How Much Does It Cost to Hire a Real Estate Agent?
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Buying a home is, undeniably, a stressful process—according to a 2023 survey by Redfin, 59 percent of Americans reported that buying a home is more stressful than dating. Respondents ranked it as the third most stressful life event, after going through a divorce and finding a new job. Another 2018 survey found that nearly 40 percent of Americans say that buying a new home was the "most stressful event in modern life."
Luckily, you don't have to go through it alone. Whether you are looking to buy, rent, or sell, a real estate agent is a helpful ally to help you navigate the process. Of course, the guidance of a real estate agent comes at a cost. Real estate agents are paid through a commission fee during your real estate transaction, which is to say a percentage of the sale price of the home you're buying.
If this is your first time buying, selling, or renting a home—or it's been a while since you've worked with a real estate agent—here's what you need to know about the cost of real estate commissions.
What Does the Real Estate Agent Commission Cover?
The real estate commission, essentially, is the real estate agent's pay. It covers the time and skills used throughout the home-buying process—everything from house showings to negotiating buying prices to researching listings on the multiple listing service (MLS), which is a database used by real estate agents to share information that is not public-facing.
Who Pays the Commission?
The answer to this question recently changed! On August 17, 2024, the National Association of Realtors (NAR) implemented new rules about who pays a real estate agent's commission. In the past, the home sellers were the ones to pay the commission fees to lighten the financial load on buyers (after all, it's the seller in this situation who is, in theory, the person making a profit). But now, after industry-wide changes, that's no longer the default. Today, sellers can decide to cover the realtor's fee or let the buyers eat the cost.
Sellers will also no longer be able to share the commission percentage the buyer's agent will be paid on the MLS. This change is meant to protect buyers from real estate agents who would purposely steer their clients to listings offering higher commission fees.
How Much Is a Typical Commission?
Generally, real estate agent commission fees are between five percent and six percent, according to the NAR. For example, the organization reports that, for a home sold at $431,000 as of Q3 2023, the commission would range between $21,550 and $25,860. According to the business data resource Statista, the average commission percentage in 2023 was 5.46 percent.
Typical doesn't mean always, however. The bottom line is that this fee is determined by the free market. There are no set laws or legal standards when it comes to commissions. The NAR reported that in 2020, commission fees fell to a new low of 4.94 percent on average. Commissions may also exceed six percent depending on the market. It will be interesting to see the long-term effects of the August 2024 legal changes and how they affect commission rates going forward.
Are Real Estate Agent Commission Fees Negotiable?
Yes, but you'll need to settle that before you sign your representation agreement (more on that below). The NAR notes that commissions can come in many formats—not just a percentage of a sale. Options include a flat fee approach or a reduced service/discounted fee model. (For example, if you're selling a home, since marketing dollars typically come from the commission fee, you may be able to negotiate a deal in which your realtor charges a smaller commission but does not do as much advertising of your listing.) The only hard and fast rule, according to the NAR, is that compensation must be clearly defined and not open-ended or a range.
Anything Else I Need to Know About Commission Fees?
Another change that was implemented in the NAR's 2024 updates is that potential home buyers now need to sign a representation agreement committing to working exclusively with that agent before they tour a home together. This holds whether they're doing in-person or virtual tours. As Cara Ameer, a realtor working in California and Florida, explains, "A buyer's agreement is a written employment agreement to work with an agent for the services they will be providing you and also outlines the buyer's responsibilities and obligations to their agent as part of the agreement. It will stipulate how the agent is to be compensated and by whom as well as the fee they are charging for their services. As a result of the nationwide practice changes, the agent's fee must be a specific amount. It cannot be a range, left blank, or stated as 'to be determined based on the property purchased.'"
Depending on what type of property you are looking to buy, and where you are looking, fee structures may differ. In markets where there's less demand for rental properties, rental agents typically work with landlords to have the property owner cover commission fees. And those purchasing empty lots can expect a higher commission fee, anywhere from 5-20 percent.
Finally, if you are not happy with your real estate agent, you have options—specifically, the terms outlined in your exclusivity contract, which states that you and the agent are working together for a specific period. Ameer explains, "There is no minimum timeframe in which you have to have a buyer representation agreement signed for—it could literally be for one day, a few days, a week, a couple of weeks, a couple of months. Some states do have a maximum timeframe these buyer agreements are in place for. In California, for example, it is a maximum of three months." In other words, if things aren't working out, you can wait until the time specified in the contract runs out, and then sign with a new broker.
Just be aware that many contracts list specific conditions under which they can be exited. "There is often a protection period after termination of the agreement though that allows the agent to receive compensation if the buyer ends up buying a property that they showed them or introduced to them during the time they worked together," Ameer explains. "So, you want to make sure you understand what a post-cancellation protection period looks like. This is important because if you decide to break up with your agent after you’ve seen a property covered by your buyer’s agreement and make an offer with another agent, you could be obligated to pay compensation to the original agent you signed a buyer representation agreement with."
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