How Does Your Broker Determine Your Commission?
Commissions from a real estate transaction cannot be paid directly to you as the real estate agent. Instead, they must be paid to a brokerage. Therefore, you and your broker will need to agree on a commission split. Once you close a deal, the broker will get paid first and then they will pay you your cut.
In many cases, listing agents and brokerages will agree to a 50/50-split on a deal. Similarly, brokerages and buyers agents also often agree to split the commission 50/50. As you become a more experienced and reputable real estate agent, you can likely negotiate a higher commission percentage. However, when starting out, the brokerage is helping to get you ramped up so the pay is often lower.
Who Decides How Much Commission the Brokerage Gets?
The amount of commission that your broker receives, in total, depends on the deal they negotiate with the listing agent. Listing agents work with sellers to determine the overall commission cost for the transaction. Once an amount is agreed upon, it's added to the listing agreement. Then, listing agents will seek out buying agents and their brokerages to find buyers. It's at this point that the listing agent and the brokerage of a buying agent will negotiate a commission rate.
Example of Commission for Real Estate Agents in California
Let's look at an example. Say you have a listing with a sale price of $550,000 and a commission rate of 5%. The total commission on that sale would be $27,500. If all parties agreed on 1.25% (25% of the commission), each party would receive $6,875 when the deal closes.
How Many Ways Does the Real Estate Commission Get Split?
All in all, there are often four splits and five negotiations to be made:
- The overall commission rate between the seller and listing agent.
- The commission rate for the listing agent's broker.
- The commission rate for the listing agent.
- The commission rate for the buying agent's broker.
- The commission for the buying agent.
While there is no standard, the average overall commission rate in California is right around 5%, according to a survey by List With Clever. After splitting that in half between the buying and listing agents, and again in half between you (the buying agent) and your broker, you'd be looking at an average commission equal to 1.25% of the sale price.
Some companies are disrupting the market by trimming down on these commissions. For example, Redfin offers sellers a 1.5% commission fee to list their home, less than the 2.5% average cost they would face going the traditional route. However, there's something to be said about the personal service of a listing agent, as Redfin faces complaints regarding its service.
