Real Estate Agent Fees: Breakdown for Investors

If you’re a real estate investor looking to either sell or buy an investment property, you’re likely working with an agent. While some investors prefer to work solo, there are situations where hiring an agent will benefit both parties. A good real estate agent serves as an investor’s best asset. They can pick up a lot of tasks and save you money and management headaches. Many agents also find investors as one of their best sources of repeat business. So if you’re still working on building your real estate team, need more deal flow, or need help negotiating or writing offers, an agent will be a helpful partner to have. But agents don’t work for free. So what are real estate agent fees? Keep reading as we answer this and other important questions to explain everything investors need to know about agent fees and commissions.

How Much Are Real Estate Commissions?

First things first, what is a typical real estate commission in the United States? There are a lot of misconceptions about commissions and they are changing fast. Real estate agents earn money only when a real estate deal goes through and they charge a percentage of the final sales price of the home. Their commission does not factor in the amount of time spent working on a sale. Thus, whether your property sells in five days or five months, you pay your agent based on how much it sells for.

The exact percentage varies depending on several factors like the local housing market and the type of property you’re selling. Also, there are no laws or regulations in the US dictating the commission rates that agents can charge. However, a real estate commission is typically 5% to 6% of the property’s final sales price. Meaning, on a $320,000 property (the median home price in the US right now), a real estate agent’s commission is between $16,000 and $19,200.

Who Pays Real Estate Agent Fees?

Because it is up to the seller to negotiate how much of the final sale price goes to their agent, they are the ones paying. The seller pays the commission – half to their agent and half to the buyer’s agent. Some say that because buyers put up the money, technically they’re the ones paying. Yet, the commission rate really doesn’t affect the buyer’s wallet. Furthermore, sellers sometimes account for the fees they’ll pay and pass costs along by raising their listing price. And though there aren’t real estate agent fees for buyers to account for, they still have to pay closing costs.

A frequently asked question from sellers is whether they have to pay a commission if the property doesn’t sell. Remember that real estate agents get paid during the closing process. Meaning, if a house is not selling, you won’t owe your agent a commission. The same goes for when you’re looking to buy an investment property but end up not making a purchase. However, there can be some exceptions based on the agent’s contract, so read it carefully before you sign. This includes:

Your agent found the buyer: Some contracts state that you owe your agent commission if your buyer was a prospect during the term of the agent’s contract.
You back out of the sale: If you decide to back out of the sale last minute after an offer is accepted, you still have to pay both real estate agents their commission.

What Are the Types of Real Estate Agent Fees?

Real estate agents chiefly make a living by charging a commission on every property they sell. Depending on the agency they work for, agents charge commissions based on 2 different commission structures:

#1 Flat Fee

Also referred to as fixed commission, a flat fee structure is exactly what it says. This means that the percentage of the real estate agent commission stays the same no matter the price that a property ultimately sells for. Flat commission rates may vary from state to state and are based on the specific rate applicable in the local housing market where the property is being sold.

For example, say an agent recommends a selling range between $330,000 and $380,000 after inspecting the property and after establishing what real estate comps sell for in the market. Let’s also say this agent charges a 5% flat fee on the final selling price. If market conditions are favorable and the property sells at a higher price (say $400,000), the agent earns $20,000 in commission at the fixed rate of 5% he/she initially charged. This is more than what you would pay if the investment property was sold at the expected price range. However, because the price is also higher, you’ll be able to cover real estate agent fees and still end up with cash in hand.

#2 Tiered Commission

Also called negotiated commissions, this commission structure works as an incentive for agents to fetch the highest possible price on the sale of a property. It’s basically the real estate industry’s bonus system. Tiered commission rates escalate according to the final price that a home fetches. A real estate agent will earn more commission according to a sliding scale, which is decided during the initial negotiations between you and the agent. Here is an example of how this structure works using the same numbers in the previous example (a selling range between $330,000 and $380,000 and charging a commission rate of 5%).

If you’re selling a rental property, you can incentivize an agent by suggesting the following tiered commission scale: a commission of 5% is paid for a sale price of below $330,000, 5.5% if the sale price is between $330,000 and $380,000, and 6% if the final sale price is between $380,000 and $400,000. If the property sells for $400,000, the agent earns $4,000 more had he been paid the commission rate he/she initially wanted to charge. However, you’ll also reap financial rewards because, though you’ll pay more in real estate agent fees, you’ll sell your property at a higher price than initially suggested.

Is Paying a Real Estate Commission Worth It?

are real estate agent fees worth it?

