If this is your first time buying a home you might be a little hesitant at the thought of all the costs that are involved. Afterall, a home is expensive enough, add in closing costs, insurance, and paying your realtor and you probably have a headache already. The good news is that with the right person helping you through the process, buying a home is a lot more fun than you would expect. Today we are going to break down one of the areas of buying a home that a lot of people have questions about: How exactly does the realtor get paid?
- What is a real estate commission?
The first thing you need to know about how a real estate agent gets paid is that it is by commission. Basically what that means is that the real estate agent is paid a small portion of the home’s sale price after the home is sold. Quick and simple, right? One thing to keep in mind is that the real estate agent does not get paid if no one buys a home. While it is perfectly fine to visit several houses to find the right one, if you do not eventually end up buying a home your realtor will not receive any compensation for their time.
- What do realtor fees cover?
Your real estate agent will be a vital part of your home buying experience from taking the time to research properties that fit your needs to negotiating on your behalf. It is quite literally your realtor’s job to use their knowledge and resources to help you. As an expert in this area a realtor makes the home buying infinitely quicker and easier. One of the largest benefits that come from realtor fees is access to the MLS or Multiple Listing Service. This service gives your agent a list of all the houses for sale in your area. Needless to say, it is an invaluable resource. To summarize, the commission or realtor fees are there to compensate your agent for their expertise, time and effort.
- How much is it?
When I say a small portion of the home’s sale price that leaves a lot to the imagination. What it typically looks like is approximately 5-6% of the home’s sale price. Generally, the real estate agent for the buyer receives 2.5-3% and the seller’s agent also receives 2.5-3%. Obviously this can vary based on factors such as agent and location.
- Who pays?
Okay so now we know what the commission is and how much it is, but who pays it? I mentioned this in another article about why you need a realtor when buying a home, but I’ll remind you just in case you haven’t seen that article yet. Generally, the commision for BOTH the buyer’s and seller’s real estate agents comes from the home seller. That’s right, the seller. The buyer does not usually have to worry about the commission for either real estate agent.
- Is commission the same as closing costs?
The short answer to that question is no. Closing costs are a myriad of fees including the down payment (usually 20%of the price of the property) , appraisal fees, title insurance, taxes, lender fees and potentially other costs. Before closing, your mortgage provider will give you a Closing Disclosure, which will outline each of your closing costs and the total due at closing. Generally, the agent’s commission is not included in that list of fees.
Conclusions
Hopefully this guide answered all of your questions about real estate commissions/realtor fees. They are actually simpler than most people think. Basically all you need to know is that they are a way for agents to be compensated for their expertise, time and effort. They are usually a small (5-6%) portion of the cost of the house. Generally, the seller pays the commission. And of course, closing costs and commissions are different but often lumped together in the world of real estate.