby!
Fine, when I sell I’ll pay 5.5%—do you (my listing agent) get to keep that full 3%?
Oh no no no no, wouldn’t that be fun! A real estate agent (or salesperson) is an independent contractor who works under the supervision of a broker. I, Analise, am a real estate agent of The Grubb Company; any deals I transact are on behalf of that brokerage. As such, the brokerage gets a minority cut of my commission.
Every brokerage is different and within brokerages, there can be different arrangements with individual agents. I, for example, will never get more than 80% of a given commission while I’m at Grubb, which is a max I will only get provided I maintain a certain sales volume per year—and a standardized approach observed by all agents at my brokerage.
I took home more at my previous brokerage, and I know agents who take home 90-something percent. Commission truly isn’t everything, it’s just part of bigger equations.
So while we’re at it, is there anything else that comes out of an agent’s commission besides the brokerage’s cut?
Thanks for asking! If I bring in a co-agent because I don’t want to work alone or because I feel like a client is better served by having two of us, I’ll split my commission at whatever agreement I have with that agent for that transaction (maybe I pay them 20% to help with marketing, or maybe we’re sharing it 50/50).
Listing agents also pay for all the marketing of a property, so deduct another few thousand in expenses (or on the buy side for example agents pay for home warranties at some $600).
Lastly, commissions are pre-tax, so I’ll go ahead and put aside a third of what I’m taking home to pay The Man.
It sounds like you’re whining about how little you actually take home?
Absolutely not, I’m well-paid for serving my clients impeccably, and it’s not the client’s responsibility to consider how their particular transaction fits into my business plan anyway.
But I’m sharing all this with you (buyers, sellers, general public, readers, Katies, publicists), because it’s all something that I had zero understanding of until I was in the business, and I think it’s interesting.
I swear by the tenet that money is only weird if you make it weird. Fraught, complicated, challenging, and so forth? Can’t fix that, but we can at least be frank about the realities of the costs of working together. This is business, after all.
THE END
I’m going to stop here because you’re probably already asleep and I’d like to save the qualifying questions we’d get into otherwise, for next week’s final Part 3: What Do Realtors Even Do?
Questions that concern for example the reality that an agent stands to make more commission on a more expensive property because payment is percentage even though that’s not always reflective of challenge level, or what negotiations look like when a seller simply won’t pay the buy side, or how a buyer’s agent can effectively serve a buyer who cannot afford to pay the agent’s commission and stipulates as much in the representation agreement.
Those are the kind of nuanced questions that I love and that we get into when we talk about value—the work, energy, time, and liability that agents and brokers actually undertake on behalf of clients.
So: next week, let’s crush a finale with the tough stuff!
Don’t forget, for the millionth time, what may end up having to be my next tattoo because it’s sort of a good rule for life in general:
Everything is negotiable.
Source: People v. National Association of Realtors (1981) 120 CA3d 459