Some real estate investors and sellers consider real estate commissions as a hefty expense and would forgo hiring an agent to save money. However, remember that agents are professionals in the industry and spend years gaining qualifications and expertise. Paying real estate agent fees for selling a house sets you up to take advantage of their knowledge of the market. Agents will also take control of all paperwork and administration on your behalf and try to fetch a higher price when selling a property. Paying agent commission is money well-spent considering what they do to help close the deal, including:

Performing a comparative market analysis to set a competitive price
Arranging for photoshoots, sometimes getting aerial shots via drone in high definition
Writing descriptive listings that attract interest from other realtors and potential buyers
Listing your property on all major property search websites
Providing staging guidance
Showing the property multiple times to prospective buyers
Hosting open houses on weekends
Helping the seller review and negotiate buyer’s offers

Also, a lot of sellers who go for the for sale by owner approach end up either not making a sale or selling the property for less than the asking price. For example, say your asking price is $270,000. Is it worth saving $2,700 by not hiring an agent who charges a 5% commission rate if it means selling your house for $10,000 less? Moreover, most agents don’t get paid a salary and work on a commission-only basis. They use this money to cover taxes and the normal costs of doing business like advertising costs, MLS fees, insurance, licenses, dues, and other real estate agent fees. Finally, keep in mind that your agent doesn’t get the entire commission.

How’s the Real Estate Commission Split?

When you do the initial calculations to estimate how much a real estate agent commission will cost you, it looks expensive. But as mentioned, your agent isn’t getting that whole commission and isn’t putting all of that money into their own pocket. Instead, many players will share the commission, including the:

Listing agent: the person who took the listing from the seller
Listing broker: the broker whom the listing agent works for
Buyer’s agent: the person who represents the buyer
Buyer’s broker: the broker whom the buyer’s agent works for

By law, the realtor commission is paid to the listing broker. This commission is then split between buyer and seller brokerages 50/50. Next, each brokerage has its own split with the individual agent. In many arrangements, it’s a 60/40 split (60% to the agent and the broker keeps 40%). But, it could also be 50/50 or 70/30 or anything else that the broker and agent agree upon. The final figure agents keep after splitting commission is still gross and doesn’t account for taxes, marketing expenses, or other average real estate agent fees.

Can You Negotiate Agent Commissions?

As mentioned earlier, there’s no federal or state law that sets realtor commission rates, meaning they are negotiable. So if you’re selling your house or investment property, you can certainly ask your agent to reduce their commission – be aware, though, that he is not obligated to do so. One thing to consider, however, is that cheaper isn’t always better. The best real estate agents sell homes faster and for more money, and you typically get what you pay for. Hence, finding an experienced, hard-working agent is more important than finding one with the cheapest real estate agent fees for sellers.

That being said, you can still ask your agent if his/her real estate commission is negotiable. If your realtor requires you to sign a contract, remember to read it carefully and negotiate before you sign. Some agents will lower their commission fees, particularly if they’re representing both the buyer and the seller (dual agency). This, however, is only legal if full disclosure is given to both parties. It’s completely illegal in eight states: Alaska, Colorado, Florida, Kansas, Maryland, Oklahoma, Texas, and Vermont. Other time when an agent will accept a lower commission if:

You’re selling a property that is high-end, updated, or move-in ready
You’re using the same agent to buy a property at about the same time you sell
The local housing market is hot and it’s likely to sell your house fast
You’re selling during an off-peak season when the agent would like more business
You’re a real estate investor who plans to sell or flip multiple properties a year

How to Save Money on Realtor Fees?

Deciding which real estate agent to work with when selling your property should not be a rushed decision whether you’re a real estate investor or a regular home seller. Comparing several realtors and discussing how much are real estate agent fees beforehand will help you to make an informed decision that suits your budget. Understand what you’re getting for their commission fee. Some brokerages charge lower rates, but they’ll only provide basic service like putting your home on the MLS and sticking a “for sale” sign in your yard. Other agents may offer a lower commission, but charge additional fees for certain services like professional photography. Meanwhile, other agents provide all of those services at the standard rate.

When you compare real estate agent fees, you should have a clear picture of the commission structure that will be applicable and what’s included in the fees. This helps in making an apples-to-apples comparison. From there, you can decide what’s important to you and how much you’re willing to pay for it. While some sellers opt for a discount rate, the home could sell for less money which means your commission savings may not make a difference to your bottom line. Again, we advise investors to find the best real estate agents who’ll help you close the deal faster. If they’re made aware that you invest in real estate, they might reduce their commission if you can guarantee repeat business.

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Real Estate Agent Fees Explained: A Breakdown for Investors