How to Calculate Real Estate Commission

Instructor: Ian Lord

Ian is a real estate investor, MBA, former health professions educator, and Air Force veteran.

In this lesson, we will define real estate commissions. We will then explain how the commission is divided among the real estate agents and their brokers at the conclusion of a real estate transaction.

Real Estate Commission

Many professionals charge a fixed or hourly fee for their services. Real estate agents and their sponsoring brokers earn commissions. A commission is a percentage paid to the agent at the conclusion of the transaction. Sellers pay a percentage, typically six percent of the sale price, at the closing table. That amount is then divided up among different parties according to the purchase contract and the agent's arrangements with their respective brokers.

The downside of this payment system is that agents don't make any money unless and until the sale goes through. That can be a benefit for the seller though, since it serves as motivation for the agent to get the property sold quickly. By selling the property quickly and at the highest possible price, the seller's agent stands to make the greatest possible return on their investment of time and energy in the deal.

Technically the seller pays the sales commission. This is how the expense appears on closing paperwork. However, the buyer indirectly pays the cost since the higher the purchase price the more money goes to the agent. The seller is definitely considering the amount of money they need to pay off on any existing mortgage. Also, they will base their listing price partially on accounting for the cost of commissions. Another way of looking at it is that the seller typically wouldn't have the money to pay the commission unless they had money coming from the buyer in the first place.

The Split

Joe has hired a real estate agent named Frank to sell his house. Bill found and bought the house with the aid of his agent, Tom. These agents need to be paid. Joe writes one check for the real estate agent commission at the closing table, but how does everyone get paid? First, let's look at who is entitled to a cut of the commission:

  • Frank, the seller's agent who is hired to list and market the property for sale.
  • Parkway Realty, the seller's agent's brokerage, or the company the agent works for.
  • Tom, the buyer's agent, who assists the buyer in finding a property and negotiating a deal.
  • Tom Smith Realty, the buyer's agent's brokerage.

A brokerage is the legal entity that is licensed to represent buyers and sellers. It's important to note that an agent either works for a brokerage as an employee, or with experience can become the owner of a brokerage and still represent clients.

When Joe, the seller, lists his property with Frank, that posting will include a proposed split of the commission between Frank and the buyer's agent. Usually it's an even split, but in the negotiation process, it might become an uneven split.

At the closing table, the commission is divided and sent to each broker as previously arranged. The brokerage then pays the agent according to the employment agreement they have with that agent. This can change from brokerage to brokerage. Frank is an employee of the Parkway Realty brokerage. Of course, if the agent and the brokerage are the same person (as in Tom's case) than there no cut is taken.

So let's look at how the commission from Joe's house is broken down. Joe's property is listed for sale at $155,000 with a six percent commission to be evenly split between the brokers. After negotiations, Bill buys the house for $149,000. The split would look like this:

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