Understanding Realtor Fees - Listing Agent vs Buyer’s Agent

Realtor fees aren’t the most exciting topic for sellers or homebuyers to discuss. For sellers, they make up the largest portion of closing costs. For buyers, if the seller doesn’t offer to pay the buyer’s agent commission, it may mean an extra expense when it’s time to close.

The modern real estate market is changing rapidly. It is already much different than the traditional one most people are familiar with - even though tradition hasn’t yet gone out of fashion.

Examining the work of both listing and buyers' agents is essential for sellers and buyers to be updated on commissions and why they are paid.

Below, the Prevu Real Estate team will explain the definition of each commission, what these fees typically include, why they may be separate, and what you need to know about each one. 

What are realtor fees?

Realtor fees - sometimes referred to as real estate commissions - are compensation paid to real estate agents for their services during a property transaction, typically calculated as a percentage of the home's sale price or a quoted dollar amount or flat fee.

The listing agent works on behalf of the seller to price the listing, give recommendations on staging, market the property, manage showings, negotiate deals, among many other responsibilities. In contrast, the buyer's agent assists the buyer in finding properties, providing market insights, and negotiating purchase terms. This commission structure is designed to incentivize agents to secure the best outcomes for their clients—maximizing sale prices for sellers and favorable purchasing terms for buyers.

Agents invest considerable effort in marketing, administration, and client service, and the commission is not just compensation for these efforts but also a critical component of the real estate market's operational framework.

What is a listing agent commission?

The commission paid to a listing agent is not merely for placing a property on the market; it covers a comprehensive suite of services that facilitate the sale of the home from start to finish. This fee compensates the agent for their expertise, time, and various tasks, which are crucial for attracting potential buyers and closing a sale successfully.

The listing agent invests significantly in marketing the property. This can include professional photography, creating and distributing sales materials, and digital marketing efforts such as listing the property on multiple real estate platforms and social media. Effective marketing reaches a broad audience and targets the right potential buyers through strategic advertising.

In addition to marketing, the listing agent brings in-depth knowledge of the local real estate market. They provide valuable insights on pricing the property appropriately—a critical factor in attracting buyers while maximizing the sale price. This pricing strategy is based on a comparative market analysis, which involves evaluating similar homes in the area and understanding current market trends and deep local insights.

The listing agent also plays a pivotal role in managing the logistics of the sale process. 

They coordinate showings and open houses and handle negotiations with potential buyers and their agents, leveraging their negotiation skills to secure the best possible terms for the seller. After an offer is accepted, the agent facilitates the transaction process, working with the buyer's agent – or with the buyer directly – to ensure all paperwork is completed, deadlines are met, and the sale progresses to closing without issues.

What is a buyer’s agent commission?

A buyer's agent’s commission compensates a wide range of services designed to streamline and guide the home-buying process. 

The primary role of a buyer’s agent is to help the buyer find the right property. This involves understanding the buyer's needs, preferences, and budget to make tailored property suggestions. The agent uses their access to multiple listing services (MLS) to find homes matching the buyer's criteria and arrange showings to view these properties. This targeted approach saves buyers significant time and effort by filtering out unsuitable listings.

Beyond property discovery, the buyer's agent also brings their expertise in market dynamics and negotiation. They assist the buyer in understanding the fair market value of homes, advising on the amount to offer, and crafting competitive offer strategies, especially in multiple-offer scenarios. During negotiations, the buyer's agent advocates on behalf of the buyer to achieve the best possible purchase terms and price, leveraging their negotiating skills and experience with deal structure, relevant contingencies, paperwork documentation, and other creative ways to achieve success and mitigate risk for the buyer.

Once an offer is accepted, the buyer's agent continues to play a crucial role in guiding the buyer through the complexities of the purchasing process. This includes coordinating with inspectors for home inspections, liaising with mortgage professionals, and working with title companies or real estate attorneys to handle paperwork. They also help navigate any challenges during escrow or closing, ensuring the buyer's interests are protected at every step.

Who pays the realtor fees?

Historically, in most real estate transactions, it had been customary for the seller to pay the real estate commission. That commission fee was paid to a listing agent, which was sometimes shared in cooperation with a buyer's agent for bringing a qualified buyer to the transaction. The payment of this fee was included in the transaction's closing costs and was one of the final steps in transferring ownership of the property.

The rationale behind a seller offering to pay both the listing agent and buyer’s agent commissions is that the seller is incentivizing agents to market the property and facilitate the sale. By compensating the agents, the seller ensures that their property is professionally represented in the market, potentially leading to a quicker sale and at the best price.

However, the arrangement of who pays the commissions is flexible and entirely subject to negotiation between the parties to the transaction, especially in light of recent changes to National Realtor Association (NAR) guidelines, which went into effect August 17, 2024, following a recent court settlement. 

In some cases, the seller may be willing to cover all or a portion of the buyer’s agent commission as an incentive to attract buyers. In other scenarios, the seller may be unwilling to offer any compensation to buyer’s agents, in which case the buyer may be responsible for paying out of pocket for their representation. 

A key change for all situations, whether a seller wants to offer buyer agent compensation or not, is that NAR-affiliated listing agents will no longer be able to input or display any owner offer of buyer agent compensation in the MLS.

