If you’re wondering what a real estate commission calculator is, and how to use it, then you’ve come to the right place.
Table of Contents
- What Is a Real Estate Commission?
- How Much Does It Cost?
- What Is a Real Estate Commission Calculator?
- Bottom Line: Using the Real Estate Commission Calculator
Anyone who is looking to buy or sell real estate property will have to pay a real estate commission at some point.
So, it helps to be aware of what this commission is, who you’re paying it to, how much it will cost you, and what tools can help you plan for it.
Real estate investors who are looking to expand their portfolio or start an Airbnb business will find a few tips in this guide that will be especially useful to them.
Without further ado, let’s talk about the real estate commission calculator and everything related to it.
What Is a Real Estate Commission?
As the name suggests, this is a commission that you pay when you’re buying or selling real estate.
In other words, it is a fee that costs a percentage of the transaction, and therefore it’s a cost that increases as the price of the property gets bigger.
The most common commission that you will come across in real estate is the agent’s commission, although you might use other services that have commission-type prices as well.
While most real estate commission calculators online are primarily used to calculate the agent’s commission, they can generally be used for any percentage-based services.
So, what are the different types of real estate commissions that you can expect to come across?
Types of Real Estate Commissions
As mentioned above, the most common type is the agent commission.
But this type of commission involves several parties in terms of who pays it and who receives the money.
In a real estate deal, both the buyer and the seller will hire real estate agents.
This means that both the buyer and the seller will have to pay an agent commission.
Additionally, each agent will typically also have to split the commission money with the broker whom they work for.
This, in turn, means that a typical real estate transaction will involve a buyer, their agent, and that agent’s broker; and a seller, their agent, and that agent’s broker.
I will talk about the costs and details of the payment arrangements in a bit. But first, I want to briefly talk about other types of commissions that you might come across in real estate.
Other Types of Commissions
As I said earlier, any percentage-based services that you will pay for in real estate can be included in this category.
But it’s important here to draw the distinction between price-based commissions and income-based commissions.
Price-based commissions are similar to the agent commission in that they are based on the price of the property.
This could include the lawyer fees for closing the deal, for example.
Sellers can also expect to pay this commission when using some online platforms to list and advertise their property.
Income-based commissions, on the other hand, are based on the rental income of the property.
These can include many services like property management or HOA fees.
Income-based commissions are very common when using some of the best Airbnb pricing tools, such as the dynamic pricing Airbnb tool, which automatically manages your rental rates in real-time.
When using a real estate commission calculator for a rental property, it’s very important to find one that allows you to factor in income-based commissions as well as price-based commissions for the best long-term investment planning.
How Much Does It Cost?
So, since a real estate agent commission is something that you will probably have to pay, you definitely want to know how much it costs.
While there isn’t a set rate for this commission, it is typically between 4–6% of the property’s price in the United States.
But this price is usually set by the agent or the broker and can be negotiated between the buyer, seller, and their agents.
In a later section, I will give some tips on how to get lower commission costs when buying or selling a property.
For now, let’s assume that you are paying a 6% commission on a $500,000 property.
If you’re using a real estate commission calculator, you will quickly find that the commission for such a property would be $30,000.
That is a considerable amount of money that the agents just made.
It’s important to consider, however, that this amount will be split between both agents.
This means each agent will only be getting $15,000.
Furthermore, each agent will also have to give their brokers their share of the commission, which can be around 50% of that amount, leaving them with $7,500 as their final profit.
All things considered, that is still a very good way to make a living.
But you might be wondering, who exactly paid that money, to begin with? Was it the buyer or the seller?
Who Pays the Commission?
This is the part where most of the confusion arises when talking about the real estate commission.
The truth is, both the buyer and the seller are somehow responsible for paying the commission, but in practice, only the buyer actually pays it.
This is because, once the agents agree on a commission rate, the amount is usually added to the total property price by the seller.
For example, if a seller owns a property that is valued at $280,000, and the agent commission is 5%, the $14,000 commission would be added to the property’s listing price.
What this means is that the price which will be offered to the buyer will actually be $294,000.
So, in practice, the buyer will have to pay more money to cover the agents’ commission.
However, the confusion comes from the fact that the buyer pays this money to the seller as it is part of the property’s price.
