How Real Estate Agent and Broker Fees Work

Thinking of buying or selling a home? This is a major financial decision that can be very challenging and costly. Many consumers don't consider the factors that go into real estate transactions—especially first-time home buyers—including the location, legalities, and cost.

The cost is one of the most important factors in the home buying process. That's because it isn't just limited to the purchase or sale price of the home. There are also other costs associated with real estate transactions, including:

• Home inspections
• Loan fees
• Appraisal and survey fees
• Insurance, including critical illness and title insurance
• Closing costs
• Real estate commissions

Real estate and commissions, which are also known as agent and broker fees, are paid to the professionals who help you either buy or sell your home. Understanding what these costs are and how they are determined can give you a leg up on the process of buying or selling your home.

Real Estate Agent vs. Real Estate Broker

Most people believe there's no difference between a real estate agent and a real estate broker. And that isn't necessarily untrue. While there may be some similarities between them, there are subtleties that set real estate agents and brokers apart.

Real estate agents are professionals who bring buyers and sellers together. As such, they help consumers buy and sell their properties and are paid a commission for their services. They are licensed by the state in which they do business. Some of their duties include:

• Passing offers between buyers and sellers
• Working with other agents
• Helping clients deal with paperwork
• Informing clients of buying and selling requirements, such as home inspections and closing dates

In order to qualify for a real estate license, agents must take classes and pass an exam. Agents must be sponsored by brokers before they can begin their careers.

Real estate brokers, on the other hand, are professionals who further their education to get specialized licenses. This allows them to start their own firms and work independently. If they choose, they can also bring real estate agents and associates to work under them. Their duties and responsibilities are the same as agents.

There are generally three different broker tiers. As noted, they all have the same responsibilities as agents. But their functions may differ:

• Associate Brokers: Work with other brokers and do not supervise others.
• Managing Brokers: Manage daily office functions while hiring, training, and managing staff.
• Principal Brokers: Overseeing agents to ensure they are in compliance with state regulations.

They get paid by collecting commissions on the deals they execute but also receive a share of the commissions from their agents' sales.

Fees

Since agents work for commissions, they’re only paid when a home sells and don’t receive payment until after settlement. That agent is going to work hard for you.

Real estate commissions are negotiable. But most agents charge a commission of 5% to 6%. This means a transaction involving a $100,000 home results in a $5,000 commission at 5%. In most states, the fee is normally paid by the seller—the buyer won't be responsible for this charge.

The sales commission passes through a broker first. It is usually split between the sales or listing agent and the buyer's agent, netting each half. So that $5,000 is split into $2,500 for the seller's agent and $2,500 for the buyer's agent. But that full commission isn’t divided just between the listing agent and the buyer's agent. The listing broker and buyer's agent's broker also take a share of the commission.

If you’re going to hire an agent, it's highly recommended that you research their history. If that agent has a great track record, it might be worth paying a premium, which essentially means paying full commission. If you can’t find an agent with a great track record, then at least attempt to negotiate the commission.

Agent Tips for Buyers

If you’re buying a home and plan on using an agent, there are several steps to follow to ensure you’re making good decisions:

• Shop around for the agent with the best reputation. Paying a premium for someone who can get you the best deal can save you thousands of dollars or more.
• As noted above, commissions aren't set in stone. So make sure you negotiate them. The only exception to this rule is if you’re working with a top-tier agent, which would make full commission justifiable because that agent will save you money in the end. After all, it makes sense if you're going to pay more to your broker if they'll save you on the price or get you top dollar for your home.
• Don’t reveal to the agent what you’re willing to pay for a home while offering a much lower amount to the seller. The agent might use this information to their advantage if they're more concerned with their commission.
• Use the website for the National Association of Exclusive Buyer Agents. This site will help you find buyer agents who have no ties to seller agents. This is also a good way to find a buyer agent who works on a fee structure as opposed to commissions.
• Be wary of inspector lists provided by buyer agents. The buyer's agent and inspectors on that list might have a mutual interest that doesn’t benefit you. This means it's possible that the inspector won’t disclose the real damages to the home because the buyer's agent wants the commission when you buy the home and the inspector wants repeat business from the buyer agent. 

Agent Tips for Sellers

If you’re selling a home, you can also choose not to use an agent. Pricing is the key to success if you’re selling a home on your own. You can hire an independent appraiser for around $200 to ensure you’re pricing the home correctly. 

But how much money will you save? Let’s assume you would have used an agent and paid a 6% commission for a $200,000 home. That’s a whopping $12,000. If you used an independent appraiser for $200, plus let’s assume $200 for advertising, then you just saved $11,600. That's much more money in your pocket.

Selling your home without an agent has its challenges, though, and it's important to keep this in mind. This includes the time spent as well as the expertise needed to navigate real estate procedures and contracts. And if you have an unusual property or if the market is soft, you could be in for a long wait.

The Bottom Line

Buying or selling a home is one of the largest financial transactions most people will make. It's important to understand how real estate agents on each end of the deal get paid. That way you can decide if hiring an agent or going it alone is the best choice for you.