Where the Commission Dollars Go in Real Estate Deals
Not all home sale listings and transactions are handled the same, but this article is about the most widely used listing methods and transaction commission splits among participating real estate professionals. It explains who normally pays the commissions and where the dollars go.
Generally, the listing contract with the seller specifies that the home seller will pay the commission out of sale proceeds at closing. The listing brokerage then splits the commission with any other licensed brokerage that brings a buyer to the deal. If the listing brokerage finds the buyer themselves, they get to keep the entire commission. There can be negotiated discounts in this case, such as shaving a percentage off the commission if it is all going to the listing brokerage.
Starting with 100% of a commission to be paid by the seller on the sold price of the home, for this example the sold price will be $300,000, and the total commission percentage is 5%. The listing brokerage is advertising the listing with a 50/50 split of the commission with a different brokerage bringing the buyer.
Generally, the brokerage also splits the broker's portion of the commission with the agent that listed the home, and the seller broker splits their portion with the agent delivering the buyer. This split is often 50/50, but experienced high producer agents can often negotiate their split to be higher. For this example, a 50/50 split will be used.
Using our example sold price and commission, here is how this deal could look and who gets what from the commission:
• Total commission for the deal is 5% of the $300,000 sold price = $15,000.
• Assuming listing broker is splitting 50/50 with buyer brokerage, they each would get half of the $15,000, or $7,500.
Keep in mind, this is the commission each brokerage would receive. However, the agent that represents the buyer and seller respectively, work for the brokerage and would receive a commission based on the compensation plan they have with their brokerage. Let's assume the brokerages are splitting the commission 60/40 with the agent that brought the deal, meaning 60% to the agent and 40% to the brokerage. Using these percentages, here is the net amount received by both the agents and the brokerages.
• If each of the brokerages is splitting with their agent 60/40 that brought the deal, then each agent would receive $4,500 and each brokerage would receive $3000.
This is assuming the brokerage is not a franchise. When dealing with franchises, such as Re/Max, Keller Williams, Coldwell Banker and the like, a franchise fee is assessed on each transaction which is paid off the top (usually around 6%). The remaining commission is what will be split between the brokerage and the agent.
As you can see via this example, the agent you would be dealing with as the seller, or the buyer is getting $4,500.00; or less if they work for a franchise. This gives a more realistic picture for many buyers and sellers, who may think the agent is making much more. Also, agents don't make anything until a transaction closes, they assume 100% of the upfront cost without any guarantee of a return.
In real life these days, total commission percentages are often negotiated, and they can run anywhere from around 4% to 7% depending on the type of real estate, higher for lower priced land parcels.
Also, the agents and brokers can have many creative deals or even avoid splits altogether. Some brokerages have their agents pay "desk fees" and give them 90% to 100% of the brokerage share of the commission.
Hopefully, this explanation and example home sale transaction commission split breakdown will help buyers and sellers to understand where the money goes.