How Do Real Estate Commissions Work?

How Real Estate Commissions Are Paid


On the surface a commission arrangement on a real estate transaction seems pretty simple. But each transaction is unique and like many things the devil is in the details.

So how do real estate commissions work and how do we get paid?

I’ll start with the easy stuff first.

Commission Agreements Between Agents, The Seller And Buyer

The seller pays a commission to the listing agent, who works for the listing brokerage, and to the buying agent and brokerage that buys the property for their client. This commission is determined prior to listing the property.

Because of this arrangement a home buyer typically pays no out of pocket expense for using an agent to buy properties.

Here in Kitchener-Waterloo a buying agent usually gets paid between 2 and 2 ½ percent of the sale price of the property + HST.

The listing agent gets paid anywhere from 1 to 3 percent of the sale price + HST.

An agent working with both buyer and seller is engaging in multiple representation, or double ending as it’s known in the industry. A double ending agent will usually offer a discount on commission in an attempt to make the buyer and seller happy.

Some agents and brokerages will list your property for as little as 1% + HST but these offers more often than not include caveats and exceptions that end up costing you more.

To each his own, but I’m a firm believer in the saying you get what you pay for…

Anyways, the total commission that’s ultimately agreed to is paid out to the listing brokerage upon closing by the seller’s lawyer. The listing brokerage then pays out the buying agent’s commission to the buyer brokerage.

Commission Agreements Between Agents and Their Brokerages

The commissions are further divided depending on the individual arrangements of each brokerage and the agents involved. This is known in the industry as the split…

This is also the complicated bit where the devil is in the details…

At many brokerages the split percentage changes at set intervals based on the volume of business the agent generates, and resets at the end of each year. Depending on where an agent is in the fiscal year they may pay as little as 5% to the brokerage or as much as 35% or more.

Some brokerages only ever take 5% from the agent but have sky high desk fees of over $1,000 a month that the agent pays instead. There are also brokerages with very low splits that have no brick and mortar offices and thus lower business expenses.

If an agent is on a team or got the sale from a referral the commission is divided up even further. The standard referral fee from another agent is 25%, and teams often charge the agent 50% or more.

As an example, a referral that was early in the year netted me only $3,900 on a sale price in the mid 500,000’s. But another more recent transaction at the same price brought me $9,200. And both properties paid my brokerage a 2% commission.

Anyway, that’s how it works. Simple eh?