In the market for buying, selling or renting a home? Be sure you know and understand how real estate commissions work before you have a last minute surprise. In short, the commission you pay will come out of your net proceeds when you sell or rent a house. It may be added on to the money you need at closing when you purchase or lease a house.

Commission Varies

The first aspect of real estate commission to understand is that it varies from company to company and area to area. There is no set percentage or flat fee commission rate. In fact, if there were it would be illegal because it would violate antitrust laws. According to the website, "The Sherman Act prohibits any agreement among competitors to fix prices, rig bids, or engage in other anticompetitive activity." Every real estate company decides on their own commission schedule. Real estate commission also varies in different states or areas of the country. In some areas of the country the average commission is higher than in others. A 6% commission has been the industry standard for years, however, recently with rising prices, that number will often go  much lower, especially in high price markets such as California and New York.

Commission for Selling or Renting a Home

When you list your home for sale or for rent, you sign a listing agreement with the real estate brokerage you are working with. Part of this agreement states the commission amount that you will be responsible for paying. Some companies charge a certain percentage of the sales price or rent price. Some companies charge a flat fee. With home values rising over the past few years, commission amounts have been going up even though the percentage may have gone down.

Some real estate brokerages are full-service companies, and some are discount brokers. Others offer a menu of services for you to choose from where they charge a basic rate or amount of commission and then you add extra services you deem worthy of including. Most real estate brokerages charge you the full amount of commission due for both their listing services and for the buyers' brokerage services. Then, at closing, they split the commission with the other brokerage. This is called cooperating commission with whatever company brings the buyer or tenant.

Commission for Buying or Leasing a Home

Typically, the commission for buying or leasing a property is paid by the seller or landlord to the buyer's brokerage firm. However, your real estate agent may ask you to sign a buyer's agreement to ensure they get paid. If the listing brokerage does not cooperate on commission for some reason, you will be responsible for the commission amount you agreed upon on the agreement you signed with your agent's brokerage.

Commission is Negotiable

It is important to understand that commission may be negotiable. Some companies have a commission schedule set in stone. Some real estate companies let their agents have free will to set the commission they charge their clients. Always feel free to ask your agent in they will agree upon a lesser amount of commission. It doesn't hurt to ask. However, be sure it is a win-win situation. Real estate agents work hard for their earnings. Also know that real estate agents do not receive the entire amount of commission being paid.

How Agents Get Paid

Real estate agents get paid from their own brokerage companies. They are independent contractors who receive an agreed upon percentage of the total commission on their transactions from their brokers. Many times, new agents start at around 50% of the total commission received by the brokerage. More experienced agents might be able to negotiate a higher commission percentage.

Knowing all about real estate commission is important due to the fact that it could save or cost you money. With home values rising over the past few years, commission amounts have changed as well. Talk to your agent about how the commission is being paid in your particular transaction.