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How Real Estate Sales Commissions Work
Whether you are a home buyer, seller, or real estate professional, chances are you have worked with a real estate agent. Real estate agents are crucial to keeping the real estate industry working efficiently. They connect buyers and sellers, representing their interests in a real estate sale. How exactly are these valuable professionals paid?
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Who pays a real estate agent?
Most real estate agents work on commission. This means that they receive a percentage of the overall purchase price of the home. A typical agent commission is 6%. This is split between the buyer’s and seller’s agents if they are both working with an agent. Each agent gets 3%, which is paid out of the home’s proceeds at the time of closing. The commission comes out of the seller’s profits from the sale.
The closing attorney or title office will take care of the actual payment, providing a check to the agents after closing. If the agent works for a brokerage, they may have their own process to distribute earnings to their agents.
What happens in a For Sale By Owner sale?
If neither the buyer nor seller is not working with a real estate agent, the commission is not taken out of the overall transaction. This amounts to more money given to the seller after all of the legal, processing, and lender’s fees are taken out. So why doesn’t everyone do real estate transactions this way? Because working with a real estate agent is most often work the cost of their commission—a good real estate agent can get a better deal for you (buyer or seller), keep the sale on track, and get the home sold faster.
If only one party (the buyer or seller) works with a real estate agent but the other does not, the 6% commission is still the default. In this scenario, the entire 6% will go to a single agent. Some agents will reduce their commission in these cases if a lower overall purchase price will make the sale go through.
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