Buying, selling, or leasing property almost always involves the services of real estate professionals. These professionals, agents and brokers, earn their income through commissions, which are fees paid for successfully closing a transaction. Understanding how commissions work is essential for buyers, sellers, landlords, and tenants because it directly impacts the overall cost of a real estate deal.
In this guide, we’ll explain what commissions are, how they are calculated, who typically pays them, and the pros and cons of the commission system. We’ll also explore legal considerations, negotiation strategies, and current market trends influencing commissions in 2025.
An Overview of Commission
What Is a Commission?
A commission in real estate is a fee paid to an agent or broker for their role in helping facilitate a property sale, purchase, or lease. It is usually calculated as a percentage of the property’s final sale price or rental value.
Why Do Commissions Matter?
Commissions motivate agents and brokers to market properties, negotiate deals, and provide guidance through the complexities of real estate transactions. For consumers, understanding commissions ensures transparency and allows for better financial planning.
How Commissions Are Calculated
Percentage of Sale Price: The most common method, typically ranging between 5–6% in the U.S., split between buyer’s and seller’s agents.
Flat Fee: A fixed amount agreed upon regardless of the sale price.
Tiered Commission: Rates that vary based on the final price—for example, 6% for the first $500,000 and 3% above that.
Leasing Commissions: In rental properties, commissions may be one month’s rent or a percentage of the total lease value.
Who Pays the Commission?
In Residential Sales: Usually, the seller pays the commission from the sale proceeds, though the cost is factored into the listing price.
In Commercial Real Estate: Commission arrangements vary but are typically negotiated between landlords, tenants, and brokers.
In Rentals: Either the landlord or the tenant may pay, depending on local custom and market conditions.
Commission Splits
Between Agents: The commission is typically divided between the buyer’s agent and the seller’s agent.
Between Agents and Brokers: Agents working under a brokerage must share commissions with their managing broker.
Referral Commissions: Agents may pay referral fees to other agents who refer clients.
Benefits of Commission-Based Compensation
Performance Incentive: Agents are motivated to close deals.
No Upfront Cost for Clients: Agents typically only get paid when the deal closes.
Flexibility: Commission rates can often be negotiated.
Alignment of Interests: Agents benefit when clients secure favorable deals.
Drawbacks of Commissions
High Cost: A 5–6% commission can be significant, especially on high-value properties.
Potential Conflicts of Interest: Agents may prioritize deals that close quickly over those that best suit the client.
Market Dependence: Agents’ income can fluctuate with market activity.
Transparency Issues: Some clients may not fully understand how commissions are split or allocated.
Legal and Regulatory Aspects
Disclosure Requirements: Laws in most states require agents to disclose commission structures upfront.
Antitrust Concerns: Agents cannot collude to fix commission rates, as this violates antitrust laws.
Listing Agreements: Contracts between sellers and agents clearly outline the commission rate and terms.
Recent Lawsuits: In recent years, lawsuits have challenged traditional commission structures, potentially leading to reforms in how commissions are paid.
Negotiating Commissions
Compare Agents: Interview multiple agents and compare their commission structures.
Value of Service: Consider the marketing, negotiation, and expertise an agent provides.
Flat Fee Alternatives: Some brokerages offer fixed-fee services instead of traditional commissions.
Volume Discounts: Investors who do multiple deals with the same agent may negotiate reduced rates.
Trends in 2025
Pressure on Commission Rates: Increased competition and online platforms are pushing fees downward.
Flat-Fee and Discount Brokerages: Gaining popularity for cost-conscious sellers.
Technology Impact: Tools like virtual tours and AI-driven valuations reduce some traditional agent tasks, influencing commission structures.
Legal Scrutiny: Ongoing lawsuits may change the way buyer’s and seller’s agents are compensated.
Global Variation: Commission rates differ widely across countries; for example, 1–3% is common in Europe compared to 5–6% in the U.S.
Frequently Asked Questions
What is a standard real estate commission?
Typically 5–6% of the property’s sale price in the U.S., split between agents.
Can commissions be negotiated?
Yes, commission rates are not fixed by law and can be negotiated.
Do buyers pay commission directly?
In most U.S. sales, no. The seller pays, though the cost is factored into the price.
How do agents get paid in rentals?
Either the landlord or tenant may pay, depending on the local market.
Are commissions the same in commercial real estate?
No, commercial commissions vary and are often customized per deal.
What happens if a deal falls through?
Agents usually don’t get paid unless the transaction closes.
Do all agents charge the same rate?
No, rates vary by agent, brokerage, and market.
Can I sell a home without paying commission?
Yes, through For Sale By Owner (FSBO), but it requires more work and expertise.
Are commissions taxed?
Yes, agents must report commission income as taxable earnings.
What if multiple agents are involved?
The commission is split according to agreements between the agents and brokers.
Related Terms and Concepts
Listing Agreement: Contract outlining commission terms between seller and agent.
Buyer’s Agent: Represents the buyer in a transaction.
Seller’s Agent (Listing Agent): Represents the seller in a transaction.
Dual Agency: One agent representing both buyer and seller, with commission implications.
Flat Fee Listing: Alternative to commission-based agreements.
Referral Fee: Payment from one agent to another for client referrals.
Wrap Up – Commission
Commission is the cornerstone of real estate compensation, incentivizing agents and brokers to successfully close transactions. While traditionally set as a percentage of the sale price, commission structures can vary widely and are subject to negotiation.
In 2025, commissions remain essential to the industry but face increasing scrutiny, competition, and innovation-driven changes. For buyers and sellers alike, understanding how commissions work ensures transparency, allows smarter financial decisions, and helps in choosing the right professional representation.
