Real estate agents are compensated in different ways, depending on the type of transaction. One of the primary differences between real estate agents is their commission structure. While they may have other variations as well, a majority of real estate agents charge either flat fees or a percentage of the sales price when assisting clients with buying or selling a home.
If you’re considering working with an agent to buy or sell a home, it’s important that you understand how each commission structure works and what it means for your final costs. This article will explain the difference between flat fee vs percentage-based commissions and give you insight into which one is best for you based on your personal situation and financial goals.
What is a Flat Fee Real Estate Commission?
A flat fee real estate agent is exactly what it sounds like — a set, predetermined fee that the agent charges you regardless of the value of the transaction. Flat fees are typically calculated based on a percentage of the sales price at closing.
So, for example, if an agent is charging a 10% flat fee on a $200,000 home, they’ll receive $20,000 from the seller regardless of whether their services were worth that amount. A flat fee real estate commission can range from a few hundred to several thousand dollars, depending on the state where you’re buying or selling property.
It can also vary based on the price of the property, your agent’s experience level, and the difficulty of the transaction. Typically, the higher the price of the property, the higher the commission — it’s a way for agents to make sure they get compensated fairly for their time and expertise.
What is a Percentage Based Real Estate Commission?
Your real estate agent charges you a percentage of the sale price of your home — typically 3% to 6% — once the transaction closes. This means that if your home sells for $200,000, you’ll owe your agent a percentage of that sale price — usually around $6,000 in this example.
The percentage a real estate agent charges can vary based on several factors, including the state in which you’re selling property and your agent’s experience level. Like flat fees, percentage-based commissions can also vary based on the size of the final sale price.
A $200,000 home sale will result in a higher commission than a $50,000 sale. This is because the more work an agent does, the more they deserve to be compensated for it.
Which commission structure is best for you?
If you’re wondering if you should choose a flat fee or a percentage-based real estate commission, the answer is it depends on your situation and financial goals. While flat fees and percentage-based real estate commissions have different costs, they also have different benefits as well. Before you decide on one commission structure over the other, it’s important to understand the advantages and disadvantages of each one.
Advantages of Flat Fee Real Estate Commissions Flat fees are often lower than percentage-based commissions. You know exactly how much you’ll be paying upfront. This means there are no surprises when it’s time to pay your agent. Agents who charge flat fees are often more focused on customer service than those who charge percentage-based commissions.
This can be especially useful if you’re a first-time home buyer and aren’t as familiar with the home-buying process. Advantages of Percentage-Based Real Estate Commissions Percentage-based commissions vary based on the value of your home, meaning you can’t predict how much they’ll be upfront.
If your home sells for a higher amount, you’ll pay a higher commission, which can be helpful for real estate agents who specialize in high-end properties. If real estate market conditions make it a tough time to sell, percentage-based commissions ensure that agents are still compensated for their work, even if the value of your home doesn’t increase.
How to find out if your agent charges a flat or percentage commission?
The first step in choosing between a flat fee or percentage-based real estate commission is finding out which one your agent charges. Unfortunately, it’s not something you can ask your potential agent upfront.
That’s because real estate agents are required to disclose their commission structures when they are accepted into the MLS (Multiple Listing Service) and officially become “listed” agents.
Once they’re listed, they’re obligated to disclose their commission structure to anyone who asks. Your best bet is to ask to see your agent’s listing agreement, which shows their commission structure.
When should you use a Flat Fee real estate commission?
If you’re on a tight budget and don’t want to spend more than you have to, choosing a flat fee real estate commission might be the best choice for you. There are some disadvantages to going with a flat fee over a percentage-based commission, including the fact that you won’t know exactly how much the real estate transaction will cost you until it’s all said and done.
However, if you’re on a tight budget, a flat fee is often significantly lower than a percentage-based commission. If you have a smaller house and don’t expect it to sell for a high price, a flat fee is a good choice.
This is because a percentage-based commission is often calculated based on the final sale price, so a small home sale would result in a significantly lower commission than a larger sale.
When should you use a Percentage Based real estate commission?
If you’re selling a high-value home, percentage-based commissions are often the best choice. Like flat fees, percentage-based commissions vary based on the value of your home, meaning that a large home sale will result in a higher commission than a small one.
This is good news if you’re selling a high-value home because it means your agent will be earning more for the work they do. If you have a large home that you expect to sell for a high price, percentage-based commissions can be a good choice. If you have a smaller home that you expect to sell for a lower price, a flat fee commission may be a better choice.
Bottom line
If you want to make sure you’re getting the most out of your agent, it’s important to understand the difference between flat fee vs percentage-based real estate commissions. A flat fee commission is often lower than a percentage-based commission, but it’s also less likely to be focused on customer service.
A percentage-based commission is often higher than a flat fee, but it can be focused on providing excellent customer service. Before choosing between a flat fee or a percentage-based real estate commission, make sure you understand the advantages and disadvantages of each one.
This will allow you to make an informed decision about how you want to be compensated for the services of your real estate agent.
