Imagine having to pay office rent, a car payment, a house payment/rent, etc. but you don't know when you'll receive your next paycheck. Now imagine that you have to wait until you sell a house or help a buyer buy a house before getting paid. That's the life of a real estate agent. They work on commission (with few exceptions). Do you know how much a real estate agent makes in commission? (Note: Realtor, real estate agent, and agent will be used interchangeably in this article).
Much of the time, 4-6% of the sale price of a home goes toward agent commissions. The total commission is split between the buyer's agent and the seller's agent (2-3% per agent). 4-6% might sound like a lot to some but to an agent who goes months and months without representing someone who buys or sells a house, that commission has got to stretch a long way and over an extended period of time. It's not like they're closing on the sale of a house every week. In addition, each agent doesn't receive 100% of the 2-3% commission earned. Some of it goes to the broker who runs the real estate agency.
The amount of work a real estate agent puts into finding a home for a buyer, or selling a home, is astounding. They essentially work for free until the sale of a house closes and commission checks are written. So if you're thinking about asking your agent to reduce their commission, you'll want to consider all that they've done, at no charge, to help you sell or buy a house.
With all of that in mind, let's look at what's changing with commissions in relation to online listings. In addition to the property information being listed on sites like Zillow, Redfin, Re/Max, MLSs (Multiple Listing Service) and others, companies like Redfin are now disclosing the percentage of commission the buyer's agent will earn from the sale of the home. In the image below, you'll see 2.5% "Buyer's Brokerage Commission" has been added to the "pricing insights".
"This is the amount the seller is offering to a real estate brokerage who represents the buyer. The commission is often a percentage of the final sale price." - Redfin
The option to "click... for more information" opens a page which explains real estate commission in more detail and provides examples.
So, what brought about the need to display buyers agent commissions on public-facing websites? The U.S. Department of Justice sued the National Association of Realtors® (NAR) back in November 2020, stating that NAR needed to "...provide greater transparency to home buyers about the commissions of brokers representing home buyers." As more and more listing websites and MLSs begin implementing the change, you'll see agent commissions displayed publicly in an effort to make you aware of what your real estate agent earns.
Although posting agent commissions on websites seems pretty straight forward, there are many variables. Did you know some real estate agents are members of multiple MLSs and listing organizations? Because there can be multiple MLSs in an area, or bordering areas, your home could be listed through 3 different MLSs to draw a bigger audience of agents and home buyers. Each of these MLSs could display different commission rates. Sam Debord, CEO of Real Estate Standards Organization (RESO), Realtor® and broker, outlined it best in this tweet:
The fact that a home can be listed on 3 different MLS sites with 3 different commission rates will require sites, like Redfin, to figure out how to present and explain the differences to you. For example, commissions could be listed as 1.5% in Mountain MLS, 2% in Lake MLS, and 3% in Desert MLS. Confused? Let me share more details.
Most real estate agents belong to a "primary" MLS, board, or organization, as well as a secondary MLS, board or organization. Agents in our area are members of the Montana Regional MLS (MRMLS), the Missoula Organization of Realtors® (MOR), and many also belong to the Bitterroot Valley Board of Realtors® (BOR). These agents are able to represent buyers and sellers in the city of Missoula as well as the neighboring cities in the Bitterroot valley. Buyers agent commission could vary per organization, 2.75% for MOR and 3% for BOR, for example, for the same listing.
It's important to note that the agent will only get compensated for the commission if they participate in the identified MLS. In other words, if a local buyer wants to buy a home in Washington (WA) state, their agent would have to be registered as a WA agent or they wouldn't receive a commission from the sale. In the majority of these cases, your local agent would refer you to a WA agent to buy a home in that state. The WA agent would then receive the commission from the sale of the house. Your local agent would receive a referral fee.
How are these commission rates determined? In some cases, agents are willing to accept lower commission rates on high priced properties (>$1 million) while accepting higher commission rates on low priced properties (<$50,000). In another scenario, if the median price of homes is lower in Missoula (MOR) compared to Hamilton (BOR), for example, it may result in a lower commission rate in the MOR listing. Other variables exist.
Now that the U.S. Department of Justice requires NAR to display buyers agent commissions on house listing websites, you'll clearly be able to see what your agent earns when you buy a house. Due to a variety of commission variables, sites will be forced to explain the differences to you in greater detail, providing even more transparency. As you begin to see these changes display on various websites, don't hesitate to talk to your real estate agent about their commission. If you need to find an agent in your area, please let us know and we'll do our best to accommodate you. Happy home hunting!