Homebuyers, do you know how much your real estate agent will make on your sale? A recent lawsuit argued that, for most buyers, the answer is no.
Settling the suit, a trade group representing 1.4 million real estate agents and brokers promised to make commission information more transparent early this year. And it’s already leading to more disclosure.
Earlier this month, real estate brokerage Redfin announced that it would start publishing the commission offered to the buyer’s agent for over 700,000 homes that appear on its highly-trafficked website (promising to publish in any region where the information is available).
The Seattle-based company has been publishing commission offers for homes listed by Redfin agents since 2019. This move extends the policy to other brokerage’s listings, as well.
The home seller typically negotiates and pays the commission for not only their listing agent, but also the agent working with the buyer. Since this influences asking prices and, some say, agent behavior, Redfin and others have long argued that buyers need to know about the agreed upon commission up front.
“Homebuyers will finally see how much money their agent stands to earn on any home for sale, letting them evaluate whether they’re getting good value for their money,” said Redfin CEO Glenn Kelman in a statement. “On the other side of the deal, people listing their home will find out what other sellers are paying buyers’ agents, without having to take their agents’ word for it.”
What Prompted the Change?
Redfin says it is able to publish additional commission information due to an upcoming settlement between the Department of Justice and the National Association of Realtors, which removes restrictions on publishing the data.
The goal of the suit was to increase competition among brokers by modifying how broker fees and information is presented in Multiple Listing Services, a collection of around 600 databases where brokers list and browse the details of local homes for sale.
For example, agents are currently able to use the platform to filter listings according to the commission percentage they would be paid, which the suit said could lead them to steer a buyer toward listings paying higher commissions.
The suit also alleged that the lack of publicly available information concerning commissions could allow an agent or broker to claim their services are free to buyers.
NAR, a trade group that sets the rules of use for the majority of MLSs, agreed to a settlement with the DOJ, without admitting any fault, and is currently working on changes to its policies.
“This agreement furthers NAR’s and the MLS system’s goal of creating an efficient marketplace that fosters cooperation between brokers for the benefit of consumers,” said Mantill Williams, vice president of communications for NAR.
Among the changes NAR is making is the full disclosure of the commissions paid to both the seller’s and the buyer’s broker as part of publicly available home listing information. NAR rules will also specify that brokers must show potential buyers all properties that fit their criteria, regardless of the compensation offered or the listing broker.
As it becomes easier to learn what real estate professionals are being paid, here is everything you need to know about how commissions work.
What’s the difference between a realtor, a real estate broker and a real estate agent?
Realtors are licensed agents who work as part of a real estate brokerage. Real estate brokers, on the other hand, can work independently, and they can hire agents to represent them when listing homes.
A listing or seller’s agent has a legal duty to represent a home seller and has many duties. They help you put a proper price on your home, market it, place it on one or more MLS, and help you negotiate a sale.
A buyer’s agent, on the other hand, has a legal duty to represent a home buyer. Their duties include finding the right properties for your needs, arranging showings, and helping you negotiate the purchase.
How are real estate agents and brokers paid?
Most real estate agents will work on commissions, meaning that they only make money when they sell a home. Some brokerages, like Redfin, pay agents a salary instead. However, that is not the general rule.
When you list your home with an agent/broker, you agree to pay a commission to the brokers involved in the ultimate sale. Typically, this commission is a percentage of the sale price of the home.
The most common percentage is 5% to 6%, split between your listing agent and the agent working with the buyer. However, the commission percentage is not regulated by state or federal governments. Sellers can negotiate the commission amount directly with their broker.
The commission is usually shared four ways:
- The listing agent’s broker
- The listing agent who is working directly with the seller
- The buyer’s agent’s broker
- The buyer’s agent
Say, for example, you are selling a $300,000 home, and your listing agent is charging a 6% commission, the standard rate. The commission would be $18,000.
That commission is first divided in two, with $9,000 going to the listing agent’s broker and $9,000 going to the buying agent’s broker. From there, each broker will pay a portion to their agent.
Exactly how much goes to the agent depends on the split the agent has negotiated with the broker. A common split ratio is 60/40, where 60% of the $9,000 in the example above would go to the agent and 40% to the broker. More experienced or successful agents may receive a higher split.
There are exceptions to a four-way split. If a broker directly lists and finds a buyer without the help of an agent, the broker receives the full half of the commission. Or, if one brokerage works on both sides of the transaction (buyer and seller), they get the full commission and divide it internally.