Hovnanian Enterprises : Who Pays Realtor Fees?

One aspect of the real estate industry that's most often misunderstood is realtor fees. Although US home sellers are estimated to have paid $114 billion in realtor fees in 2018, a survey conducted the following year found that even among Americans who had bought or sold a home in the last five years, over half were unable to guess the amount of a typical realtor fee.

So, what exactly is a realtor fee, and how is it determined? Is it fair? If not, who benefits most, and how can the other players best protect their interests? Do you need a realtor if you are building a new construction home? As is so often the case in the homebuying process, appearances can be deceiving. Let's learn more about what exactly realtor fees are, and what they could mean for you.

What is a Realtor Fee?

A realtor fee, sometimes known as a real estate commission, is simply the amount of money that a realtor takes home from a successful home sale. The term "fee" can be slightly misleading, as fees are often understood to be nominal charges on top of something else, whereas the realtor fee generally represents the entirety of a realtor's earnings from the process.

It's important to note that while there are some exceptions (which we'll get to later), most home sales involve more than one realtor: one who represents the buyer, or the buyer's agent, and one who represents the seller, or the listing agent. The realtor fee from the home sale is usually split down the middle between the two of them - so if the realtor fee from one home sale is $30,000, each realtor will collect $15,000. (Though as we'll see later, the fee typically continues to be split from there.)

How Much is a Real Estate Commission & How Can I Calculate It?

The realtor fee is always determined as a percentage of the final sale price of a home. This percentage isn't governed by legal requirements - rather, by market conditions and negotiations - and while they can range from 1% to 10%, the national average is 5.8%. In New York state, the standard real estate fee is 6%, though this too can vary on a case-by-case basis.

Calculating real estate commission in a particular sale is simple, once you know three things: the final sales price of a home, the number of agents involved in the transaction, and the percentage they charge for their involvement.

If a home sells for $400,000 and the real estate commission rate for your sale is 6%, the commission comes to $24,000. Divide that by the number of realtors involved in the sale; if there are two, each will take away $12,000.

If you'd rather avoid back-of-the-envelope math altogether, there are also a number of online calculators available to make the process even easier.

Who Pays the Realtor Fee?

When it comes to who pays the fee - homebuyer or seller - technically, the seller foots the bill. If a home sells for $400,000 and the realtor fee comes to $24,000, that $24,000 comes out of the money that the seller takes to the bank.

Of course, the money that they're taking to the bank actually comes from the buyer - and sellers generally factor in realtor fees when they price a home. If a buyer is charged $400,000, it often means that the seller considers the actual home price to be $376,000, and the difference goes towards paying the realtor fees. This is all bundled up into the final sale price that, ultimately, the buyer is responsible for.

Are Realtor Fees Expensive?

While realtor fees might appear to be pricey at first glance, there's more going on than meets the eye. First off, let's take a closer look at how the realtor fee is distributed.

As we mentioned already, a 6% fee on a $400,000 home means that the two agents involved will take away $12,000 each. However, that $12,000 continues to be split into smaller pieces after that, between each agent and their sponsoring broker - the person who rents their office space, holds their real estate license, ensures legal compliance of contracts, negotiates agent contracts, and so on. If the agent and their broker again split the fee 50/50 (though it's possible they use a different ratio), the real estate agent is actually taking home $6,000, or 1.5% of the sale price.

To return to a point we touched on earlier, it's important to keep in mind that most real estate agents don't earn a base salary - so however much of the fee they take home is typically the entirety of their earnings for the sale. In addition to the hours spent showing clients a home, holding open houses, negotiating prices, and scheduling inspections and repairs, among other things, the fee also typically pays for overhead expenses like marketing costs and open house material supplies.

From the perspective of realtors, fees from successful home sales help to assuage some of the uncertainty that goes along with the profession, as it's quite possible that a realtor could work hundreds of hours towards a home sale that ends up fizzling out, yielding no profit at all; realtor fees from successful sales ameliorate that risk and make the profession more viable. Of course, the question of how many sales a realtor closes, and how much of their work yields a profit, is arguably not the responsibility of either the home-buyer or seller, despite the fact that they're the ones providing funding for this system.

Some have also questioned the logic and fairness of adhering to a system that was set up before the internet revolutionized the homebuying process. Increasingly in recent years, homebuyers and sellers are doing more of the legwork on their own, before even engaging a realtor; according to the National Association of Realtors, 44% of sales in 2018 began with an online search rather than referrals. Statistics like these suggests that in the internet age, there's simply less work left over for a realtor to do - and a series of ongoing lawsuits indicate that in the years ahead, the dominance of the traditional realtor fee may come more and more into question.

How to Save on Realtor Fees: Dual Agency

In practical terms, is there anything you can do now to lower the realtor fee? If you're a homebuyer, probably not; even though the buyer is the one actually paying the fee, the fact that they don't do so directly means that they don't have a hand in the negotiations, at least not officially.

On the other hand, sellers can try to lower the fee, and one possible method is something called dual agency: when the same realtor represents both the buyer and seller in a transaction. In this case, the entire real estate fee would go to the one agent (also known as the transaction broker), and this can be one way that a seller could negotiate a lower fee - say, from 6% to 4%.

That said, dual agency is not without controversy. Many argue that the practice offers serious ethical issues and conflicts of interest, as it seems logically impossible for one agent to represent the interests of both the buyer (who wants the house to sell for as little as possible) and the seller (who wants the house to sell for as much as possible). Given that the dual agent will make more money for a higher-selling home, it's quite possible that the buyer will be getting short shrift.

As a result, dual agency has been outlawed in eight states, including Florida, Colorado, Texas, and Vermont. In those states where dual agency is legal, like New York, agents are required by law to disclose that they'll be representing both sides to their clients.

Other Ways to Save on Realtor Fees

There are some less divisive ways that sellers can attempt to lower the realtor fee. They can always negotiate with the realtor, though research suggests that this is not very effective. A2019 report from the Consumer Federation of America found that realtor fees are less negotiable than they may appear, as 73% of realtors surveyed said they would not be willing to lower their fee.

Some brokers do offer the option of a fixed or flat fee (which is also known as discount brokerage) - for example, a fee of $5,000, no matter what - but as ever, there is danger in potentially getting only what you pay for. A smaller budget for marketing and business expenses may mean that the agent can't market your home as effectively as possible, and may also not be motivated to get as high a price as possible, as their take-home pay won't change. In some cases, a flat-fee broker may do little more than list your home on the MLS (Multiple Listing Services).

For home sellers who anticipate doing most of the work themselves, a flat fee could be a good option - but no matter what, it's always best to discuss the fee in detail with a potential realtor, to be sure you know what services it does - and does not - provide.

Realtor Fees: Conclusion

However you may feel about realtor fees, there's no question that understanding them better is deeply beneficial to both homebuyers and sellers. For even the most independent among us, buying or selling a home is a team effort - and having a grasp of the motivations and considerations at play for your team members will help to ensure that you all work together as effectively as possible.

Last Updated on March 3, 2022