How Real Estate Agent Commissions Work and How to Negotiate Them

Real estate agent commissions are always negotiable, a fact underscored by recent industry legal settlements. For both buyers and sellers, understanding how these fees work and feeling empowered to discuss them with your agent is crucial for a cost-effective transaction. Commissions are typically paid at closing from the sale proceeds, and the specific services covered should be detailed in a written agreement. This guide explains the standard services commissions cover and provides actionable strategies for negotiating fees based on your market conditions and needs.

What Is a Real Estate Commission?

A real estate commission is the fee paid to licensed agents for their services in facilitating a property transaction. This compensation is most commonly a percentage of the home’s final sale price, but it can also be a flat fee. The commission is typically split between the buyer's agent and the seller's agent and is paid at the closing, which is the final meeting where the property's ownership is legally transferred. Crucially, the amount of this fee is not set by law and is determined by negotiation between the client and their agent, as outlined in a signed contract.

What Services Does a Real Estate Commission Cover?

The commission compensates an agent for a wide range of services, which should be explicitly agreed upon before signing a representation agreement. The scope of work differs depending on whether the agent represents the buyer or the seller.

For Seller's Agents (Listing Agents):

• Advising on home improvements to maximize sale price.
• Conducting a comparative market analysis (CMA) to determine a competitive listing price.
• Developing a marketing strategy that may include professional photography, 3D tours, and open houses.
• Evaluating offers and negotiating on the seller’s behalf.
• Coordinating the transaction process to ensure all deadlines are met.

For Buyer's Agents:

• Educating clients on the home-buying process and connecting them with lenders.
• Scheduling showings and providing deep local market knowledge.
• Helping craft competitive offers based on recent sales data, known as comps (comparable properties).
• Negotiating for repairs or credits after home inspections.
• Managing communication with the seller’s agent and coordinating the closing timeline.

How Are Real Estate Commissions Determined After the NAR Settlement?

Following the recent National Association of Realtors® (NAR) settlement, new rules emphasize transparency and written agreements. Commissions are now squarely established through direct negotiation between the client and their agent.

For Buyers: A Written Agreement is Key New rules require agents to obtain a signed buyer’s agency agreement before touring homes. This agreement legally defines the agent's compensation, which can be a percentage of the purchase price, a flat fee, or an hourly rate. You may also encounter a touring agreement for short-term, limited services, which gives you a chance to evaluate an agent before committing to a long-term contract. Buyers should clearly understand if they are responsible for paying their agent’s fee directly or if the seller has offered to cover it.

For Sellers: The Listing Agreement Dictates Terms Sellers sign a listing agreement with their agent, which must specify the compensation amount. The recent changes mean sellers are no longer required to offer compensation to the buyer’s agent, though they may still choose to do so as an incentive. It is illegal for agents to steer buyers toward or away from properties based on the offered commission, a practice addressed by the recent settlement.

How to Negotiate Your Real Estate Agent's Commission

Your agent expects a discussion about compensation. The key is to align the fee with the services provided and your local market conditions.

Negotiation Tips for Buyers:

• Discuss Strategy: In a competitive market, your agent may provide more intensive service, justifying their fee. Understand what that service includes.
• Calculate the Fees: If considering a flat fee, determine how it impacts your cash needs at closing. If paying a percentage, know exactly what that translates to in dollars.
• Interview Multiple Agents: Compare the services and proposed compensation structures from several agents to find the best fit.

Negotiation Tips for Sellers:

• Assess Your Market: In a hot seller’s market, you may have leverage to negotiate a lower rate as the home may sell quickly. In a buyer’s market, extensive marketing services are more critical.
• Consider Your Role: A home in excellent, move-in-ready condition may require less marketing effort from the agent.
• Get Creative: If you are also buying a home with the same agent, you might negotiate a package deal for both transactions.
• Get Specific: Ask exactly what marketing tools (e.g., professional staging, 3D tours) are included in the proposed commission.

Key Takeaways for Home Buyers and Sellers

Real estate commissions are a significant cost of a transaction, but they are not fixed. The most important step is to have an open conversation with any potential agent about fees and services before signing an agreement. Understand the new rules requiring written buyer agreements and use them as an opportunity to clarify expectations. Finally, choose an agent based on their local expertise and the value they provide, not solely on the commission rate. A skilled agent can often save or make you more money than the cost of their fee.