Doing The Math On Real Estate Agent Commissions

One of the biggest learning curves when it comes to buying or selling a house for the first time has to do with the huge subculture of working with real estate agents. The industry has decades of practices that are all but set in stone for things like contracts, home inspections, and the commission paid to real estate agents. The last one can sometimes take new buyers or sellers by surprise since it is a big piece of the sales price. But, as with most things in real estate, commissions are negotiable. We checked in with the CMO of the local MLS, John Heithaus, to get the details on what first-timers should expect from the system.

First give us the basic set-up for real estate agent commissions.
The way this system works all commissions are negotiable. Historically the number for commissions has started around 6% and can be negotiated down depending on the circumstances. But the important thing to remember is there is no set price.

Let's stick with the industry standard of 6%. How does that get divided up?
Roughly 70% of the time the listing agent is doing a cooperative deal with another agent so there'll be a commission split and again those are all negotiable with the sellers permission. Usually it is half of the 6% for each agent, or 3% each. It is typically mandated on the listing agreement and it will say in the MLS database 3% for each agent. Sometimes if the property is going to be tough to sell it will be written that one agent gets more of the commission, you might see a 4%/2% split in that case. Also if the same agent represents the seller and the buyer they might lower the percentage they take.

Once the agent gets their 3% how much do they owe the broker?
It really varies, but I would say generally it is usually around 70/30. For every dollar the agent takes in, they keep 70% and the broker gets 30%. But having said that we have 50,000 people in our system and not many of them have identical splits. Every agent has an opportunity to negotiate with their broker. But a broker may have a system where they say 'hey, if you've got less than five years experience'or your production is less than X dollars here's what our split is'. The more experienced agents will get more of the commission. But still, it isn't huge. The average agent in the National Association of Realtors systems grosses in the $30,000s for their annual pay.

There are a few brokerages that advertise they charge lower commission on all their sales. How common is this trend for brokers to lower the percentage they make on a sale?
Not much. I've been doing this a long time and I've seen brokers come and go trying to do this. The way the math works out it's really not as enriching as people think it is. One example I know of was a million dollar house that was on the market with all the commission going to one agent. The total commission starts out at $60,000 but the agent has to split that with their broker. And the agent has all the expenses of marketing, promotion, and sitting there at the open houses. On this million dollar house the agent ended up making $7,500. Which is still a lot of money, but it isn't $60,000. When you run down the line of all the expenses it isn't as much as people think it is.

Another downside is agents have to wait a long time to get paid. They don't get an advance on their commission. They have to wait until closing. They do it all on spec and if it doesn't close they don't get paid.

What else should people know about commission?
That the agent doesn't take home as much as the public thinks. I'm not trying to paint a totally bleak picture, but the agent will spend some of their future commission on marketing and promoting the house so that is an expense they have to absorb upfront. Some of the higher-end brokerages will charge an extra 1% commission to cover the cost of all the marketing and getting ads in magazines. Not many people are finding houses that way but the customer wants to see their house in Washingtonian or Chevy Chase Journal so agents think to get the listing they have to do that. Also, some of these agencies have a brand they are protecting. It doesn't have anything to do with the house but it has to do with the visibility of the brand.