How An Agent Makes Money from Real Estate Commission

A seller is obligated to provide a commission to any individual agent involved in the transaction of their property-whether they are the agent assigned to selling the property, or the agent representing the buyer of the property. When working under the assumption that most commissions are generally between 3-5 percent of the purchase price of the property, a seller should always work consider that they could part with up to 10 percent of the proceeds of their sale in commission to agents (provided both parties are using agents).

While ten percent of property’s price can appear to be an exorbitant amount (if one works under the assumption that most properties sell for hundreds of thousands of dollars), the fact is that a commission usually serves as an agent’s return on what has always been a somewhat risky proposition.

When an agent or agency agrees to represent a seller and their property, the only thing they are guaranteed is the exclusive right to sell the property. They then undertake, at their own expense, the advertising and marketing of the property-not to mention expend the time on the process without any guarantee of compensation until the property is sold. This means that the agent or agency undertakes the agreement with the hope that the property will sell, because if it does not, and the seller ultimately opts to got with another agent, the original agent foregos both time and money.

Most individual agents rarely take on more than a few properties at a time; the process of selling is proportional to the demand of the property in question. The typical process is usually tedious, for an agent, often escorts their clients, to various properties as they make their decision on which piece of real estate they would like to purchase. Therefore, an agency commission on either end, is usually the return on months, even years of an agent’s time, effort, and resources.

There is no true industry standard regarding commissions; they are generally considered negotiable. However, as stated, an exclusive right to sell always represents a risk on the part of the agent or agency, and therefore if one does try to negotiate a commission down, one must be sure that the property being sold or being purchased is ultimately worth the agent’s consideration.

Therefore, an agent or agency will usually only entertain a decreased commission if the potential return on a property can be great (in other words, if it is going for a high enough price that even a reduced commission can yield a substantial return. If the demand is strong enough that they can turn it over quickly (thus they need to spend a minimum of time or resources to its sale), or in the case of representing a buyer, they are of the understanding that the buyer would like to spend enough that there can again be a potentially higher return.

Unless the property being sold or purchased fits these or other very specialized circumstances, it is rarely advised by industry professionals to try to negotiate a commission down.

NEXT: Real Estate Listings