Even for experienced home buyers and sellers, real estate commissions can be confusing. How do Realtors get paid? Who pays Realtor fees? Are real estate agent fees fixed or negotiable? Bottom Line Personal asked Joan Herlong of Herlong Sotheby’s International Realty for clarity.
Contingency: With few exceptions, real estate agents work on a contingency basis. That means you don’t owe them anything unless and until the deal closes. If closing day never comes, you’re not on the hook for a dime.
Only rarely does a client negotiate a flat fee instead of a contingency fee. Agents sometimes perform ancillary services such as design consultation, which typically are billed at a flat rate. These services are separate from the Realtor commission on the property deal.
Traditional model: Until recently, virtually all sales followed a standard model for real estate agent fees. The seller of the home paid a percentage of the sale proceeds to his/her real estate broker (also known as the listing agent). Traditionally, this was 6% of the sale price. The listing agent would split that 6% commission with the buyer’s agent. In other words, each agent would receive 3% of the sales price in the form of commission paid at closing, and the commissions were paid out of the seller’s proceeds.
New model: In 2019, a group of home sellers sued the National Association of Realtors, claiming that the traditional commission model constituted collusion to inflate fees and drive up real estate prices. Under a settlement that took effect in August 2024, sellers are no longer required to offer any compensation to buyers’ agents.
More importantly, buyer agents must have a written buyer-agency agreement with their potential buyer before they show any properties. This agreement specifies how much the buyer’s agent shall be paid, when and by whom. By signing the agreement, the potential buyer guarantees that his/her agent shall be compensated the agreed amount at closing, either by the buyer directly or by the seller as one of the terms of the transaction.
What that means for sellers and buyers: When a listing agent puts a house up for sale on the multiple listing service (MLS), buyer agents may need to ask what the listing agent’s seller is offering in terms of compensation, if anything, for the buyer’s agent. If a seller declines to offer any compensation to the buyer’s agent, the buyer is solely responsible for compensating his agent on his own. Few buyers have that kind of cash on hand in addition to their down payment, so they will likely “bake it into the contract” as a seller-paid transaction cost to finance the fee.
If taking away “automatic” buyer-agent commissions seems unfair to buyers or buyers’ agents, consider the overhead costs involved in representing sellers versus buyers. Listing agents must cover the cost of professional photography, video, marketing, and advertising (all on a contingency). The overhead and labor burden on buyers’ agents is much smaller—which explains why the vast majority of real estate agents (about 80%) specialize only in buyers, according to statistics from the National Association of Realtors (NAR).
Today’s reality: Despite the lawsuit and settlement, the old model largely persists. Many agents (for both buyers and sellers) behave as if nothing has changed. That behavior puts many brokerages at risk, because failure to comply with the terms of the NAR settlement is not covered by Errors & Omissions (E&O) insurance, a type of liability insurance that protects businesses and professionals from claims of negligence, errors or omissions in their services that result in financial loss for a client.
Caution: Discuss commission structures with your real estate agent in detail before signing any contract.
Home sellers should rule out any listing agent who advises you to “pay X% so that buyer agents will show your home.” That agent may not be looking out for you.
Home buyers should avoid any buyer-agent who insists, “Nothing has really changed…the seller still pays my entire commission.” They’re either unaware of the facts or deliberately misleading you.
