Calculate Real Estate Commissions

If you buy or sell a real estate property, a commission will be owed to the brokers involved in buying or selling the property. Commissions are often paid by the seller, and the overall commission is split by the agent who worked on behalf of the seller and the agent who represented the buyer. Learning how commissions work and how they are calculated can help you to determine the cost of your property, or how much you will receive from a sale.

Steps

Calculating Common Real Estate Commissions

  1. Multiply the commission percentage by the value of the sale to find out your total commission. Because the commission is a percent amount, you will not know the dollar amount until the house sale is finalized. To estimate commission, however, simply multiply the percentage by the value of the property. Remember, to convert percentage to decimal first by dividing it by 100.
    • Rate: 5.5%; House: $200,000 → .055 x 200,000 = $11,000
    • Rate: 4.75%; Property: $325,000 → .0475 x 325,000 = $15,437.50
    • Rate: 6.3%; House $132,000 → .063 x 132,000 = $8,316
    • Formula = <math>\frac{Comm %}{100} * Property Value</math>
  2. Familiarize yourself with common commission amounts. When you buy or sell a home, the broker receives a percentage of the sale value as commission. This is their payment for helping your buy or sell the house. This percentage typically ranges between 5% and 7%, with the average currently around 5.5%.[1]
  3. Discuss your specific commissions before signing any paperwork. Some brokers have arrangements where there will be a certain percentage charged on the first $100,000 of the home value, and a smaller percentage charged on the remainder of the house. On rare occasions, the commission is a flat fee.[2] If you buy a house for $225,000, and your realtor has a mixed commission (7% for the first $100,000, 3% for the rest), you would simply break the price up and calculate separately:
    • $225,000 - $100,000 = $125,000
    • ($100,000 x 7% ) + (125,000 x 3%)
    • ($7,000) + ($3,750)
    • Total Commission = $10,750
  4. Remember that commission is already tacked onto final sale price. A commission is always deducted from the total value of the home sale price, not added to it. The seller pays it in one sense (since it comes out of the proceeds they receive for their sale), but the funds come from the buyer. For example, if you are selling a home for $200,000, and if the dollar value of the commission is $10,000, you will receive $190,000 for your purchase.
    • If you sold a house for $150,000 at 5% commission, you receive $142,500 on the sale, or $150,000 - $7,500 in commission.
    • If you buy a house for $225,000, and your realtor's commission is 4.6%, then you'll be paying your realtor $10,350, already included in the sale.
    • Note that these are the final sale prices. The house would be on the market for less before fees are added.
  5. Understand how commissions are split between brokers. The standard arrangement is that the broker representing the buyer and the broker representing the seller will each split the commission 50/50. At this point the broker would then split the commission 60/40 with the agent (this is the most common split). However, this changes from office to office, and you don't need to do the math as a buyer or seller. Note that if you choose not to use a broker, the seller's broker would receive the entire commission. It is possible, however, to negotiate with the broker to reduce the fee to the half they would usually receive in order to save money for yourself.
    • If you had $10,000 commission, $5,000 would go to the buyer's broker, and $5,000 would go to the seller's broker.

Calculating Total Cost of A Sale

  1. Settle on the commission amount ahead of the sale. Before selling a property, make sure to determine exactly what the commission will be in percentage form. Commissions are often negotiable, and do no not be afraid to ask for a reduction in commissions, especially if you are selling a high-value property.
    • For this section, assume you settled on a 5% commission with your realtor for a 2-story ranch house in Georgia.
  2. Determine the property's gross sale price. Once the commission is determined, you need to determine the sale price of your property. Ask your agent for help in understanding the sale price of your home. The commission will be based on the total price of the home, not the amount the seller gets to keep after a mortgage or other lien is paid off. The sale price will only be finalized once you have agreed to an offer from a buyer and the appropriate legal documents have been signed and confirmed.
    • Continuing the example, pretend this GA ranch is worth $200,000.
    • Note that gross sales price refers to the price of your home before any deductions are taken off. This means before any taxes, commissions, fees, etc.
  3. Calculate the commission by multiplying the gross sales price of the property by the commission percentage that was agreed upon. For example, our ranch that sold for $200,000 with a 5% commission rate would result in a $10,000 agent commission. Remember to convert the percentage to a decimal (by dividing by 100) before multiplying if your calculator does not have a "%" button.[3]
    • <math> 200,000 * 5% = 10,000</math>
  4. Add taxes to the commission amount. Since commission is being paid in exchange for a service, the commission amount is often taxed just like any other purchase with a sales tax. Sales tax rates vary between states and countries. To calculate this, simply find out what the sales tax amount is (say, 4%), and multiply 4% by the commission amount. This will tell you the amount of tax that is owed, and you can simply add this amount to the total commission owing to obtain the total cost of the commission.
    • For example, multiply 4% (or 0.04) by our $10,000 commission and you get $400 in sales tax. This means your total commission would be $10,400.
  5. Subtract the commission from the total sale to determine your cut. To determine the net value you will receive for your home after commission, simply subtract the gross value from the commission paid. If the ranch's gross value is $200,000, and you have a total commission of $10,400, you would be left with $189,600 afterwards.

Tips

  • Ask agents if they would be willing to reduce their commission. Many real estate agents are willing to do this in tight markets, or if the house does not sell in a reasonable amount of time.
  • Consider the amount of commission you will be paying when you sign a contract with a real estate agent. The commission comes out of the seller's profits, so you will want to compare what kind of service you get for a higher commission amount with those agents who offer to take a smaller commission.

Things You'll Need

  • Listing agreement
  • Calculator

Related Articles

  • Find Commercial Real Estate

Sources and Citations

  1. ↑ http://www.nytimes.com/2014/10/26/business/an-extra-cost-in-american-home-sales.html?_r=0
  2. ↑ http://www.investopedia.com/articles/personal-finance/080714/how-do-real-estate-agents-get-paid.asp
  3. ↑ http://youngandthrifty.ca/real-estate-agent-commissions-decoded/

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