Who Pays Commission: Seller or Buyer?

A commission is a fee paid to an agent or broker for facilitating a transaction. This financial arrangement is common across various industries, including real estate, finance, and sales. Commissions typically involve a percentage of the total sale price or transaction value, though they can sometimes be a fixed amount. They incentivize professionals for successfully completing sales, purchases, or other financial dealings.

The Standard Practice in Real Estate

In most residential real estate transactions, the seller traditionally pays the real estate commission. This arrangement is formalized through a listing agreement, a legal contract between the seller and their chosen listing broker. The listing agreement outlines the specific percentage of the final sale price the real estate agent will receive upon a successful sale.

Commissions are calculated as a percentage of the home’s final selling price. While rates can vary, the total commission traditionally falls within a range of 5% to 6% of the sale price. For instance, on a $400,000 home with a 6% commission, the total commission would be $24,000. This fee compensates agents for marketing the property, conducting showings, negotiating prices, and guiding the transaction process.

The practice of sellers paying the commission developed as a convention rooted in listing agreements and Multiple Listing Service (MLS) rules. This system incentivizes buyer agents to show properties, as their compensation has historically been secured from the seller’s proceeds. This traditional model aims to simplify the buying process for potential homeowners by consolidating fees into one payment at closing.

How Commissions are Divided

While the seller pays the total commission, this single payment is then distributed among the various parties involved. The commission is typically split between the listing broker, who represents the seller, and the buyer’s broker, who represents the buyer. A common split often results in a nearly equal division, such as 50/50, between the two brokerages.

Each broker then shares a portion of their received commission with their individual agents. This internal split between a broker and their agent can vary widely, with common arrangements including 50/50, 60/40, or 70/30, where the agent receives the larger percentage. More experienced agents or those with higher sales volumes may negotiate more favorable splits with their brokerages.

The buyer’s agent is compensated out of the commission paid by the seller, even though they represent the buyer. The commission is first sent to the agent’s brokerage, which then disburses the agent’s share according to their agreement.

Influence on Transaction Costs

Real estate commissions significantly influence the financial outcomes for both the seller and, indirectly, the buyer. For the seller, the commission directly reduces their net proceeds from the sale. For example, if a home sells for $500,000 with a 6% commission, the seller pays $30,000, which is deducted from their gross sale amount. This makes the commission a substantial closing cost for the seller.

While buyers do not traditionally pay the commission directly at closing, it is implicitly factored into the home’s sale price. Sellers often price their homes to cover the commission, meaning the buyer indirectly bears some of this cost within the purchase price.

Closing costs for sellers, including real estate commissions, can range from 8% to 10% of the home’s sale price. This percentage can vary based on local tax rates, the specific agent commission agreed upon, and the home’s value. Sellers should budget properly and manage their financial expectations from the sale.

Variations in Commission Payment

The standard “seller pays” model for real estate commissions has seen evolving practices and alternative scenarios. While historically sellers paid the entire commission for both agents, recent industry changes allow for more negotiation. Buyers can now negotiate commission amounts directly with their agents and may be responsible for compensating their own agent, especially if the seller does not offer compensation to the buyer’s agent.

A buyer might directly pay a commission through a buyer-broker agreement, particularly if the seller is not offering a cooperative commission to the buyer’s agent. This direct payment by the buyer was always an option but is becoming a more common discussion point due to recent regulatory shifts. Buyers can still request the seller to cover the buyer’s agent fee as part of their offer.

Other alternative models include flat-fee listings, where sellers pay a fixed amount rather than a percentage-based commission. With a flat-fee MLS service, sellers pay a predetermined fee to have their property listed on the Multiple Listing Service (MLS), aiming to reduce the listing side commission. In “for sale by owner” (FSBO) situations, sellers manage the sale themselves, potentially eliminating or significantly reducing commission costs if no agents are involved.

Commissions also operate in other industries, often with the buyer or client directly paying the fee. In finance, brokers charge commissions for executing trades or providing investment advice, where the client pays a service charge for buying or selling securities. Sales professionals in various fields, such as software or automobiles, earn commissions directly from their employer based on sales generated, serving as a motivational tool.