Real estate commission: a guide to who pays, how much and more
If you’re using a real estate agent to sell your property, you need to know what their fees will be. The skill and expertise you’re buying is often a great investment as a good agent can help you get a much better price for your property than you’d achieve on your own. However, knowing what the average real estate commission is can help you create a more accurate budget and avoid any nasty surprises.
So how much is real estate commission? What other costs should you be aware of and who pays for what? We spoke to Mark Wolens, a principal at Independent, to get his insights into what your real estate commission is paying for. In this ebook, we’ll also look at alternative methods of selling your home and the pros and cons of each choice.
What does real estate agent commission pay for?
The seller pays for the real estate agent’s services. That’s because real estate agents work directly for them and help them get the best price for their property.When you pay a real estate agent commission, you are paying for their time and skill.
This includes:
- Setting up a marketing campaign that’s customised to the demographic most likely to buy your property. Real estate agents know who your property is most likely to appeal to and what their buying behaviours are.
- Researching your property and the surrounding area to arrive at a fair market price. Knowing the true value of your home is an expert skill. You need to understand the overall market conditions, the local area, seasonal variations and what makes one property more desirable than another. Your real estate agent’s skill and expertise in this area can make a huge difference to the price you achieve.
- Returning phone calls and other enquiries from potential buyers about the property. They work long hours to make sure every enquiry is followed up quickly. Too slow, and the person may have moved on to the next property, so time is of the essence.
- Putting their buyer lists to work to find you the right offer. Real estate agents maintain databases of potential buyers so they can match your property to people who are looking for the same type of home. Sometimes, you can sell your home even before it hits the open market.
- Helping you present the property at its best. This might include advice about presentation and any repairs or touch ups that need to be done. Real estate agents also work with stylists who can provide furniture and accessories to really showcase your home in its best light.
- Arranging open inspections, meeting buyers there and showing them the highlights of the property.
Agents do help buyers as well, of course. But they do so to further the interest of their sellers. By cultivating a robust list of keen buyers and selling them on the neighbourhood, they can achieve faster sales for better prices.
Typically, real estate agents provide some or all of the following services to a buyer:
- Arranging inspections so they can check out a new property
- Putting them on a database that means they get advance notice of new listings
- Providing general advice about what they can expect to buy for their given budget
- Informing them about the area and the property market
How much do you pay a real estate agent?
There is no standard real estate commission, so it can vary a lot from agent to agent. The way in which the fee is determined also varies. When asking 'how much does a real estate agent charge?' make sure you understand the total amount that will be due before you sign a contract.
There is no legislation that determines what a real estate agent can charge. Fees are determined by agreement between agent and seller. Most agents have a standard fee, or fee structure, which they will tell you up front. You can try and negotiate that fee, and they can choose whether to agree to the lower rate or not.
The seller and real estate agent sign an agreement. The agreement sets out the responsibilities of both parties. This includes the amount of commission and the amount agreed upon for the marketing campaign.
It also gives the agent sole rights to sell the property for a set period of time. That means that the seller can’t use another agent during that time. It also means that even if the seller sells the property themselves, the agent will collect their commission. If your agency agreement is current and a friend approaches you and asks to buy your house, you will still need to pay commission.
Real estate commission structures
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Flat fees
The agent and seller agree on a fixed fee, which is paid on the sale of the property. No matter what the property sells for, the fee stays the same. Some people prefer this model because of the certainty. They can calculate their costs more accurately and budget accordingly. Others worry that a flat fee doesn’t incentivise the agent to try and achieve a higher price.
“At the end of the day, we’re a performance-based industry,” says Mark. “Tying the commission to the sale price does give the agent more of a reason to achieve the best result they can. That said, good agents will do their best, regardless. And some owners feel more comfortable knowing what it’s going to cost them at the end of the day so they can work out their budget.” -
Percentage fees
Here, the agent gets a percentage of the final sale price. The higher the final sale price, the higher the commission. The real estate agent commission percentage typically varies from as little as 1% to around 3%. Most Canberra agencies charge between 2% and 3%. The average commission for a real estate agent is around 2.5%. -
Combination fees
You may also see a two-tiered fee structure. These use a combination of percentage fees and bonus fees. A bonus fee is an incentive bonus. The agent and seller agree on a sale price which acts as a threshold. If the property sells for more than that, the agent gets a bonus. That might be an extra percentage of the entire sale price, so that instead of getting 2%, the agents gets 2.5% over a certain price. Alternatively, it might be a higher percentage of the amount above reserve.
Jennifer and Ian own a four bedroom home in Calwell. Jennifer has accepted a job overseas and they have decided to sell. They want to make sure that their agent works hard to achieve the right sale price for them and are trying to decide which structure will net them the most.
They get a few appraisals, which estimate that their home is worth between $800,000 and $850,000.
In the end, the pair decide to go with an overall incentive bonus. The home sells for $820,000. They pay a 2.5% commission since the agent achieves a price over the threshold. This totals $20,500.
Pay-what-you-feel
Mark and some of our other agents have been trialling a different approach to real estate commission. Pay-what-you-feel, or range commission, allows the seller to decide on a fee after the sale.
The agent and seller agree on a percentage range for the commission. At the end of the transaction, once the property is sold, the seller decides how much to pay the agent within that range. If they think that they received excellent service and value, they might pick a number nearer the top of the range. If they’re dissatisfied, they’ll pay a lower percentage.
“We took that approach for two reasons,” Mark explains. “We believe we can achieve a higher sale price than other agents in our local market. But although we have statistics to back that up, it’s hard to show a seller what we can do for their property before we do it. Seeing is believing, and we think they’ll believe us once they see the excellent result we can get for them. Because of that, it makes sense to let them decide how much we’re worth after we’ve proved ourselves, not before.
The other reason is that for some sellers, real estate commission can feel like a bit of a barrier. They might be tempted to choose an agent just because their commission is lower, and that’s not necessarily the best choice for them. This way removes the risk for the seller. If they don’t get what they’re hoping for, they can pay us a lower commission. It’s an insurance policy.”
So what happened when this was trialled?
“Lots of things! We got the market talking. We got a lot of enquiries about the new approach. And best of all, we actually got higher commission rates because we had so many satisfied clients. People who might have objected to our rates ahead of time were happy to pay them once they’ve seen what we can do, so it’s been great for our agents as well."
What affects how much you’ll pay?
Factors that influence the real estate commission include:
The price of the property
Mark explains: “You’re more likely to see a higher percentage if the property is fairly cheap, so that the agent is still compensated for their time and effort. For high end prestige properties, a lower percentage is more common. The actual dollar amount that the agent gets is still higher than what they would receive for a lower-value property.”
Where you live
High density urban areas, including the inner suburbs and CBD, will drive down the average commission. This is because there is more competition from competing agents than in our suburbs or rural locations. These desirable locations are also more likely to command higher sale prices, so agents can afford to lower their percentages a little.
The experience of the agent
A new agent might be more likely to drop their commission in an attempt to drum up business. Once they’ve got a few wins on the board, their commission might go up to reflect that. When you choose an agent purely because their commission is low, you might be choosing someone who lacks the necessary experience to get you a great result.
Ultimately, It comes down to the agent’s ability to negotiate a high sale price. That’s what you’re paying for. Look at their past results and especially their individual results. Volume of sales alone won’t show you whether they’ve accepted a lower sale price to get the sale done fast. You want someone who will focus on getting the highest price for each property even if it takes a bit more work.
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