Therefore, each commission scenario is unique to the particular transaction and can depend heavily on negotiations between buyers, sellers, and their respective agents. 

The commission structure incentivizes agents to work diligently on behalf of their clients, knowing that their compensation is tied directly to the successful sale of the property. Both buyers and sellers need to understand this aspect of the real estate transaction, as it affects how the total costs of the transaction are calculated and who ultimately bears these costs.

How to save on listing commission

When you’re a seller facing the most expensive closing cost, you’ll obviously brainstorm ways to reduce it. 

One popular approach is selling your home "For Sale by Owner" (FSBO). This can help you bypass the need for a listing agent entirely, saving you from paying the commission that would typically go to the listing agent. However, while FSBO can lead to substantial savings, it requires a deep understanding of the real estate market, strong marketing skills, and the time to manage all aspects of the sale on your own.

Another effective strategy is utilizing a flat-fee MLS service. These platforms allow you to list your property on the Multiple Listing Service (MLS), which is crucial for visibility, without paying the full commission fee to a real estate agent who has direct access to your local MLS. 

Instead, you pay a flat fee for the MLS listing, which can be significantly lower than traditional commission costs. This option provides a middle ground between FSBO and using a full-service agent, giving you control over the sale while still accessing essential marketing tools.

Finally, some sellers opt for discount brokerages, which offer reduced commission rates in exchange for a more streamlined set of services. These brokerages typically provide basic marketing and listing services for a lower fee, allowing you to save on commission costs while still benefiting from professional real estate advice.

How to save on a buyer’s agent commission

There can be scenarios where a seller is willing to pay the buyer’s agent commission to help incentivize potential buyers. 

In such cases, buyers won’t have to worry about paying the fee out of pocket at closing. Good news, though, is that buyers can prioritize additional savings in such a scenario by working with a buyer’s agent that offers commission rebates—such that the buyer’s agent gives a portion of the commission they receive from the seller back to the buyer.

For example, Prevu offers buyers up to 1% of a home’s final purchase price via the company’s Smart Buyer Rebate in cases when a seller pays the buyer’s agent commission. These situations can significantly increase affordability for homebuyers and help them offset expensive closing costs. 

In cases where the seller offers to pay either a portion of the buyer’s agent fee or none at all, buyers can seek to work with low-cost brokerages that offer a reduced rate for a full spectrum of buyer services.

Prevu invests in a streamlined digital homebuying platform that empowers a buyer’s home search and enables them to unlock significant savings via a lowered commission rate compared to traditional market standards. 

Buyers must interview and consider multiple agents before committing to representation. Ultimately, the most important thing is to work with a broker who can offer exactly what you’re looking for and provide the style of services you need most. 

Be sure to carefully review and go over the buyer’s representation agreement before entering into a relationship with a broker, especially if it is an exclusive agency agreement. The agreement will detail everything about the potential rebate or commission when and how it will be paid, and essential details regarding the fee itself. Remember that commission and length of agreement are always negotiable, regardless of how any brokerage presents its fee structure or term of agreement.

Understanding and documenting realtor fees

Agency agreements have always been a part of the real estate transaction - listing agreements for sellers and buyer’s representation agreements for buyers.

However, recent changes to NAR guidelines have brought commission transparency to the forefront, making listing agreements and, particularly, buyer’s representation agreements some of the most important documents both parties will sign before agreeing to representation.

Both agreements essentially outline the same things: the services that each broker will provide their client, the obligations of representation, whether it is an exclusive or non-exclusive relationship, and the specific guidelines in terms of agent compensation.

Both buyers and sellers must remember one essential fact: commissions are negotiable. 

There is nothing set in stone that defines how much each party should pay for representation by their representative. Regardless of what the market has shown in recent years, the commission fee was and is negotiable. The exact commission structure of the particular transaction and how it will be paid depend entirely on negotiations between both parties and their respective agents. 

Do buyers and sellers have to work with an agent?

Many buyers ask themselves: Why should I pay a commission if I can work directly with a listing agent or seller and avoid it altogether?

Answering that question requires reviewing a buyer’s comfort with a real estate transaction. But the answer ultimately comes down to who will represent your best interests. Unless you come to a home-buying transaction equipped with vast real estate knowledge and expertise, guaranteeing the best possible outcome can be challenging. 

Hiring expert representation ultimately comes down to each buyer’s preferences and needs. Dealing directly with a listing agent means negotiating a deal with a professional who is only responsible for securing that seller’s best interests. Hiring a buyer’s agent may imply paying a buyer’s agent fee in a scenario where the seller is unwilling to pay that commission.

Sellers, meanwhile, can explore selling their homes independently if they choose to forego representation. 

Options such as selling For Sale By Owner (FSBO), pursuing a flat-fee MLS listing, or other alternatives to traditional real estate brokers can help sellers avoid or substantially rescue transaction fees outright but at the risk of taking on many selling responsibilities alone. 

These alternatives can mean handling negotiations solo, taking charge of marketing and photos for the property, and hosting open houses personally. While the reward can be significant savings on real estate commissions, the workload may be a daunting task for some sellers who don’t have much experience selling a property.