Real Estate Commissions Facts
We have received questions about why brokers representing home sellers often pay the commission of brokers representing home buyers. Here are answers to those questions and basic information every buyer and seller needs to know.
This practice has worked so well for so long because it provides the greatest economic benefits for both buyers and sellers, creates greater access and equity for first-time, low- and middle-income and all buyers and enables small business brokers to compete with larger brokers.
In fact, listing brokers paying the commission of buyer brokers underpins local broker marketplaces, which are the primary source of information for home search sites, and serve as the driving force behind America’s efficient and accessible real estate market.
How Real Estate Commissions Work
In order to understand how real estate commissions are paid, it’s necessary to first understand the tool used in the vast majority of all home purchases: a Multiple Listing Service.
Multiple Listing Services, or local broker marketplaces, are essentially databases of all the homes for sale in a given market, maintained in most cases by local REALTOR® associations. Local REALTOR® associations also make most of this information publicly available for free, and each database often feeds home search sites.
When a seller lists a property on one of these local broker marketplaces with a listing broker, they get access to the largest pool of possible buyers that have been brought to the marketplace by buyer brokers. Meanwhile, buyers can work with any broker and see ALL homes for sale.
So where do commissions come in? Typically, the seller’s broker pays the buyer broker’s commission for finding a ready, willing and able buyer. This creates a larger pool of buyers for sellers and saves sellers time and money by working with an established group of brokers. For buyers, it saves them money at closing and enables the buyer to receive professional representation.
The practice of listing brokers paying buyer brokers enables efficiency, effectiveness and accessibility for first-time, low- and middle-income and buyers of all walks of life. This practice also has been the driving force behind a thriving American real estate market. From 2010 to 2020, this approach to commissions:
- Enabled 88% of homebuyers to purchase their home through a real estate broker
- Contributed to an $8.2 trillion increase in total housing wealth
- Helped 6.3 million more new buyers become homeowners
For the 90% of sellers who use a broker, they sell for 30% more on average than homes sold off the local broker marketplace as for sale by owner. That means someone working with an agent could get $390,000 for their home versus $300,000 if they tried to do it on their own.
If this practice changed and sellers’ brokers stopped paying buyers’ brokers, what would be the likely outcome?
- No centralized source of available homes for consumers or brokers
- Buyers would have to visit every broker in town to see all available homes
- Outdated home status information
- Fewer homes for buyers to choose from on real estate sites
- Unverified, inaccurate and unreliable property information
- Sellers would likely have to pay to list and advertise their properties on websites
- Buyers unable to afford brokerages would have fewer options
- Inconsistent broker information in listings across the marketplaces
- Markets would be controlled by the largest brokers
Competition in Real Estate
REALTORS® are mostly small business owners who work to ensure buyers and sellers have the greatest access, transparency and choice through independent, local broker marketplaces that level the playing field for all types and sizes of brokerages.
The U.S. model of local broker cooperation has long been – and is still – viewed as the best value for consumers around the world. Local broker marketplaces provide sellers equal access to the largest possible pool of potential buyers and create the greatest number of housing options for buyers in one place without hidden or extra costs. Listing brokers making offers of compensation to buyer brokers also gives first-time, low/middle-income and all homebuyers a better shot at affording a home and professional representation. The free market organically establishes commission costs within local real estate markets based on service, consumer preference and what the market can bear, among other things. Learn More Here
