Nearly 30% of recent home buyers have zero clue how much their realtor is paid—and a lot of people don’t know where that money came from
There’s no way around it: Home buying is expensive. Between high mortgage rates and climbing home prices, purchasing a house in today’s market strains new buyers. But what many buyers don’t know is how much their own realtor gets paid as part of the transaction—a figure that often gets lost or overlooked in the homebuying process.
Indeed, 28% of recent home buyers have no idea how much their agent made, and 17% don’t know how the amount was determined, according to a Redfin report released Thursday. Findings from a separate survey revealed that nearly 20% have no clue who actually paid their agent. The survey conducted by Qualtrics in February polled nearly 3,000 homeowners and renters.
The results come at the heels of a groundbreaking $418 million settlement with the National Association of Realtors over an alleged conspiracy to inflate realtors’ commissions. NAR, the country’s largest trade association, which represents 1.5 million members, reached an agreement to pay out the damages across multiple lawsuits, including one that resulted in a $1.8 billion verdict, finding NAR (among other brokerages) conspired to inflate commissions. NAR also said it would prohibit offers of broker compensation on the Multiple Listing Service (MLS), and require MLS users to sign written contracts with buyers. These agreements must specify the compensation agents will receive, according to Redfin.
In the aftermath of the verdict, experts have had mixed reviews on how much it affects realtors’ bottom line. Some say it won’t have much of an effect on realtor commissions, while others say the verdict spells doom for the profession as we know it. Either way, it’s clear that home buyers don’t really have to care about the verdict—or even how their realtor gets paid, whereas sellers have to be involved in those negotiations from the start.
But it’s something that everyone involved in the homebuying process should be aware of, Redfin Chief Economist Daryl Fairweather said in a statement.
“Many Americans make the biggest purchase of their life without knowing precisely how the professional they hired to guide them through the transaction is getting paid,” Fairweather said. “Home sellers often have a candid conversation about fees with their agent before signing an agreement to work together. Buyers would benefit from doing the same.”
How do realtors get paid?
Just like other sales professionals, realtors get paid through commissions on the homes they help a buyer to purchase or a seller to offload. However, this is the only money they make from working with their clients. They don’t typically get paid a salary or hourly wage. What’s more is they only actually enjoy a payday when the transaction goes through. While the tight housing market has resulted in shorter closing times, it can still take weeks or even months for housing transactions to be completely finished.
A realtor’s commission is determined by the price of the home, with the buyer’s agent and seller’s agent typically splitting the commission. Assuming the average-priced home (as identified by the Case-Shiller index), of about $310,000 at a 6% commission, which is fairly typical, the seller’s agent and buyer’s agent might split that $18,600, and each take home more than $9,000.
It’s not always that cut-and-dry, though. Sometimes newer agents earn a smaller percentage of the commission than experienced agents due to team commission splits and bro. And for agents who work at a firm, the broker also typically takes a cut of the commission.
That sounds like a lot of money for one transaction…
Redfin’s survey also showed that nearly 40% of homeowners who plan to sell their house in the next year think a 3% commission for a buyer’s agent seems too steep. But a similar share of sellers think it’s “just about right” or too low—just going to show how little the average homeowner knows about the homebuying process, and that they’re totally mixed on the right amount to pay an agent.
What’s important to know, though, is that commission rates can be discussed and negotiated ahead of time. In fact, NAR now requires that those figures be established ahead of time.
“People feel awkward talking about money, but it’s important to understand what your agent is charging and have a discussion about whether you will need to ask the seller to cover your agent’s fee as part of your offer negotiation or pay for it out of pocket,” Fairweather said.
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