How Do Realtors Get Paid? What Every Buyer And Seller Should Know

Realtor Compensation Changes

August 17, 2024, marked a day of sweeping changes for how home buyers and sellers are represented in real estate transactions and how they get paid, changing decades-old practices.

Under a National Association of Realtors (NAR) legal settlement (Sitzer v Burnett et al.), NAR members received a new mandate: listing brokers (representing sellers) may no longer share their commissions with buyer agents (representing buyers).

The lawsuit claimed that mandatory commission sharing among Realtors (state-licensed real estate agents who are members of NAR) violated antitrust law.

Before the settlement, listing agents charged sellers a commission (typically 5% to 6%) and then split that commission (normally 50/50) with the buyer’s agent.

While the responsibility of payment (who pays whom for services) changed, one thing remains: Realtors get paid through commissions based on the sale price of a home.

Furthermore, rules and laws about how agents represent consumers and how agents are compensated may be further defined by local MLSs to which they belong and state laws where they practice.

What follows is how agent compensation works and some variation in rules and regulations.

Traditional Model (Before the Settlement)

Before August 2024, agents representing sellers would charge a listing fee, typically 5% or 6% depending upon local norms (agents in Dallas usually charge 3% to list a home, whereas Los Angeles agents market and list homes for 2.5%.)

The listing agent would market the property to the public and other agents who might bring a buyer to the table. Listing agents would make a commission offer to buyers’ agents as a split of the listing fee, typically 50/50.

If the listing agent could source a buyer themselves, they would keep the full listing fee.

Once the property sells and is conveyed to the new owner, commissions are sent from the escrow company (or attorney) to each agent’s respective brokerage.

The proceeds are divided based on the split between the broker and the agent.

Traditional Model of Real Estate Agent Compensation

NAR members who belong to NAR-affiliated MLSs cannot engage in commission sharing between buyer and seller agents as explained above.

However, commission sharing is still practiced by members of independent (not NAR-affiliated) MLSs.

For example, in the Puget Sound region of Washington State, Northwest Multiple Listing Service (NWMLS) is an independent MLS. NWMLS did not opt-in to NAR’s settlement and still allows its members to cooperate (share commissions) under the traditional model.

Post-NAR Settlement Changes

With the change in NAR rules, buyers and sellers now negotiate directly with their respective agents representing them.

Listing Agent Commissions

Listing agents representing sellers still charge a commission to list a home, but not an amount intended to cover the buyer’s agent commission (since commission sharing is not allowed).

The seller and the listing agent agree upon a fee, typically 2.5% to 3% of the sales price of the home (rather than 5% or 6% as it was before).

Listing fees are negotiable.

Buyer Agent Commissions

Buyers’ agents have direct agreements with the buyers they represent, separate from the agreement between the seller and their listing agent.

Buyers’ agents may no longer receive any compensation from listing agents. That means no commission sharing and no separate side deals between agents.

A typical buyer representation fee is 2.5% to 3% of the final purchase price of a home.

Representation fees are negotiable.

What’s more, NAR-affiliated Realtors representing buyers must now have that representation agreement (contract) in place before showing clients any homes. The agreement must stipulate the maximum fee for representation and that the buyer is responsible for paying it.

Post Sitzer v Burnett Real Estate Agent Commissions

Price Concessions

Unfortunately, many buyers do not have enough money to pay for representation, especially first-time home buyers. First-time buyers may only have enough money saved up for a downpayment.

Move-up buyers may not have enough equity in their existing homes to cover fees.

While both kinds of buyers may lack the funds needed to pay for representation, some relief is available.

Some MLS rules allow sellers to make price concessions to buyers, which may cover their buyer's agent fees.

For example, CRMLS (a regional MLS covering a large portion of California's major cities like L.A., San Diego, and San Jose, allows sellers to offer a Concession in Price (CIP).

If a price concession is offered, when a home is listed on the MLS, buyers can see it, which may entice them to choose one property over another.

Seller price concessions can take one of three forms:

• A percentage of the purchase price (e.g., 2.5%)
• A flat fee (e.g., $25,000)
• Or yes/no (meaning a concession will or will not be considered, no amount specified)

Note that seller price concessions are negotiable and they are not commissions.

At closing, buyers can use funds from the seller’s concession to pay for all or some of the cost of their agent’s representation. The buyer’s agent may not receive more than the amount specified in their original representation agreement.

Dual Agency

Agents on both sides of a deal have a fiduciary responsibility to their clients. This means agents must disclose known issues about a property and negotiate in good faith. As such, a buyer's agent must act in the best interests of their customers just as a seller's agent must represent the best interests of their clients. There may be a time when a listing agent represents the seller and a buyer (for the same property, at the same time), and this is known as dual agency.

Because dual agency makes it difficult to negotiate and represent both parties of a real estate deal, several states prohibit the practice. The State of California allows dual agency, but only if the agent or broker fully discloses it to the buyer and seller. To say the least, this can become a precarious situation.

Summary

Realtors are still paid through commissions, typically a percentage of the home's sale price.

However, commissions paid by the seller (out of the sale proceeds) are no longer split between the buyer's agent and the seller's agent, as was once the widespread practice.

Instead, sellers and buyers pay their respective agents directly.

Some MLSs now provide for Concessions in Price which can be used by a buyer to pay their agent.

Some agents, who are members of independent MLSs (not affiliated with NAR), may still share commissions paid by sellers.