In turn, the seller is the one who pays the money to their agent, who will then split it with the buyer’s agent.
And while this makes a difference for both the buyer and the seller when it comes to finances and tax purposes, it is what you would expect from a typical real estate transaction.
It does not mean, however, that other types of deals can’t be negotiated, as we will see below.
But it does mean that, when it comes to a typical real estate commission calculator, the majority of users will be property sellers as they try to figure out a proper price for their property.
It is also very important to include the commission in any other real estate calculators, such as a vacation rental pricing tool, in order to get the most accurate results and projections.
Negotiating a Lower Commission
As I said earlier, it is possible to negotiate different types of deals and commission rates.
This applies to all parties involved in a real estate transaction.
Since each party has a different goal, each party will try to negotiate towards the result that favors them the most.
When it comes to buyers, for example, they will want to pay the least amount of money to purchase a property, especially if you want to purchase multiple ones.
Sellers, on the other hand, won’t have to pay any extra money if the commission is higher.
However, sellers are affected negatively by higher commissions because they would have to raise their listing price, which makes it more difficult to find a buyer.
The dynamic here is very different for each, as buyers are directly paying more while sellers are giving away a larger pool of buyers in exchange for a more efficient selling process, which in most cases is worth the price.
On the other side of the spectrum, both agents and their brokers will want to make the most profit.
This means that it is in their best interest to have a higher commission.
The Best Way to Negotiate
With all of that in mind, negotiating a lower commission is typically something that a buyer will want to do.
And the easiest and best way to do so would be to directly negotiate the prices with the seller.
Buyers can sometimes convince sellers to lower the property price to make up for the extra commission cost that the buyer will have to pay.
Sellers might be inclined to accept such offers if they’re made in good faith or if they include other incentives such as a more fluid payment schedule.
Additionally, if you own an Airbnb business across multiple markets, for example, you can opt in for using one brokerage that operates across these markets.
This can allow you to negotiate more favorable terms and set a fixed commission rate on all of your purchases.
By doing this, you will also find it much easier to use Airbnb dynamic pricing tools as you won’t have to calculate a different commission rate for each property you want to analyze.
What Is a Real Estate Commission Calculator?
I have mentioned the real estate commission calculator several times already, but what exactly is it?
As I said earlier, a typical commission calculator would simply let you enter a property’s price, a commission rate as a percentage, and it will tell you how much commission you would have to pay.
Since most users of such tools are property sellers, the tool will often include a field telling you what the final price of the property would be.
However, buyers can also get value out of the tool if they combine it with other tools to compare Airbnb prices when planning their investment.
This is especially true when analyzing listings that are for sale-by-owner, as these might not have the commission rate added to them.
Generally, however, you will need to use additional tools in order to property analyze an investment property.
In the next section, I will talk about Mashvisor’s Airbnb analysis tool and how to use it combined with a commission calculator.
How to Use a Commission Calculator
Mashvisor’s investment property calculator is an Airbnb analysis tool that can be very useful for buyers, especially if they want to run an Airbnb business.
This tool will calculate the return on investment that a rental property is projected to have.
The calculator uses important metrics such as the cap rate and the cash on cash return.
It also calculates these values for traditional or vacation rental properties, and its data comes from the MLS and Airbnb.
Included in this Airbnb analysis tool are fields designated for all costs and expenses related to the property.
This allows you to add the real estate commission to the closing costs of any property that you’re analyzing in order to get the most accurate future projections of that property’s return on investment.
Since Mashvisor’s database includes properties that are listed on the MLS, as well as ones that are for sale by owner, not all properties will have the real estate commission added to their listing price.
This is why using a real estate commission calculator in order to add the commission cost to the closing fees is the best way to see accurate results for the cap rate of the vacation rental you’re analyzing.
Bottom Line: Using the Real Estate Commission Calculator
The real estate commission can be a considerable price that you will have to pay as part of any real estate deal, especially if you’re a buyer.
It is very important to always account for this commission price, and ask sellers whether the listing price includes this commission.
If you’re using a real estate agent to help you find an investment property, then your agent will negotiate and be aware of the commission fee, and they should notify you of any changes in the amount of money you will have to pay.
But if you’re using an online platform like Mashvisor to find properties for sale, then you should make sure that you’re aware of all costs and expenses related to your purchase and include them in your financial planning.