What is a realtor's fee and how do they earn it?

Have you ever wondered how realtors are paid? Generally speaking, a realtor’s commission is the fee they receive for helping you sell or buy a home. It’s usually a percentage of the purchase price of the home. Let’s look closer at how that works.

In a commission setting, a realtor only gets paid when a home is sold or purchased. They don’t get paid for the time they spend at open houses, showing hopeful homebuyers new listings, working out offers, or completing paperwork.

What is a seller’s agent in real estate?

If you’re looking to sell your home you may want to hire a realtor to handle the process for you. It is important to note that using a realtor is not legally required and many people sell their home by themselves (For Sale by Owner — FSBO). But using a realtor can help speed up the process, ensure you get a fair price, bring buyers to the table, and as a bonus they know how to navigate the mountains of paperwork involved in a home sale.

Sometimes, a seller’s agent is also referred to as a listing agent because they’re the ones who list the home for sale. If you’re selling your home and using an agent, you’ll establish a contract that sets the commission price. This can vary and you can actually negotiate the percentage that they’ll be paid and how that will be split. But the standard today is a 6% commission with 3% going to your realtor and 3% going to the buyer’s agent. This 50/50 split is typical but it’s not a rule and you may see different ratios.

What does a seller’s agent do?

If 3% of your total home sales price seems like a lot, it might help to look at what a seller’s agent does for you.

Competitive market analysis. Your realtor should look at home comparisons in the area and establish a competitive market analysis that gives you an idea of what your home is worth. Your home may have unique features, or it could have issues that may affect the asking price, but this research is a great starting point.

Curb appeal and staging. Remember that your realtor looks at houses all day long and spends most of their time with people who are interested in buying a house. They know what appeals to home buyers and what buyers don’t like. They will often give you some tips to help you improve your curb appeal and stage the inside of your home. Try not to take it personally if they suggest making a change — they’re just trying to help you appeal to more buyers.

Marketing the house. There are a lot of elements that get rolled into the sale of your home. Some things your realtor may do are posting for sale signs, Multiple Listing Service (MLS) exposure, newspaper ads, internet advertising and social media buzz. They will also use that all-important word-of-mouth marketing and speak to other realtors.

Representation during negotiations. Once an offer is made, your realtor can guide you through the offer, counteroffer, acceptance, contingencies, and all other pieces of this complex transaction and contract.

Closing help. Your realtor may then coordinate between your lender and the title company to ensure all the necessary documentation is in place. That way, when you come to that all-important, final day, the closing day, you’ll have everything in place for signing. They may or may not come with you to the home closing, but this often depends on their schedule. However, you can request their presence if you’d like them there.

One tip when picking a seller’s realtor is to interview several realtors and ask them what they will do for you and what percentage they charge. If they know you’re shopping around, they may be more interested in negotiating the percentage they receive.

What is a buyer’s agent in real estate?

Just as a seller’s agent represents the home seller, the buyer’s agent represents the home buyer. When you’re buying a home, having a realtor on your side can help you find the right property and negotiate a fair price. However, it should also be noted that you don’t need a real estate agent when buying a home. You’re welcome to find a home on your own and handle the paperwork by yourself or with the assistance of an attorney.

The real estate commission for a buyer’s agent also comes from the home purchase and is typically based on the sales price. They get paid at the time of closing and receive payment from a split of the seller’s commission. One thing to note is that the buyer’s agent’s fee is not negotiable, it’s already been determined by the seller’s contract with their realtor, that is if you’re working on the traditional fee basis.

What does a buyer’s agent do?

Your realtor will have you sign a contract that will list what they will do for you specifically, but you can expect the following:

Confidentiality. You’ll be telling your agent information about your situation that the seller shouldn’t know — you can expect them to protect anything you tell them in confidence. Imagine that you’re in a situation where you have to move soon. If that information was shared with the sellers, they may want to hold firm on the price rather than negotiate because they know you’re in a desperate situation.

Find potential homes. The realtor will make notes on what you’re looking for and then they’ll scour the MLS and other home listings for you. Some realtors have great connections with other real estate professionals and will even know about upcoming listings before they become public.

Go to showings. Your buyer’s realtor will set up appointments to see homes, showings, and go to them with you. Feel free to share your real thoughts on the property as it will give your realtor an even better idea of what you want.

Expert knowledge. A great realtor knows their region and has their pulse on the current market. They’ll be able to give you advice on the estimated value of the home and of comparable homes. They might also be able to point out some concerns or plusses you didn’t notice.

Representation during negotiations. The buyer’s realtor will help you make an offer on a home. Then both the buyer’s realtor and the seller’s realtor will work back and forth to come up with a fair deal. Your realtor can have a wealth of information here that’ll help you understand the process and prepare you for negotiations.

Closing help. Much like a seller’s agent, your realtor may help ensure the paperwork is ready for the closing, and they may attend the closing with you.

What is a real estate dual agent?

What about a realtor who represents both the buyer and the seller? This is referred to as a dual agent, and it’s not legal in some states. If dual agency is legal in your state, it’s still wise to tread carefully here. You may not get the full representation you had hoped for or the feeling of someone on your side through the process. However, the benefit of using a dual agent is that you’re likely to save on the commission.

Remember, realtors' commissions are tax deductible, so you should include them on your taxes this year.

The process of buying a home is both thrilling and exhausting. There’s a lot of paperwork, and it can take a while to find the home that speaks to you, but there’s nothing quite like the feeling of coming home. Your American Family Insurance agent is on your side and will help you protect that new home with homeowners insurance customized to your unique needs.

This article is for informational purposes only and based on information that is widely available. This information does not, and is not intended to, constitute legal or financial advice. You should contact a professional for advice specific to your situation.