If you sell or buy a home, you may owe the brokers involved a commission. That’s why understanding how commissions are calculated is important as it will help you figure out the estimated price of a property and know whether you’ll make a profitable transaction. So, how are realtor commissions calculated?.
How Are Realtor Commissions Calculated?
Realtor commissions are calculated using this simple equation: The agreed payment percentage/100 x the cost of the property. For instance, if a property is sold for $800,000, and the commission rate is 6%, the equation would be (6%/100 x $800,000 = $48,000 commission).
It’s essential to remember that commission is not an extra fee, it’s included in the cost of the transaction. In the above example, the buyer or seller would only receive $752,000 ($800,000-$48,000), as the other $48,000 would go toward paying the brokers involved their commission.
What if the Commission Is Not Set at an Even Rate?
In some cases, the commission may not be set an even rate. For instance, a realtor may charge a 7% commission for the first $200,000 and 3% for the remaining amount. To calculate this uneven rate, break it into two equations and add the results together to get the total rate.
7%/100 x $200,000 = $14,000
3%/100 x $600,000 = $18,000
Now add $14,000+$18,000 = $32,000 total commission.
What Is the Cost of Hiring an Agent?
Real estate agents earn their money through commissions, which is a portion of the sale price given to buying and selling agents for closing a transaction. Although different countries have their own methods of paying commissions, in the U.S., the seller usually pays part of the commission to both the buying and selling agents.
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When you get agent help, you can expect to pay 6% of the property’s price. If the selling and buying realtor is the same person, they will receive the full 6% commission. If two agents are involved, they’ll split the commission. However, with AZ Flat Fee, you’ll get full service with professional marketing, and more for a low $3,500 on the listing side.
Note that although 6% is the standard rate, realtors can negotiate for higher rates. Also, not all commission rates are pocketed by realtors. If the realtor works for a brokerage firm, the funds are split between the realtor and their firm at a set rate like 60:40.
How To Calculate Commissions Split Between Two Realtors
Calculating commission split between two realtors is very simple. Typically, the buyer’s agent and seller’s agent split the commission rate 50/50. There are two ways to calculate this split commission, using the examples below:
Take the total commission and divide it by two
- 6%/100 x $800,000 = $48,000
- $48,000/2 = $24,000 commission for each agent
Calculate using half of the agreed percentage
- 6%/2 = 3%
- 3%/100 x $800,000 = $24,000 commission for each agent
However, if the realtor works for a brokerage firm, they’ll split that rate with their firm. For instance, if the realtor agreed to a 60:40 split, they’ll only receive 60% of $24,000. That’s just $14,400, while the remaining amount goes to the firm.
Types of Real Estate Realtor Commissions
Knowing the types of real estate realtor fees available can help you choose a realtor that better suits your budget and needs. That being said, there are two types of real estate realtor fees:
Flat Fee (Fixed Commission)
A flat fee means the percentage of the agent commission remains the same no matter the cost of the property. Note that flat fee commission rates differ from state to state and company to company, with widely varied service levels. However, they are based on the specific rate that applies in the local real estate market where the property is located.
Let’s assume a typical percentage based broker suggests a selling range between $330,000-$380,000 after assessing your home. Let’s also assume this broker charges a 3% on the final sell price.
If the prevailing market conditions are good and the home sells at a higher rate of $400,000, the broker will earn a $12,000 commission rate at the fixed rate of 3% they initially charged.
A flat fee company would have set the fee up front and even if the sale price increased, their flat fee would remain the same. As an example, AZ Flat Fee offers full service for a low flat fee of $3,500. So if your home sold for $330,000 or $400,000 you would still pay the same $3,500 flat fee commission.
Tiered Commission (Negotiation Commissions)
This commission works as an incentive for brokers to fetch the highest price when selling a property. Tiered commissions may increase depending on the final price. Below is an example of how this model works using the numbers in the previous illustration (a selling range between $330,000-$380,000 with a commission rate of 3%).
If you are selling your home, you can incentivize a broker by recommending this tiered commission structure:
- A commission of 3% for a selling price below $330,000
- A commission of 3.5% if the selling price is between $330,000-$380,000
- A commission of 4% if the final selling price is between $380,000-$400,000
In this example, if your house sells for $400,00, the broker earns $16,000 ($4,000 more). Although you will pay more in broker fees, you will sell your house at a higher cost than initially recommended
Are There Situations When You Don’t Have To Pay the Commission?
There are situations when you don’t have to pay the commission. You won’t pay the commission if your home has been listed for a long time, taken off the market and hasn’t sold, for example. Some people may also opt to list their own homes and not give commissions to buyer agents, though this typically results in far fewer buyers being shown your property and lower overall sales price from the decreased competition.
Why Are Commissions So High?
Commissions are so high because they’re split between different parties. The agent also has to mail marketing materials, pay upfront for quality pictures and cover advertising expenses, among other services.
Deciding which realtor to hire should not be a hurried decision. Discussing agent fees and comparing different realtors will help you choose a realtor that suits your budget. You should also understand what’s included in their fees to make an informed decision.