Who Pays the Realtor Fees?

Let's say you're ready to purchase a home and wondering about buyer's realtor fees. You've begun asking friends and family about suggestions for real estate agents and someone mentions they know of a real estate brokerage where the agent will offer a rebate on some of your closing costs to help offset how much you are spending.

This makes you wonder, "Wait, how much would my agent be making from my real estate purchase? Actually, who is paying them, and who's paying the seller's agent?"

Who pays the realtor fees?

There are two answers here, depending on how technical and specific you want to be:

  1. The technical answer is the seller pays both agents out of the proceeds of the sale.
  2. The more complete answer is that both the seller and the buyer ends up paying the agent, as we'll explain below.

The way real estate agents are paid is almost always based on a commission-based system, where the seller agrees to provide a specific percentage of the sale price as a commission to a brokerage in exchange for an agent from the brokerage (the seller's agent/listing agent) assisting with preparing the house for sale, marketing, helping bring buyers to the property to make an offer, and otherwise assisting with bringing the transaction to a close. This percentage can vary by market, but is usually a standard value of 5-6%.

As part of the listing agreement between the seller and their agent, a portion of this commission will be set aside to be paid to the brokerage of the agent representing the buyer, in exchange for them bringing the buyer in and helping to bring the transaction to a close. In most markets, this is 50% of the sale price, so both the brokerage representing the seller and the brokerage representing the buyer will make the same amount. This fact, that listing and buyer's agents make commission, is what allows them to offer credits, or rebates, to buyers - they are reducing their cut of the sale to help a transaction close easier.

Prior to closing, the escrow company will obtain what are known as "disbursement demands" from both brokerages that outlines how much they should receive as part of their commission payments. At the time of closing, once the property transfer is recorded, the escrow company will then disburse the proceeds of the sale to the various parties that are owed money, including the brokerages. The remainder of the proceeds is disbursed to the seller. This is what is meant by "the seller pays," because it's the seller's proceeds that end up paying out the brokerages and the agents.

As a simplified example, let's say that a seller sells their home for $500,000, and for the sake of the example, let's pretend that the closing costs (such as unpaid taxes, notary fees, and unpaid staging costs) are zero. The seller does not actually get $500,000 added to their bank account, because $25,000 (5% of the sale price) is used to pay the two brokerages, leaving $475,000 as proceeds to the seller.

As a side note, most agents won't actually see the full amount of the commission paid out to the brokerage. As part of being able to associate their license with a brokerage, they generally agree to contribute a portion of the commission they receive to the brokerage. Depending on how much support the brokerage might provide (administrative, advertising, etc.) an agent will contribute more or less of the commission to the brokerage.

What do you mean that both the seller and buyer pay the agent's commission?

Given the above, what does it mean when we say that both the seller and the buyer end up paying the agents? The reason we say that is because the fact agents make a commission on the sale is built into the sale price of a property. A seller knows that they are going to lose somewhere in the realm of 5% of the sale price to commissions, so raise their price and expectations accordingly.

In turn, this means that a buyer is going to end up needing to take on a bigger loan (meaning a higher principal) and making a larger down payment than if a seller didn't have to factor in losing around 5% of the sale price to pay commissions.

The rise of many discount brokerages over the past decade takes advantage of the fact that they are able to use technology and scale to make their processes more efficient to "pass on the savings" to customers. In some cases in the past, some would even say that their brokerage services are free to buyers, relying on the fact that many buyers are not aware of how the commission structure increases their costs.

This has led to a recent antitrust case and settlement filed by the Department of Justice that along other things, required the preeminent realtors association in the United States to stop "allowing buyer brokers to misrepresent to buyers that a buyer broker’s services are free."

By stopping realtors from misleadingly claiming that services were free, and also making it clearer to consumers how much commission agents in a transaction are earning, the DOJ is hoping to "enhance competition in the real estate market, resulting in more choice and better service for consumers."

This could happen in many ways, such as making it more common for sellers and buyers to negotiate with brokers to reduce commissions and pass the savings to the buyer, or helping differentiate brokerages that provide a high level of service and can demand a higher commission percentage from brokerages that provide less service and would be less able to demand a standard commission (or would need to offer to rebate a portion of their commission to buyers).

With this information, hopefully you will be better prepared for your home purchase and any realtor fees that come with it!

READ NEXT: 5 Must-Read Books for First-Time Homebuyers

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