Understanding Real Estate Commissions: How They Work and What You Need to Know

Understanding Real Estate Commissions: How They Work and What You Need to Know

Let’s be honest—real estate commissions can feel confusing. Who pays whom? How much? And what are you really getting in return? If you’re buying or selling a home, you’ve probably run into these questions. You’re not alone. So let’s clear things up. We’ll keep it simple, use real examples, and explain what you need to watch out for.

Let’s be honest—real estate commissions can feel confusing. Who pays whom? How much? And what are you really getting in return? If you’re buying or selling a home, you’ve probably run into these questions. You’re not alone. So let’s clear things up. We’ll keep it simple, use real examples, and explain what you need to watch out for.

A real estate commission is the fee paid to agents when a home is bought or sold. It’s usually a percentage of the sale price—most commonly between 5% and 6%. For example, if you sell your home for $400,000 and the total commission is 6%, that’s $24,000. While that sounds like a lot, it’s important to know that this fee is typically split multiple ways. The seller generally pays the full commission, even though both the seller and buyer are represented by their own agents. That means the $24,000 is divided between the listing agent (seller’s agent) and the buyer’s agent, with each typically receiving $12,000.

What do you get for that money? It’s a fair question. Real estate agents do a lot more than just show homes and smile at open houses. A good agent helps price the home accurately, markets it with professional photos and listings, hosts showings and open houses, negotiates offers, handles inspection and repair requests, and guides you through closing. While the system isn’t perfect and some agents work harder than others, a truly committed agent can make a major difference. That’s why it’s essential to choose someone you trust and feel comfortable working with.

Can you negotiate the commission? Absolutely. Many people don’t realize that commission rates aren’t fixed. If an agent tells you otherwise, consider it a red flag. You can often negotiate a lower rate, especially if the market is hot, your home is priced high, you’re both buying and selling with the same agent, or your property is in great condition and ready to list quickly. That said, don’t just go with the cheapest option. A skilled agent may earn you more on your sale than you’d save with a lower commission. It’s about value, not just cost.

Now, what about buyers—do they pay their agent? Traditionally, the answer has been no. The seller covers the commission for both sides. But that may be changing. Ongoing legal challenges and shifts in the real estate industry are prompting some markets and MLS systems to revisit how commissions work. In some cases, buyers may need to pay their own agent directly or work the cost into their offer. If you’re buying, ask your agent how they get paid, and make sure you get the answer in writing. Transparency is key.

Sometimes, one agent represents both the buyer and the seller in a transaction. This is called dual agency. While it’s legal in many states, it can create complications. Can one person fairly represent two opposing sides in a negotiation? Some think it simplifies things, while others are understandably skeptical. If you find yourself in a dual agency situation, be sure to ask detailed questions and fully understand what the agent can—and cannot—do for you.

You might wonder where all that commission money actually goes. That $24,000 doesn’t land entirely in your agent’s pocket. Brokerages take a cut from both the listing and buying sides. Agents also have out-of-pocket costs like marketing, photos, signs, licensing, insurance, and transportation. Many agents work on a split with their brokerage, sometimes 70/30, sometimes even 50/50. After expenses, an agent who “earns” $12,000 might only take home $6,000 or less. It’s still solid income, but not as large as it appears at first glance.

Some sellers consider skipping the agent altogether by going the For Sale By Owner (FSBO) route to save on commissions. It can work, but it’s a lot of work. You’ll need to price your home, market it effectively, manage showings, negotiate with buyers, handle inspections, and navigate the closing process—all on your own. Also, most buyers still use agents, so you may still end up paying a buyer’s agent commission. In many cases, FSBO properties sell for less than agent-listed homes. It’s not guaranteed, but it’s something to be aware of. If you choose this route, be realistic about your time, effort, and expertise.

Do higher commissions lead to better results? Not necessarily. Paying more doesn’t always mean better service, and paying less doesn’t always mean a better deal. It depends on the agent’s experience, work ethic, and marketing ability. Ask to see examples of past sales. Look at how they present homes. Read reviews. Interview multiple agents. And don’t hesitate to ask them how they justify their fee. You’re the client—you have every right to get clarity before you commit.

The real estate industry is also going through changes. Lawsuits and regulatory reforms are challenging the traditional structure where the seller pays commissions for both agents. We’re seeing more buyers expected to pay their own agents, which may become more common going forward. These changes are already impacting how homes are listed and how negotiations are structured.

So what should you do? Always ask questions. Whether you’re buying or selling, make sure you understand what you’re paying and what you’re getting in return. Get everything in writing. Don’t make assumptions. And don’t hesitate to negotiate—agents expect it. If you don’t feel confident in one agent, keep looking until you find someone who communicates clearly and respects your goals. You’re making a major decision. You deserve to feel informed and empowered every step of the way.

To recap: commissions usually come out of the seller’s proceeds; agents split the fee with their brokerages; rates can be negotiated; buyers might need to cover their agent’s cost in the future; and good agents earn their commission by guiding you through a complex and emotional process. Real estate commissions matter—but they don’t have to be a mystery. Now that you know the basics, you’re ahead of the game. When someone brings it up at a dinner party, you’ll have something smart to say. And when you’re ready to buy or sell, you’ll be able to ask the right questions—and potentially save thousands in the process. You’ve got this.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Readers should consult with financial advisors and real estate professionals before making investment decisions.

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