Real estate commission is the fee paid to brokers and agents for their services in facilitating the sale or purchase of property. For decades, the common practice was that the home seller formally paid this fee out of the sale proceeds at closing. Recent industry changes, however, have fundamentally altered this long-standing arrangement. The responsibility for agent compensation is shifting, making it an explicit point of negotiation for all parties.
The Traditional Real Estate Commission Structure
The contractual relationship begins when a seller signs a listing agreement with their chosen brokerage. This legally binding document outlines the total commission rate for the transaction, expressed as a percentage of the final sale price. The seller agrees to pay this total commission to their listing broker, and the payment is deducted from the seller’s funds once the sale successfully closes. This arrangement makes the seller the party legally responsible for the entire commission payment.
How Commissions are Divided Between Agents
The total commission fee established in the listing agreement covers compensation for both the listing and buying sides of the transaction. This cooperative compensation mechanism incentivized a wide pool of buyer agents to show the property. Historically, the listing broker shared a portion of the total fee with the cooperating broker who brought the buyer. This split was generally a near-equal division between the two brokerages.
The Economic Reality of Commission Payment
While the seller physically pays the commission from their sale proceeds, the financial burden is integrated into the home’s final price. The seller anticipates this expense when setting the asking price, effectively “baking” the cost into the purchase price. Consequently, the buyer indirectly bears this expense through the total amount they finance with their mortgage. This means the buyer has historically paid the commission over the life of their loan.
New Rules and the Shift in Buyer Agent Compensation
A significant industry shift has moved away from the traditional model by changing how compensation is managed and disclosed. The main change involves removing mandatory offers of buyer agent compensation from many Multiple Listing Service platforms. This action decouples the seller’s commission from the buyer’s agent’s pay, eliminating the standard where a seller’s offer was automatically broadcast.
The new environment places the responsibility for compensating a buyer’s agent directly on the buyer, necessitating a formal agreement between them. Agents are now required to secure an explicit, written Buyer Representation Agreement (BRA) with their clients early in the process, often before showing any homes. This contract must clearly detail the agent’s compensation, whether it is a percentage, a fixed amount, or an hourly rate. If the seller chooses not to offer compensation, or if their offer is less than the amount agreed upon in the BRA, the buyer is responsible for making up the difference directly.
Alternative Compensation Models for Buyers’ Agents
The new transactional landscape encourages buyers and their agents to explore compensation structures that move beyond the traditional commission percentage.
Direct Buyer Payment
One straightforward model involves the buyer paying their agent directly out-of-pocket, similar to paying an attorney or other professional service provider. This payment can be made at closing using funds brought to the table, or it may be paid separately outside of the closing process. This ensures the buyer’s agent is compensated regardless of any offer from the seller.
Hourly and Flat Fee Structures
Some agents are beginning to move away from the percentage-based commission entirely, offering their services under an hourly or flat-fee arrangement. An hourly model compensates the agent for the time spent on the client’s search and transaction, while a flat-fee structure charges a single, predetermined price for a specific set of services. These models provide cost predictability for the buyer and clearly define the scope of the agent’s work.
Commission Rebates
In states where it is permitted, commission rebates offer another alternative, where the buyer’s agent returns a portion of their earned commission back to the client. This rebate can help offset the buyer’s closing costs or provide cash back after the sale is complete. The exact amount is negotiated between the agent and the client and must comply with state and lender regulations.
Negotiating Commission Rates
Regardless of the party responsible for payment or the compensation model used, commission rates are always open to negotiation. Sellers retain the ability to negotiate the total commission percentage with their listing agent before signing the listing agreement, which is the most effective time to secure favorable terms. Experienced sellers often compare proposals from multiple listing agents to determine the best value proposition.
Buyers now have a new point of leverage by negotiating the terms within their Buyer Representation Agreement. Buyers should discuss compensation expectations upfront with their agent, clarifying the agreed-upon rate and determining the maximum they are willing to pay if a seller offers insufficient or no compensation.